Letter of Intent (LOI)

A typical LOI for an Ontario business transaction will set out: the proposed purchase price and how it is calculated (enterprise value, working capital adjustments, earn-out provisions); the proposed deal structure (asset purchase, share purchase, or hybrid); the due diligence period and process; the conditions to closing (financing condition, due diligence satisfaction, regulatory approvals); a proposed closing date; exclusivity (a period during which the seller agrees not to negotiate with other buyers); any required deposits; confidentiality obligations; and the key representations and warranties that will be expected in the final purchase agreement. Some LOIs also address transition services, post-closing obligations of the seller, and key employee retention requirements.

An LOI creates a deliberate mix of binding and non-binding obligations. Non-binding provisions are typically the commercial terms — purchase price, deal structure, conditions — and are described as 'subject to due diligence and finalisation of definitive agreements.' If the deal does not close, neither party can sue the other for breach of these non-binding terms. Binding provisions typically include: the confidentiality or non-disclosure obligation; the exclusivity period; the obligation to negotiate in good faith and in a commercially reasonable manner; and the deposit terms. Parties sometimes dispute whether a provision is binding or non-binding, and courts look at the language carefully — the safest approach is to be explicit about which provisions are intended to be legally binding.

Exclusivity (also called a no-shop or standstill provision) is a binding commitment by the seller not to solicit, entertain, or accept offers from other potential buyers during the exclusivity period. From the buyer's perspective, exclusivity is essential protection for the investment of time and money in due diligence and legal fees — typically tens of thousands of dollars before any purchase agreement is signed. Sellers may resist long exclusivity periods because they want to preserve optionality and their right to seek better offers. A typical exclusivity period in an Ontario SME transaction is 30–60 days, sometimes extendable by mutual agreement if the parties are making demonstrable progress.

One of the most common mistakes in Ontario business transactions is for one party to treat the LOI as more binding than it is, and to invest significant resources in closing preparations before a formal purchase agreement is signed. Courts have generally held that an agreement to agree is not itself enforceable, and a party who walks away from an LOI's non-binding commercial terms typically does not owe the other party damages for the deal not completing — absent specific binding obligations that were breached. However, courts will impose liability for bad faith negotiation and for breach of binding provisions such as confidentiality and exclusivity.