In this presentation, FMC’s Heather Barnhouse discusses the purpose of a letter of intent (LOI) and the common issues with LOI. She then discusses a relevant case (IHAG – Holding A.G. c. Intrawest Corporation, 2009 QCCS 2699) and provides an overview of the lessons learned and future application.
3. Background
• Business deals take on different structures, but in
many situations begins with a letter of intent ("LOI").
• LOIs often set out the general intention of the parties
with respect to a particular transaction, including the
conditions of a deal (due diligence, financing etc.) and
summarize in a general way what the transaction
should look like; often leaving the specific details to be
further negotiated at a later stage.
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5. Purpose of a LOI
• sets out the proposed parties to a commercial
transaction’s intentions to allow them to move
forward with a commercial transaction.
• establishes the ground rules between the parties‐
process for detailed negotiations; what each party’s
responsibilities will be; approximate timelines moving
forward; etc.
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6. Purpose of a LOI, cont’d
• identifies other requirements to the transaction:
– ex: third party consents required, such as TSX
approval; landlord consent; board of director and/or
shareholder approval; financing.
• LOI needs enough certainty with respect to the
fundamental business terms in order to be effective:
need certainty with respect to parties, price, property
subject to the transaction.
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8. Issues with LOI
• Often when the main deal is done, the transaction document
looks nothing like the LOI, as the deal may have morphed or
been further negotiated since the time of execution of the LOI.
• The process of due diligence (legal, financial) may uncover
issues that could not possibly be contemplated at the stage
that the LOI was drafted, which requires resolution in order for
the transaction to close. This may require a modification from
the terms of the LOI (ex: share deal vs. asset deal), or a shift
from the terms contemplated in the LOI.
• LOIs often take one of two forms: either (1) a non‐binding
expression of interest in a particular transaction; or (2) a
binding expression of interest in a particular transaction.
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9. Issues with LOI, cont’d
• Non‐binding LOIs are often used to present an "offer" to
complete a transaction in a particular manner, with no
"penalty" or consequence if the transaction is not
completed in the specific manner contemplated‐ the
parties may walk away with no further commitments to
each other in the event that the deal is not completed as
contemplated.
• Recent case law establishes that non‐binding letters of
intent may be relevant and enforced in certain
circumstances: IHAG‐Holding, A.G. c. Intrawest
Corporation, 2009 QCCS 2699.
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11. The Parties
• Intrawest Corporation (“Intrawest”) was a developer
and manager of a world class destination ski and golf
resort, headquartered in Vancouver, BC.
• IHAG was a Swiss holding company that owned 100%
of the shares in Mont Ste. Marie (1994) Inc. (“MSM”).
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12. Background ‐ MSM
• MSM is a 4 seasons mountain resort situated 80 Km North of
Ottawa in the Gatineau area of the Province of Quebec. The
resort is comprised of the following: (a) ski centre with 13 km
of downhill trails over 2 communicating mountains (55,000
skiers per year); (b) 18 hole, par 72 championship golf course
on 317 acres (18,000 rounds of golf per year); and (c)
architectural award winning 54 room inn and conference
centre, which was built in 1974 but closed in 1991 because of
losses‐ it was not heated or maintained, so subsequently
suffered water, ice and mould damage, in addition to
vandalism.
• MSM and IHAG had invested approximately $35,000,000 in the
development of the resort.
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14. Facts
• In 1995, IHAG decided that it wanted to sell MSM.
• It retained Mazarin Financial Inc. (“Mazarin”) in February
1996 to act as the exclusive financial advisor to explore
alternatives to sell shares or assets.
• Pierre Mantha was the principal of Mazarin. His
credentials include an MBA degree; he was trained as an
accountant; was the former managing partner of PWC;
had acted as a consultant in respect of numerous
mergers, acquisitions, privatisations, dispositions during
which it organized and conducted due diligence
studies/exercises on a regular basis.
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15. Facts, cont’d
• Mantha prepared a confidential information
memorandum (CIM) dated May 2, 1996, which set out a
two stage process for those expressing an interest in
purchasing MSM:
1. Submission of a letter of intent (LOI) on or before June 30,
1996; and
2. A limited group of qualified purchasers were then to be
invited to conduct further due diligence and shortly
thereafter, submit a final binding offer.
• A significant advantage was the availability of
approximately $25,000,000 worth of tax losses available
in Ste. Marie for a qualified purchaser.
