Imagine this: after months of coffee meetings and presentations, an investor wants to come on board in your scale-up. Or, as an entrepreneur, you have finally found a serious buyer for your business. The chemistry is right, the numbers look promising. Time to put something on paper. But what exactly do you put on paper? And what will your signature on that document mean later on?
This is where the Letter of Intent (LOI) and the Term Sheet come in — two instruments that may look harmless, but can have quite significant legal impact. A Letter of Intent is a document in which the parties record their preliminary agreements during an acquisition, merger, or other major transaction. Dutch law does not provide a fixed definition of an LOI; it is a collective term for legally relevant statements made at a certain stage of the negotiations. Think of the identity of the buyer and seller, the scope of the deal, an indicative price, and the conditions under which the deal will proceed.
A Term Sheet is very similar, but is more often used in investment rounds or financing transactions. It sets out the key commercial terms: how much money is involved, what percentage of shares the investor will receive, what control rights and protective rights apply? Here too, the idea is that it serves as an intermediate step, not the finish line.
The main difference? Mainly the context. An LOI is typically seen in business acquisitions (M&A), where a buyer wants to acquire the entire company or a substantial part of it. A Term Sheet appears in venture capital, private equity, or other investment transactions where an investor comes in, but the existing owners remain on board, at least in part. In practice, the terms are sometimes used interchangeably, but the function is similar: the parties want to check whether they are aligned before engaging the expensive lawyers and accountants for the heavy lifting.
What is included? the building blocks of an LOI or Term Sheet
A well-drafted LOI or Term Sheet contains a number of standard elements. Let’s go through them.
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Parties and scope
Who are the players? Sounds simple, but in complex deal structures this can already be tricky. Is the buyer a newly formed holding company? Is the investor acting through a fund? And what exactly is being bought or invested in: all shares, a majority stake, or only a minority participation?
The scope of the transaction must be clear. In a business acquisition: is it 100% of the shares, or does the founder remain involved to some extent? In an investment: how much new capital is coming in, and are existing shares also being purchased?
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Indicative price and pricing mechanism
Money is, of course, what it is all about. The LOI usually includes an indicative purchase price or valuation. Note: indicative means “subject to confirmation.” The final price is only set out in the purchase agreement, often after due diligence. But how do you determine that final price? Two commonly used mechanisms come into play here:
Closing Accounts Mechanism (CAM): Under this mechanism, the purchase price is adjusted afterwards based on the actual financial position on the closing date. Suppose the indicative price is €10 million, based on expected working capital of €1 million. If it turns out at closing that working capital is only €800,000, the purchase price is reduced by €200,000. Advantage: flexible, and you do not have to work everything out to the last cent in advance. Disadvantage: after the deal, there may still be a (sometimes heated) discussion about the figures.
Locked Box Mechanism (LBM): Here, the price is fixed in advance based on a historic balance sheet — for example, the annual accounts from six months earlier. From that “locked box date” onward, all profit (and any loss) is for the buyer’s account. The seller may not take anything out of the company between that date and closing (no dividends, no bonuses to themselves). Advantage: certainty, no post-closing fuss. Disadvantage: the buyer will want very thorough due diligence, because there is no room for later adjustments.
Example: An investor wants to buy a software company for €5 million on the basis of an LBM, with the locked box date set at 31 December 2023. Closing takes place on 1 April 2024. All profit the company makes between 1 January and 1 April already belongs to the buyer. If the seller pays themselves a bonus of €100,000 in February, then they must repay that amount at closing, because the cash was already “locked.”
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Exclusivity and no-shop
Nobody wants to spend time and money on due diligence while the seller is simultaneously flirting with other bidders. That is why an LOI often contains an exclusivity clause: the seller promises not to speak to anyone else for a certain period, for example 60 or 90 days. In return, the buyer invests in investigation and negotiations.
This part is usually binding, even if the rest of the LOI is not. If the seller breaches exclusivity, that may lead to damages.
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Confidentiality (NDA)
Sensitive information comes up during negotiations: customer lists, margins, strategic plans. A non-disclosure agreement (NDA) protects that information. This part is also usually binding, regardless of whether the deal goes through.
