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7 Key Worth-Including LOI Phrases

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A well-crafted letter of intent (“LOI”) provides worth for the negotiating principals by serving to to make sure the events are in settlement on key deal phrases earlier than they spend vital money and time on diligence and definitive paperwork. It could possibly additionally assist the events’ advisors perceive the deal and put together preliminary drafts of transaction paperwork that decrease the variety of open points to be resolved, thereby considerably lowering the time it’d in any other case take to finalize the paperwork. Placing within the further effort to flesh out particulars on the LOI-stage can thereby assist scale back “deal fatigue” and frustration afterward. Under are some usually neglected phrases that may bolster your LOI to keep away from time-consuming post-LOI disputes and enhance the possibilities of a profitable transaction.

  1. In roll-over transactions, specify the fairness buy-back phrases. Rollover consideration generally is a uniquely sizzling subject, because it binds equityholders to phrases that survive closing. In established non-public fairness backed platforms, buy-back rights and obligations are sometimes non-negotiable. To keep away from confusion and frustration, we advocate describing the precise buy-back phrases within the LOI – this contains the value at which fairness will be redeemed in sure occasions, and relevant definitions of key phrases like “Trigger” and “Retirement” which will function triggers for redemption rights or affect the repurchase worth of fairness.
  2. Outline indemnification phrases. That is particularly low-hanging fruit on the LOI stage, the place the events are incented to behave moderately. Whereas a generic LOI might point out that the events will conform to “customary” indemnification provisions, the well-crafted LOI specifies relevant baskets, caps, and survival intervals. It additionally calls out which representations will likely be “Elementary Representations”. Patrons must also contemplate defining separate “Specified Representations” which are topic to thresholds and survival intervals larger and longer than basic representations. These might embody representations relating to regulated industries (e.g., healthcare compliance and reimbursement), and typically tax and worker advantages. From a purchaser’s perspective, the LOI ought to reserve for added objects that could be found by diligence. Outlined indemnification phrases within the LOI removes guess-work when drafting the acquisition settlement, and saves treasured time and dear negotiations at later phases within the transaction lifecycle.
  3. Schedule sure outlined phrases. Agreeing to commonly-negotiated definitions on the LOI stage is one other solution to streamline negotiations by front-loading the work. We generally see definitions of “Fraud”, “Debt”, “Information”, “Loss” and “Materials Antagonistic Impact” (in addition to “Elementary Representations” and “Specified Representations”, as famous above) laid out in LOIs or in schedules thereto. These phrases can sometimes be negotiated within the absence of full-blown buy agreements, and isolating them within the LOI usually offers for faster decision.
  4. In RWI transactions, specify RWI phrases. If the events would require a illustration and guarantee insurance coverage (“RWI”) coverage, phrases of the coverage ought to be said within the LOI – this goes hand-in-hand with the indemnification phrases mentioned above. The LOI ought to present that the client will search an RWI coverage with a specified retention quantity (and step-down, if relevant) and specify legal responsibility for quantities beneath the retention quantity and the way legal responsibility for the premium price(s) will likely be allotted and paid for.
  5. Outline restrictive covenant phrases. Restrictive covenants are one other sensitive topic, as a result of they bind vendor events post-closing. The LOI ought to set forth the time period, geographic scope, and restricted providers relevant to sellers (and doubtlessly key workers), in addition to relevant carve-outs, grandfathered actions, and triggering occasions that might trigger the restrictions to “fall away”. For 2 latest developments on the subject of restrictive covenants, see our articles right here and right here.
  6. Outline buy worth changes. Relying on the standing of economic due diligence, the events might want to specify a closing money goal and dealing capital peg, and applicable collars for buy worth changes if the closing working capital is above or beneath the peg (or exterior of the vary). Selecting a peg that precisely represents the goal entity’s normalized working capital ought to be a comparatively painless train, and figuring out the peg on the LOI-stage can assist circumvent a celebration’s try to artificially inflate or scale back the quantity of working capital required for operations or to make use of the peg quantity as a “chip” in negotiating different phrases.
  7. Outline reserve powers. If vendor events will keep a controlling curiosity after closing, or if the transaction is structured as a three way partnership, reserve powers will doubtless be entrance and heart within the LOI. Nonetheless, even in non-JV acquisitions, negotiating the LOI presents alternatives for each events to suppose creatively and add worth. For instance, if there’s a specific buyer relationship that the vendor needs to protect, or if the vendor takes pleasure in offering simply wages to its present workforce, or if use of the vendor’s branding exterior of a selected market is especially delicate, contemplate whether or not reserving the correct to approve sure actions would possibly alleviate a strain level that may be addressed within the LOI and scale back the chance of a “deal-breaking” concern popping up after the events have spent vital sources on the transaction.

Signing the LOI is a vital step in any transaction. Getting your lawyer concerned early is an effective solution to set the transaction on the correct path, and to establish and tackle vital deal factors when the events are nonetheless taking part in properly within the early phases of the connection. If you’re contemplating a transaction, contemplate reaching out to your legal professional to help with crafting a significant and strategic LOI.

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