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16. Facts, cont’d
• Mantha identified Intrawest as a potential interested buyer,
and in June 1996 sent CIM to Andrew Voysey, Director of
Finance and Acquisition. Voysey’s credentials include an
accounting designation and senior manager of KPMG,
specializing in taxation, estate planning and some corporate
reorganization work.
• Voysey indicated that despite some initial reservations (ie:
MSM was “small and tired resort”), there was “some” interest
in MSM, as Intrawest believed it may act as a feeder to
another resort it owned, Tremblant. Intrawest also had some
interest in the tax losses.
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17. Facts, cont’d
• Intrawest visited the resort, and decided not to
participate in the bid process, therefore did not submit a
LOI by June 30 as required.
• No LOIs were received by IHAG by the June 30 deadline.
• Mantha continues to shop MSM, and in late summer 1996
contacted Voysey again.
• Ultimately IHAG and Intrawest signed a share purchase
agreement in respect of the purchase of MSM, on January
29, 1997.
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19. Offer/Process
• September 3, 1996: Voysey wrote a letter to Mantha
outlining the approach to purchase MSM:
– Purchase price of a resort is generally established on the basis of
a multiple of net earnings. The average multiple for North
American ski resorts at the time was 4.8 times EBITDA, over the
prior three year period.
• Voysey’s proposal for Intrawest’s acquisition:
• (a) Shares of Ste. Marie Inc. were to be acquired for $1.00;
• (b) Intrawest would assume outstanding third party debt
(approximately $2.3M of government loans with a net present
value of $1.5M); and
• (c) Intrawest to provide IHAG with an ongoing 50% participation
interest in the sale of MSM’s undeveloped real estate.
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20. Negotiations
• September 9, 1996: IHAG counter‐offered as follows:
– (a) minimum purchase price of $6M: $2M paid on closing and
the balance over time; such payment to be reduced by the cost
incurred to restore the inn and conference centre up to a
maximum of $3M; and
– (b) 50% participation interest in (i) the sale of all MSM assets
within 7 years of closing; and (ii) the forgiveness of any
government loans.
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21. Negotiations, cont’d
• Intrawest’s response to counter‐offer: (i) Intrawest to pay
$1,000,000 for shares of MSM; and (ii) Resort Operation
Payment Amount (“ROPA”) Payment.
• ROPA was a purchase price adjustment clause: for Intrawest to
justify a $2,500,000 investment ($1,000,000 cash for shares
and $1,500,000 for value of the government debt it is
assuming), it needed to generate a minimum of $500,000 of
net revenue from MSM operations a year over a three year
period
– Should Intrawest earn $500,000 of net revenues a year from the
resort, it would have paid a “fair” price for MSM; however, if
Intrawest earned more than $500,000 of net revenues a year
over a 3 year period, it would be willing to pay IHAG an amount
which would compensate it for having underpaid for the resort.
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22. Negotiations, cont’d
• September 30, 1996: Intrawest offers IHAG a ROPA at the
end of the third year of operations, which was equal to
4.8 times the average annual EBITDA for resort operations
over the said period “in excess of $500,000 annually”.
• IHAG basically agreed with the September 13 proposal,
subject to two changes:
– (a) ROPA Payment be calculated over a period of 4 years, not 3;
and
– (b) $1,000,000 payment be paid to IHAG in the form of a partial
repayment of debt owing to it by MSM.
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23. Offer
• Voysey agreed and drafted a non‐binding letter of intent.
The important provision from the non‐binding LOI was as
follows:
– “ROPA Payment would be equal to 4.8 times the amount by
which Earnings Before Interest, Taxes, Depreciation and
Amortization (“EBITDA”) for the Resort’s Operations less a
Prescribed Interest Amount during the period between the first
anniversary of the Closing Date and the fifth anniversary of the
Closing Date exceeds $2,000,000.”
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25. Offer, cont’d
• Non‐binding LOI signed by both parties on October 18th
and 21st, 1996, setting forth the following terms:
– (a) Intrawest to purchase IHAG’s shares in MSM for $1.00;
– (b) Intrawest to advance $1,000,000 to MSM, which would repay
a portion of the debt owing by the company to IHAG;
– (c) the terms of $12,000,000 debt in MSM (repayable on
demand to IHAG) were changed; debt was not to be repaid by
the Real Estate Participation, the ROPA Payment and a portion
(50%) of the government loans forgiven. The remaining balance
was to become due and payable (in 99 years) on December 31,
2095, thereby diminishing its NPV to a negligible amount.
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26. Offer, cont’d
• Voysey instructed its lawyer to prepare a draft Loan
Agreement on the basis of the terms set out in the LOI.
