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15
March 2022

A Letter of Intent affords protection to an offeror

Three Questions To… Andrzej Tokaj, Senior Partner at Penteris

How common are claims for failure to complete a real estate transaction after signing a letter of intent (LOI)?

Such claims are rather uncommon, especially in transactions involving institutional players. Transactions are structured carefully and it should also be noted that due diligence process generates major costs for the buyer. Naturally, it happens that the transaction is not completed. The binding effect of an LOI is limited and the parties may decide to abandon a transaction if they do not agree on its terms. However, such cases are not communicated to the public since buyers do not want the public to know that they have incurred substantial costs for nothing and sellers do not want the public to know that the interested buyer has abandoned the transaction. Following the COVID-19 pandemic outbreak, negotiations would be broken off for reasons beyond the parties’ control such as inability to travel for the purpose of inspecting the property. The most common binding elements of an LOI are terms stipulating exclusivity for the buyer for a certain period of time. A situation where the seller breaks off negotiations and enters into new negotiations with another party might be considered a breach of such exclusivity terms. However, unless otherwise expressly stipulated in the agreement (LOI), in the event of claims for failed negotiations it would be difficult to expect damages in excess of the actual costs incurred in handling the transaction.

Where a shareholder uses confidential information to make a counter-offer, can an unsuccessful offeror rely on insider trading provisions?

Although some similarity can be inferred, in Poland insider trading concerns public trading in shares where there is no contractual protection and therefore protection must be based on law. As a rule, a preliminary agreement – or a letter of intent (LOI) – protects the parties to the extent to which they have agreed.

Is it true that the law prohibits a more advantageous offer from being made if the minority shareholder considers the negotiated price to be too low?

It is relevant whether the minority shareholder’s offer was made during the validity period of the letter of intent and at what stage the arrangements between the seller and the buyer were at the time the minority shareholder intervened. If such intervention took place during the validity period of the LOI, and especially during the period in which the exclusivity clause was in effect for the buyer, it would indeed be an act of unfair competition to encourage the abandonment of the transaction for personal gain. However, if a deadlock occurred, the parties were unable to reach an agreement and negotiations were terminated, the seller would be free to accept the minority shareholder’s applicable offer. However, it would be prohibited from disclosing to the minority shareholder the contents of the original offer which was made on confidentiality terms.

Full article to be found in Puls Biznesu.