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When ‘Buyer Beware’ Meets Sandbagging: Lessons from the Akorn v. Fresenius Case and How Your LOI in M&A Can Shield You

When Fresenius SE, a German healthcare company, agreed to a $4.75 billion takeover of Akorn Inc., a U.S.-based generic pharmaceutical company, the deal seemed solid—until Fresenius uncovered financial and operational issues and tried to back out. This high-stakes showdown put sandbagging clauses and the age-old principle of ‘buyer beware’ in the spotlight, revealing how due diligence and careful contract clauses can make or break billion-dollar acquisitions.

For buyers, sandbagging clauses provide critical protection by allowing claims for breaches discovered before closing. For sellers, managing this risk early on is essential, starting with the Letter of Intent (LOI), to avoid future conflicts.

LOI in M&A lays the groundwork for negotiations and deal protection. So, what key elements should you include to ensure the LOI is comprehensive, clear, and leaves no room for costly misunderstandings?

LOI is like making the first big move in a business relationship—it’s where you lay your cards on the table and show you’re ready to deal. It’s not just about saying ‘let’s do this,’ but about setting the rules, keeping things on track, and protecting your interests. Whether you’re aiming to seal the deal or just testing the waters, nailing the LOI is how you set the stage and get everyone playing by your terms.

Let’s break down everything you need to know about LOIs—from what they actually are, to the key elements that make them effective, and the pitfalls you’ll want to avoid.

What’s an LOI in M&A?

At its core, an LOI is a formal document that expresses the intent of a buyer to acquire a target company. This document is typically the first significant step in the M&A process, serving as a bridge between initial discussions and the formal purchase agreement. While LOI typically is non-binding, certain provisions like confidentiality and exclusivity can be binding.

What are the Essential Elements of an LOI?

  1. Introduction: State the purpose of the LOI and identify the parties involved.
  2. Transaction Structure: Describe the nature of the transaction (e.g., asset purchase, stock purchase).
  3. Purchase Price: Outline the proposed purchase price and payment terms.
  4. Due Diligence: Define the scope and timeline for due diligence.
  5. Confidentiality: Include confidentiality obligations.
  6. Exclusivity: Specify any exclusivity period.
  7. Closing Conditions: Identify conditions that must be met for the transaction to close.
  8. Termination: Outline the circumstances under which the LoI can be terminated.
  9. Governing Law: Indicate the governing law and jurisdiction.
  10. Signatures: Include signature blocks for both parties.

What Makes Your LOI in M&A a Strategic Power Move?

An LOI is not just a preliminary step; it is a vital strategic tool that can shape the entire M&A process. Here’s why it matters:

  1. Formalizes Intentions: The LOI establishes a formal commitment between the buyer and seller. This shows that both parties are serious about moving forward, which can foster goodwill and collaboration throughout negotiations.
  2. Guides Negotiations: As a roadmap, LOI in M&A provide clear parameters within which negotiations will occur. By outlining key terms upfront, both parties can avoid misunderstandings and focus on critical issues during discussions.
  3. Mitigates Risks: By including a due diligence clause, the LOI protects the buyer from unexpected issues. If significant problems arise during the investigation, the buyer can reconsider the offer, minimizing the risk of overvaluation.
  4. Facilitates Timely Closing: An effective LOI in M&A can expedite the closing process by addressing key concerns early on. When both parties have a clear understanding of the transaction’s framework, it can lead to quicker negotiations and a faster path to closing the deal.

What are the Common Pitfalls to Avoid in the LOI Stage?

Sellers often rush through the LOI in M&A, mistakenly viewing it as a mere formality. This can lead to costly errors and missed opportunities. Here are some common pitfalls to avoid:

  • Neglecting Key Details: When drafting an LOI, ensure the exclusivity clause is reasonable to maintain the seller’s negotiating power, and define confidentiality provisions clearly to protect sensitive information. Additionally, specify the purchase price and terms in detail to avoid misunderstandings, and outline clear termination conditions to prevent legal complications.
  • Rushing the Process: Take the time to carefully negotiate the LOI in M&A. Hasty decisions can result in unfavorable terms that may disadvantage the seller.
  • Lack of Legal Review: Always engage legal counsel to review the LOI. Understanding the binding and non-binding aspects of the document is essential to avoid unexpected obligations.

What are the Differences Between MOU and LOI in M&A?

A Memorandum of Understanding (MOU) and a LOI serve different purposes in deals. An MOU outlines a general understanding and collaboration between parties, often lacking specific details or binding commitments. It fosters goodwill and lays the groundwork for future agreements. Conversely, an LOI in M&A is transaction-specific, to express a buyer’s intent to acquire a target company. While MOUs typically carry less legal weight and are non-binding, LOIs can include binding clauses, establishing enforceable obligations. Overall, the choice between an MOU and an LOI depends on the nature of the engagement, with MOUs emphasizing collaboration and LOIs focusing on formalizing specific terms for potential transactions.

MS Expertise in Action: Making the LOI Work for Your Deal

From drafting an LOI to finalizing the deal, M&A requires expertise and precision. At MS, we specialize in providing tailored M&A advisory services to ensure every step is strategically sound and meticulously executed. Whether you’re concerned about sandbagging clauses, mitigating risks, or avoiding costly oversights, our team knows how to protect your interests through a compelling LOI in M&A.   We help you avoid common pitfalls, streamline the process, and close deals efficiently. Whether you’re a buyer or seller, trust us to guide you through M&A and achieve the best outcomes for your business.

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