Sometimes the NDA is in a separate document, sometimes it is integrated into the LOI. The principle remains the same: what you hear and see stays between us.
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Conditions precedent
A deal rarely goes straight from LOI to signature under the purchase agreement. There are still hurdles to clear. These are set out as conditions precedent. Think of:
- Approval by shareholders or a supervisory board.
- Satisfactory due diligence: the buyer first wants to review the books, contracts, and legal risks.
- Financing: the buyer still needs to arrange bank debt or investor funding.
- Competition clearance: in larger deals, the Dutch Authority for Consumers and Markets or the European Commission may need to approve the transaction.
As long as these conditions are not satisfied, no final agreement comes into effect.
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Timelines: signing and closing
LOIs often include target dates. Signing is the moment the final purchase agreement is signed. Closing is the moment the deal is actually completed: shares transfer, money is paid, keys are handed over.
Sometimes signing and closing happen at the same time, for example in a simple acquisition without conditions. More often, there are weeks or months in between, for example because clearance from the competition authorities is still needed or financing still has to be arranged.
Binding or not? The three faces of an LOI
This is where it gets interesting. An LOI is called a letter of intent — the phrase itself suggests non-binding character. Yet the answer to the question “Is an LOI binding?” is not simply yes or no. In practice, three categories can be distinguished:
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Fully non-binding LOI
This is the “classic” LOI: the parties record their intentions, but do not commit to anything. It often states explicitly: “This Letter of Intent is not legally binding.”
Such an LOI is mainly a framework for further negotiations. The parties can walk away without consequences — at least, that is the idea.
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Partially binding LOI
Here, things become more nuanced. Some parts are binding, others are not. Typically binding:
- Confidentiality.
- Exclusivity.
- Cost reimbursement (for example: if the seller breaches exclusivity, they reimburse the buyer’s due diligence costs).
- Procedural arrangements (who provides which information and when).
The commercial essentials — price, conditions, warranties — remain non-binding until the final agreement is signed.
Example wording:
“The parties agree that this Letter of Intent is non-binding, except for articles 5 (confidentiality), 6 (exclusivity), and 8 (governing law and disputes), which shall be fully binding.”
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Binding LOI (pre-agreement)
Sometimes the parties go so far that the LOI effectively becomes a preliminary agreement: they commit themselves to enter into the final agreement later, provided that certain conditions are met. This happens when parties want certainty quickly, for example because there is competition or because financing needs to be secured.
Note: even if an LOI says it is “non-binding,” a court may still decide that the parties were in fact bound — if the content and conduct of the parties point in that direction. That brings us to the question: how does a court actually interpret such a document?
The Haviltex lens: how a court looks at your LOI
In the Netherlands, courts apply the Haviltex standard when interpreting agreements [1]. This standard, named after a 1981 Supreme Court case, means that the meaning of a contract does not depend only on the literal wording, but on what the parties could reasonably expect from each other in the circumstances.
So the court looks at:
- The wording of the document.
- The context in which it was drafted.
- The negotiation history.
- The knowledge and experience of the parties.
- Any prior contacts or deals between the same parties.
What does this mean for an LOI? Even if it says in bold letters “non-binding,” a court may still conclude that the parties considered themselves bound — for example because they had been negotiating for months, invested heavily in due diligence, and behaved as if the deal was practically done.
Conversely, an LOI without an explicit non-binding clause is not automatically binding. The court weighs all the circumstances.
Practical advice: be crystal clear in your drafting. If you really do not want to be bound, say so unequivocally, and act accordingly. Do not start laying off staff or informing customers as if the deal has already closed.
When may you still walk away? The legal limits
Suppose you have signed an LOI, non-binding, but after two months of due diligence you get cold feet. May you simply walk away?
The starting point under Dutch law is freedom of contract: you are free to contract with whomever you want, and you are free to break off negotiations. But that freedom is not unlimited. The Supreme Court has drawn lines in a number of important cases.
Baris/Riezenkamp: the birth of pre-contractual good faith
In 1958, the Supreme Court held that parties negotiating with each other enter into a special legal relationship [2]. That relationship is governed by the requirements of reasonableness and fairness (good faith). In practical terms: you may not unreasonably prejudice the other party, even during negotiations.
