Letter of Intent (LOI), also known as the Memorandum of Understanding (MOU), is a confirmation of the intention of the parties to seek mutual agreement on the basis of a deal. Letter of Intent usually lists general terms of the transaction, but does not include the details.
 
Advantages and disadvantages of Intent

Advantage

•Can show the same understanding of the two sides on a consistent and important trading point reached.

•For the possible areas of disagreement and potential barriers to trade, can advance understanding.

•Usually make negotiations more smoothly, the process quicker and more organized.

Shortcoming

•Letter of intent is not legally bound - either party may withdraw from the agreement at any time, or completely ignore its existence.

•Signed a letter of intent often publicly immediately to markets, customers, competitors and employees, and the premature disclosure could give the stock price, customer relationship, and a negative impact on staff morale. This is especially important for the target company.

•Some people believe that the signing of a letter of intent bargaining chips will be reduced because important terms of the transaction will be entered into a letter of intent with the loss of room for negotiation. Target companies often have the most bargaining chip in early trading process, then there are often interested in acquiring other companies, and loss of reputation transaction failure is very low. Acquisition of businesses usually have a maximum in late trading process bargaining chip, then there is intention to acquire other businesses often have been excluded from the transaction, and if the acquisition of companies out at the last moment, the target companies are facing disrepute.

In deciding whether a listed company signed a letter of intent often face some contradictions.

•News of the acquisition of any size will target the acquisition of both companies and enterprises, particularly affect the target company's stock price. Based on this consideration, companies are often willing to sign a letter of intent after the time to push as much as possible, until the letter of intent until the public can not be avoided.

•In accordance with the disclosure requirements of listed companies, a significant or potentially significant once the transaction should be immediately disclosed. Based on this consideration, companies are often willing to enter into a letter of intent ahead of time as possible, in time before the transaction open.

•Letter of Intent to establish investor expectations for the size and terms of the potential transaction, and therefore requires both sides to take specific action steps, and to restrict future options. Based on this consideration, companies often want as little as possible to sign a letter of intent, so that once the transaction fails, you can limit its openness.

•Agreement of intent can set the parameters for the transaction, and helps to determine the terms of significant transactions, thereby limiting controversial areas, and increase the likelihood of a successful transaction. Based on this consideration, companies want as often as possible to sign a letter of intent.

Substantive testing

In assessing the need for publicly listed companies in the Letter of Intent, U.S. law take substantive testing related transactions. In accordance with the substantive requirements of the test, if that a letter of intent (and the terms of the transaction and the transaction involved) may affect the investor's investment decisions, the letter of intent should be disclosed; If you know the letter of intent is unlikely to affect the investment decisions , no disclosures.

In fact, very few listed companies signed a letter of intent. They will usually prepare a comprehensive list of investment terms, which does not include the price. This approach can only make use of the transaction agreement has not yet entered a substantive stage (because the most important terms - prices - yet to be determined) of the favorable conditions.