Letter of intent
A letter of intent (in Danish: hensigtserklæring) can, for instance, be used during the preliminary phases of discussions between potential parties, when it is still too early to conclude an actual binding agreement, but where the parties would nevertheless like to formalise their relationship – albeit in a non-binding but morally binding statement.
The template example concerns two parties' discussions about setting up a jointly owned company which is to develop, manufacture and market a specific product worldwide, but the letter of intent could just as well concern a completely different scenario.
You can use the letter of intent for inspiration if you would like to document the discussions you have had with a partner about something in writing, without becoming legally obliged to realise the discussions.
Guidelines for letter of intent
The most complicated clauses are explained here:
- Parties
The names, business registration numbers and addresses of the parties must be correct. Businesses in the same group often have similar names, for example, but whether you conclude a Letter of Intent ('LoI') with one or the other company is not necessarily irrelevant. One company may, for example, be rich and another poor.
- Background
Clause 1.1: You should describe what the discussions with your partner are about in the introductory part of the LoI. This could, as in this example, concern discussions about setting up a joint company. The discussions could also concern the conclusion of a patent licence agreement, the acquisition of a business, delivery of services or products or something completely different.
Clause 1.2: Clauses 3-8 in the LoI are binding on you and your partner, but the LoI does not impose any other obligations on you or your partner. This means that, although you may sign the LoI, you are not obliged to realise the project that you are discussing and which is described in clause 2 of the LoI, unless you conclude a binding agreement on this.
- Key terms
Clause 2.1-2.10: The content of the clauses will vary depending on what the discussions with your partner concern. If the discussions, as in this example, concern the establishment of a joint company, the clauses will normally specify, for example, the size of each party's ownership share of the company and how much influence each party is to have on the decisions made in the company.
However, the specific content may – and will often – deviate from the content of this example of an LoI.
- Definitive agreement
Clause 3.1: The LoI is a precursor to a definitive agreement on the subject of the discussions with your partner. The LoI therefore normally contains a binding obligation on both parties to start negotiations on a definitive binding agreement.
- Exclusivity
Clause 4.1: In many cases, negotiating a definitive binding agreement and investigating the possibilities of realising the subject of the discussions with your partner can be a costly affair, including, for instance, your own internal costs and expenses for professional consultants.
To avoid unnecessary costs, the LoI therefore normally contains a stipulation on a binding obligation on both parties to refrain from negotiating with anyone else about the subject of their negotiations for as long as the LoI is in force.
- Confidentiality
Clause 5.1 and 5.2: When negotiating with your partner, you will inevitably have to disclose information to each other which you consider confidential and which you do not want to be used for unrelated purposes or disclosed to third parties. The LoI therefore normally contains a stipulation on a binding obligation on the parties to treat information received from each other as confidential.
Regardless of whether the LoI contains a confidentiality provision, however, you should never disclose more confidential information to your partner than necessary. As soon as you disclose information, you lose control of what happens with it from then on.
- Costs and expenses
Clause 6.1: As mentioned above, negotiating a definitive agreement and investigating whether it is possible to realise the subject of your discussions can be associated with costs for you and your partner. The LoI therefore normally contains an actual binding provision which defines how the costs are to be borne by the parties.
The costs may be distributed in the way that you and your partner prefer, but it is assumed in the LoI that you each bear your own costs.
- Term and termination
Clause 7.1: The LoI normally contains an actual binding provision specifying the time of expiry of the LoI. You and your partner cannot accept, for example, that the provision in clause 4 stipulating that you are prohibited from negotiating with third parties continues indefinitely. Logically, the LoI will expire when and if you and your partner conclude a definitive binding agreement, but in case this does not happen, the LoI should indicate a specific date on which the LoI expires at the latest.
- Miscellaneous
Clause 8.2: It must appear from the agreement which country's law is to apply in the event that a dispute arises which the seller and the buyer are unable to settle amicably. If both you and your business partner are owners of Danish companies, Danish law would be the natural choice.
If your business partner’s company is not Danish, however, you might insist on Danish law, and your business partner on the law of the country of his company. In such a case, choosing a third country's law could be an option.