• Donna Cooke circulated the first draft on November 19th,
which draft contained a series of complex definitions,
which explained how net revenues and ROPA Payment to
be calculated:
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27. Offer, cont’d
– “‘Net Resort EBITDA’ means, in respect of the Resort
Operation Payment Calculation Period, the amount, if any,
by which EBITDA during the Resort Operation Payment
Period exceeds the aggregate of:
• (a) $2,000,000;
• (b) the amount equal to 18%, calculated daily and compounded
annually, of Intrawest Resort Operation Loans, if any, from time to
time outstanding during the Resort Operation Payment Calculation
Period; and
(c) payments made by the Borrower during the Resort Operation
Payment Calculation Period on account of interest, standby fees,
accommodation fees, commitment fees, agency fees, contingency
fees, premiums, bonuses and penalties in respect of any financing
or other credit accommodation made available to the Borrower by
any Person (other than any Affiliated Entity) for the purpose of
financing Resort Operation Capital Costs”.
– “‘Resort Operation Payment Amount’ means the amount,
if any, equal to 4.8 EBITDA during the Resort Operation
Payment Calculation Period”.
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28. Offer, cont’d
• Subsequent draft circulated on November 25, 1996:
Cooke circulated revised draft that meant to clarify some
things, but instead confused matters‐ definitions of “Net
Resort EBITDA” and “Resort Operation Payment Amount”
were inadvertently changed from what was reflected in
the LOI.
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29. Revised Draft
– “‘Net Resort EBITDA’ means in respect of the Resort Operation
Payment Calculation Period, the amount, if any, by which
EBITDA in respect of the Resort Operation Payment Calculation
exceeds the aggregate of:
• (a) the amount equal to the interest that would be earned at the
rate of 18%, calculated daily and compounded annually, on the
Intrawest Resort Operation Loans, if any, from time to time
outstanding during the Resort Payment Calculation Period; and
• (b) all payments made by the Borrower during the Resort
Operation Payment Calculation Period on account of interest,
standby fees, accommodation fees, commitment fees, agency fees,
contingency fees, premiums, bonuses and penalties in respect of
any financing or other credit accommodation made available to the
Borrower by any Person (other than any Affiliated Entity) for the
purposes of financing Resort Operation Capital Costs”.
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30. Revised Draft, cont’d
– “’Resort Operation Payment Amount’ means the amount, if any,
equal to the amount by which (a) 4.8 times Net Resort EBITDA
during the Resort Operation Payment Calculation Period exceeds
(b) $2,000,000”.
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31. Revised Draft ‐ Error
• The error was material:
– The ROPA Payment calculated, on the basis of net revenues of
$1,709,090 as per the words used in Section 1(e) of the LOI
yields no value as the following calculation shows:
4.8 x [cumulative EBITDA ‐$2M] = 4.8 x [$1,709,090 ‐$2M] = 4.8
x $0 = $0;
– The ROPA Payment calculated as per the Loan Agreement yields
a value of $6,203,632 as the following calculation shows:
[4.8 x cumulative EBITDA] ‐ $2M = [4.8 x $1,709,090] =
$8,203,632 ‐ $2M = $6,203,632;
– The difference between the two calculations is $6,203,632.
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35. Complete Agreement Clause
• “‘Complete Agreement’: There are no representations,
warranties, covenants or agreements between the parties in
connection with the subject matter hereof other than those
expressed herein”.
• Generally the purpose of the Complete Agreement clause is to
set out all possible obligations and responsibilities between
the contracting parties. “They are often included in
commercial contracts to avoid claims of implicit contractual
obligations, to limit the parties’ recourse to documents or
discussions that occurred during negotiations and to prevent
claims of error or lack of common intention”.
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36. Complete Agreement Clause, cont’d
• Often these clauses are considered to be boilerplate clauses,
added without much thought; yet Courts often recognize the
validity of such clauses.
• In this case, the Court decided not to apply the Complete
Agreement clause in the Loan Agreement for the following
reasons:
– The Court has an obligation to find the common intention of the
parties if it is not reflected in the Loan Agreement;
– The rules of good faith allow a Court to set aside a Complete
Agreement clause if necessary: Courts have the right to review
the behaviour of the parties to a commercial contract beyond
the words, phrases and expressions used by the parties.
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37. Drafting Error
• While the ROPA Payment concept was never questioned
since it was first introduced on September 13, 1996,
reliance on the ROPA Payment language in the Loan
Agreement would result in an unreasonable commercial
transaction.
