A Letter of Intent (LOI) is a preliminary written document that outlines the fundamental terms and conditions of a proposed transaction between two or more parties before they enter into a definitive agreement. Under the Restatement (Second) of Contracts Section 27, preliminary agreements may be enforceable depending on whether the parties intended to be bound, as established in the landmark case Teachers Insurance & Annuity Association v. Tribune Co. (670 F. Supp. 491, S.D.N.Y. 1987).

The LOI occupies a critical position in commercial negotiations. It establishes a framework for due diligence, sets exclusivity periods, and defines confidentiality obligations while the parties negotiate the definitive agreement. Courts distinguish between binding and non-binding LOIs based on the specificity of terms, the existence of open issues, and the parties' expressed intent. The Uniform Commercial Code Section 2-204 recognizes that contracts can be formed even when terms are left open, which makes precise drafting of LOI binding/non-binding provisions essential.

LOIs serve distinct functions in different transaction contexts. In mergers and acquisitions, they precede stock purchase agreements or asset purchase agreements. In real estate, they precede purchase and sale agreements. In joint ventures, they establish the preliminary framework before the joint venture agreement is drafted. The LOI reduces transaction costs by confirming alignment on key terms before parties incur significant legal and advisory fees for definitive documentation.

LOIs are standard practice in business acquisitions where a buyer proposes to purchase a company for $2 million, subject to due diligence review of financials, contracts, and intellectual property over a 60-day exclusivity period. The LOI prevents the seller from entertaining competing offers while the buyer conducts its investigation under confidentiality protections.

Joint ventures between two companies developing a new product line require an LOI to define capital contributions, profit-sharing ratios, management responsibilities, and intellectual property ownership before committing to a formal partnership structure. Strategic investments similarly begin with LOIs when a venture capital firm proposes a $500,000 Series A investment with terms including board representation and anti-dilution rights.

Distribution and supply agreements frequently start with LOIs when a manufacturer engages a regional distributor covering exclusive territory rights, minimum purchase commitments, and pricing tiers. Technology licensing deals use LOIs to outline royalty structures, field-of-use restrictions, and sublicensing rights before the parties invest resources in drafting comprehensive licensing agreements.

Franchise expansions, university-industry research collaborations, and government contracting teaming arrangements all rely on LOIs to establish preliminary commitments before the parties execute definitive agreements.

The binding provisions section must clearly distinguish which terms are enforceable and which are aspirational. Typically, confidentiality obligations, exclusivity/no-shop periods, governing law, and expense allocation are binding, while the transaction terms themselves remain non-binding until the definitive agreement is executed. This bifurcated structure follows the framework established in Quake Construction v. American Airlines (141 Ill.2d 281, 1990).

Transaction description must identify the type of deal (asset purchase, stock purchase, merger, joint venture, licensing), the parties' roles, and the proposed consideration including purchase price, equity split, or royalty rates. The due diligence period should specify duration, scope of access to records, and conditions under which the period may be extended or terminated.

Exclusivity provisions, also called no-shop or standstill clauses, define the period during which the target may not solicit or entertain competing proposals. Break-up fees or expense reimbursement clauses address cost recovery if the transaction fails after significant due diligence expenditures.

Conditions precedent should list all requirements that must be satisfied before closing, such as regulatory approvals, third-party consents, financing contingencies, and satisfactory completion of due diligence. The termination clause must specify events that allow either party to walk away, including material adverse changes, failure to meet deadlines, or inability to agree on definitive terms. Include governing law, dispute resolution mechanisms, and a clear statement of whether the LOI constitutes a binding obligation to negotiate in good faith or merely an agreement to agree.