When is a binding transaction agreement concluded?

In connection with M&A transactions, it is common for the parties on the way to a final agreement to negotiate documents that are often called letters of intent (LOI) or term sheets. In most cases, the parties' expectation is that these documents do not create any binding agreement to carry out the transaction. A judgment handed down by the Agder Court of Appeal earlier in 2024, where a letter of intent was considered to be a binding agreement, illustrates that it is the content of the agreement and not its name that matters.

The case was, in summary, that the buyer and the selling shareholder entered into a document called "LOI concerning the transfer of shares" (LOI). The LOI stipulated that the transaction was for 100% of the shares in the company in question, and further that the purchase price was set at a fixed amount based on historical balance sheet figures. The two most central negotiation topics - what is to be transferred and at what price - were thus determined.

In its assessment, the Court of Appeal points out that "What is decisive is what the parties have agreed on. In such cases, the text of the agreement is an important starting point", and follows up by establishing the following:

i) The heading "LOI" [is] not in any way decisive for the legal effects of the agreement;

ii)The fact that the LOI refers to the negotiation of a "standard warranty catalog" but without this being included in the LOI does not prevent the contract from being binding, as "the rough framework for the warranties" was to be regarded as established and that the buyer had "cut itself off from the possibility of demanding any unusual or very far-reaching warranty"; and

iii)The buyer's having included carrying out due diligence/company review without any material findings as a condition to closing, did not prevent the LOI from being considered binding between the parties.

The ruling is a useful reminder to both buyers and companies, particularly in connection with transactions where the parties do not have the assistance of a facilitator and lawyer from the beginning of negotiations, of the importance of at all times being conscious as to when the binding of the agreement is to take place.

The most common way to ensure this is to ensure that all "agreement-like" documents that are exchanged or negotiated (bid, process letter, letter of intent/term sheet) include clear provisions with regard to which parts of the document are considered binding. Often the distinction will be made between provisions about purchase price, guarantee protection, indemnities etc. which are defined as non-binding before a purchase agreement has been entered into, while provisions relating to exclusivity, confidentiality, cost recovery, choice of law and venue will be defined as binding.

AGP is a law firm specializing in transactions, capital markets and corporate. Advising on M&A transactions is one of our core competencies.

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This article is marketing and does not constitute legal advice.