• The error was overlooked by all parties.
• If one added $6,200,000 sought by IHAG for the ROPA
Payment to the purchase price of $3,200,000, an EBITDA
multiple of approximately 11 would be achieved, which is
an unreasonable multiple in this type of a commercial
transaction.
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38. Drafting Error, cont’d
• IHAG would obtain an undue and unfair advantage in the
event that restitution was imposed‐ the result would not
be equitable: “the most equitable solution in the
circumstances is to enforce the common intention of the
parties with respect to the ROPA Payment which is
reflected in Section 1(e) of the LOI and to declare that the
correct definition of ‘Resort Operation Payment Amount’
in the Loan Agreement should be as follows:
– ‘Resort Operation Payment Amount' means the amount, if any,
equal to 4.8 times the amount by which (a) Net Resort EBITDA
during the Resort Operation Payment Calculation Period exceeds
(b) $2,000,000”.
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39. Drafting Error, cont’d
• While the LOI was set out to be a non‐binding
commitment that does not create legal obligations, it
does however evidence a meeting of the minds which
reflects the business terms agreed to by the parties. “To
ignore same because it is not a binding agreement would
lead to an unjust result”.
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41. Appeal Decision
• It should be noted that this decision was appealed to the
Quebec Court of Appeal, and in a decision released
October 28, 2011, it was found that the ratio prescribed
in the trial judge's decision with respect to the Complete
Agreement clause and the Drafting Error was sound‐ the
appeal was dismissed, as there was no palpable error of
law.
• Therefore, it is appropriate to consider a non‐binding
letter of intent to help ascertain the true intention of the
parties.
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42. Lessons
• The case law establishes that Courts will review signed
documentation between the parties to ascertain the
common intention of the parties where it may be unclear.
Courts will look for evidence of the parties' intention,
including ancillary documents other than the main
transaction document to understand the intention, even
if the main transaction document supercedes the ancillary
documents, if the main transaction document does not
ultimately reflect the common intention of the parties.
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43. Application
• Ensure that the transaction document, particularly complex and
intricate definitions that forms the basis of the commercial deal
between the parties are thoroughly reviewed by all parties prior
to execution of the document, to ensure that the intention of the
parties, with respect to calculation of bonuses, earn‐outs etc. is
accurate.
• Use the LOI as a checklist to compare the final draft of the main
transaction document to cross‐reference that the intentions of
the parties have been properly reflected in the final draft.
• For any transaction that requires financial calculations moving
forward, ensure that accounting advice has been solicited to
ensure accuracy in translating the formulae into words in the
draft.
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44. Application, cont’d
Consider using a hybrid form of LOI‐ separating those terms and
conditions which are meant to survive (bind the parties), and those
that are not meant to be binding on the parties post‐closing.
Consider survivability of the following provisions: confidentiality;
standstill; non‐solicitation; exclusivity; non‐competition, etc.
This approach can allow the parties to perform effective due
diligence to determine whether they wish to complete the
transaction contemplated in the manner contemplated, while
providing the target company some assurance that the sensitive
business information learnt through the due diligence process will
be protected.
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45. Application, cont’d
• In Alberta, the courts have regularly held that a LOI will not
create a legally binding relationship if it “merely records a
future intent to enter into a contract”; however, if the terms of
the LOI specifically demonstrate an intention to create a
binding relationship, then the LOI will be held to be a binding
agreement.
• Agreements to agree are not enforceable; mainly because
important elements of the contract are left still to be
determined.
• Common interpretation is that under an LOI, the parties are
bound temporarily by the preliminary agreement which is to
be replaced by the more detailed formal agreement which it
contemplates.
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46. Application, cont’d
Consider adding a clause to the LOI (which will be binding) that the
substantive terms of the LOI will not be renegotiated by professional
advisers, but instead by the business clients themselves.
Example: The parties agree not to use their respective legal counsel as a
means to renegotiate the terms set forth herein or to add any material
rights or obligations among the participants without discussion between
the parties and the consent of the parties to such additional terms. In this
regard, each party will instruct its respective legal counsel to prepare draft
definitive agreements that accurately reflect the business terms set forth in
this letter and that neither materially expand nor materially restrict the
legal rights and obligations of either party to the other unless expressly
instructed to do so by their respective clients. For their part, each of the
respective parties hereto agree not to instruct their respective legal
counsel to prepare any draft terms which materially expand or restrict the
legal rights and obligations of either party unless such new terms have first
been discussed by the respective business people and substantially agreed
by them.
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