June 6, 2017, Legal Intelligencer article by Lamb McErlane PC partner Vasilios J. Kalogredis, and associate Katherine E. LaDow.*

When doctors or health care entities are in the preliminary stages of negotiations relative to a business transaction, they are sometimes asked to execute a Letter of Intent (“LOI”). A LOI is typically an interim step which comes after mutual interests are established, but before “Formal Documents” are extended. A LOI generally sets forth material terms. It sometimes sets forth a promise to bargain in good faith based on the principles and terms outlined in the letter itself. Some of the practical functions of a LOI include:

• Expressing a commitment
• Emphasizing important negotiation points related to the transaction at an early stage
• Providing the signing parties some reassurance that a mutual understanding is recognized in a written document
• Providing a framework and time line for the negotiation process
• Providing important information to the parties who are essential to the negotiations (i.e. financial institutions or boards of directors)
• Providing for a due diligence period
• Sometimes exclusivity (agreeing to not negotiate with anyone else) is part of the LOI

Typically, a LOI is non-binding. However, by agreement among the parties, and sometimes by imposition by the Court, portions, or even all, of the LOI may be deemed binding. One needs to carefully review the verbiage in the LOI.

The Delaware Supreme Court issued an opinion in SIGA Technologies, Inc. v. PharmAthene, Inc. reiterating the concept that an express contractual obligation to negotiate in good faith is binding on the contracting parties. In SIGA Technologies, SIGA held rights to an antiviral drug with promise in treating smallpox. SIGA did not have sufficient resources to develop the drug and entered into discussions with PharmAthene for a licensing arrangement. These discussions resulted in PharmAthene making a bridge loan to SIGA and, subsequently, the parties entering into a merger agreement pursuant to which PharmAthene would acquire SIGA. Both the bridge loan and the merger agreement provided that, if the acquisition was not completed, the parties would negotiate in good faith a license of the drug from SIGA to PharmAthene in accordance with terms set forth in a term sheet attached to the merger agreement. Because of delays in obtaining SEC clearance of the merger proxy statement, the merger agreement terminated and the parties commenced negotiations on the terms of the license agreement. The court noted that there was some indication that by this time SIGA was experiencing “seller’s remorse” as a result of its receipt of a large grant from the National Institutes of Health that ameliorated SIGA’s near-term funding issues. The parties did not reach agreement on the terms of a license agreement and litigation followed. The Supreme Court affirmed the trial court’s finding that SIGA had negotiated in bad faith, noting that the trial court had found that SIGA had “virtually disregarded” the term sheet when proposing terms for the license agreement.

In SIGA Technologies, the Delaware Supreme Court affirmed the trial court’s findings that: (1) an obligation to negotiate in good faith means that the parties must propose and negotiate terms that are “substantially consistent” with those set out in the preliminary agreement and (2) absent SIGA’s bad faith negotiations, the parties would have entered into a license agreement and therefore PharmAthene was entitled to “expectation” damages, including lost profits so long as PharmAthene could prove such losses with “a reasonable degree of certainty.” This decision confirms the importance of careful drafting when entering into an LOI.

In light of SIGA Technologies, if parties wish to enter into a truly non-binding LOI, it is important that the LOI does not include an obligation to negotiate in good faith and the language in the agreement should expressly disclaim any obligation to proceed on the commercial terms as set forth in the LOI. As example of such disclaimer language is as follows:

“Each of parties agrees that unless and until a definitive agreement for the matters contemplated by the [Term Sheet] is executed and delivered, neither party, nor any of their respective affiliates, is under any obligation, express or implied, to propose or complete any such transaction or to negotiate in good faith toward a binding contract and any such party may at any time and for any or no reason determine not to proceed with further consideration of any such transaction.”

LOI agreements can be very beneficial and might suit a client’s needs when negotiating a transaction or contract. Sometimes one party is more interested in a more binding arrangement than the other party. Some important tips when drafting and reviewing a LOI agreement are as follows:

• Avoid using rigid/ legal language – a LOI should be written in a friendly tone to express each party’s ultimate goals.
• Ensure that the LOI covers the important aspects of the future contract/ transaction (i.e. salary, benefits, term, etc.)
• Use clear language to disclaim or to proclaim that the LOI (or portions of it) is legally binding on the parties.
• Ensure that all parties sign the LOI agreement.
• As soon as a LOI is executed, formal due diligence, contract drafting, and negotiation should begin.

A LOI should never be “casually” signed. Signatories should consult an attorney and understand the specific pros and cons of the LOI agreement. Avoid the “do not worry about it, it’s only an LOI” trap.

Vasilios (“Bill”) J. Kalogredis, Esquire, is Chairman of Lamb McErlane’s Health Law Department. Bill has been practicing health law for over 40 years, representing exclusively physicians, dentists, group practices, other health care professionals and health care-related entities.

*Katherine (“Katie”) E. LaDow, Esquire, an associate with Lamb McErlane PC., contributed to this article. Katie is an associate in the litigation department. She concentrates her practice in the areas of state civil litigation, family law and health law.

Click here for the Legal Intelligencer article.