Booy/Wisman: taking the other party into account
In 1966, the Supreme Court expanded on this: during negotiations, you must take account of the legitimate interests of the other party [3]. You may not create expectations lightly and then walk away without a good reason.
Plas/Valburg: the three stages of negotiation
The best-known case on this subject is Plas/Valburg from 1982 [4]. The Supreme Court distinguished three stages of negotiations, each with its own consequences if negotiations are broken off:
- Stage 1 – exploratory phase: The parties are feeling each other out, and there is still little concrete agreement. Breaking off is freely allowed, no damages.
- Stage 2 – advanced negotiations: The parties are seriously engaged, have invested time and money, but have not yet agreed on all essential points. Breaking off is allowed, but the party who breaks off must compensate the other for costs incurred (negative contractual interest). Think of due diligence, lawyers, and accountants.
- Stage 3 – highly advanced negotiations: The parties have agreed on (almost) everything, and there is justified trust that the deal will go through. Breaking off is only allowed for compelling reasons. If a party does so without good grounds, damages may be due for both costs incurred and lost profit (positive contractual interest). The other party must be put in the position they would have been in had the contract been concluded.
Example: A buyer and seller have negotiated for months over the acquisition of a restaurant. They have signed an LOI, due diligence is complete, the price is agreed, and only the exact wording of a warranty regarding the lease still needs to be settled. Then the buyer suddenly walks away because they “would rather have a different venue.” Meanwhile, the seller has turned down another bidder and had renovation plans drawn up. A court may conclude that the negotiations were in stage 3, and require the buyer to compensate the seller for lost profit (the difference with what another buyer had offered) and costs incurred.
VSH/Shell: how likely was the deal?
In 1987, the Supreme Court added an important nuance [5]. Before there can be an obligation to pay damages, it must be assessed how likely it was that the agreement would actually be concluded. Was there still considerable uncertainty about essential points? Then breaking off is less likely to be wrongful, and damages are less likely to arise.
This case shows that not every investment in negotiations automatically leads to liability if the talks are broken off. There must really have been justified trust.
MBO/De Ruiterij: unforeseen circumstances matter
In 1996, the Supreme Court held that unforeseen circumstances also matter. If something fundamental changes — a sudden economic crisis, new information that casts the deal in a very different light — breaking off may be justified, even at a highly advanced stage.
Example: An investor wants to invest in a technology company. Right before signing, it becomes public that a key customer, accounting for 40% of revenue, has gone bankrupt. The investor walks away. Despite advanced negotiations, this may be justified: the foundation of the deal has disappeared.
What does this mean for your LOI?
The message: a non-binding LOI does not automatically protect you from damages claims. The further negotiations have progressed, the more careful you must be about walking away. Do you have a good reason (new information from due diligence, changed market conditions)? Then document it carefully. Are you walking away for opportunistic reasons (you found a better deal)? Then be prepared for a possible legal dispute.
Practical tips: how to avoid legal headaches
Whether you are a buyer, seller, entrepreneur, or investor, a few practical pointers will help you through the LOI process.
- Be explicit about binding effect
Make clear in the LOI which parts are binding and which are not. Use clear language:
“This Letter of Intent is non-binding, except for article 4 (confidentiality), article 5 (exclusivity), and article 9 (governing law). The parties are not obliged to complete the proposed transaction and may terminate negotiations at any time.”
- Define the negotiation phase
Make clear at which stage you are. Is this an initial exploration, or are you already far along? That helps later when interpreting the document.
- Draft conditions precedent carefully
Be specific: not “satisfactory due diligence,” but “due diligence that does not reveal any material deviations from the information provided by the seller, where material means any deviation exceeding €50,000.”
- Set a clear timeline
When must due diligence be completed? When will the final agreement be signed? When is the intended closing? Deadlines force action and prevent endless delay.
- Allocate costs
Who pays what? The usual approach is that each party bears its own costs (lawyers, accountants). Sometimes it is agreed that the buyer reimburses certain seller costs (for example, a vendor due diligence report). Put this in writing.
- Think about exit scenarios
What happens if the deal falls through? May the buyer use the information received for other purposes? Must material be returned or destroyed? A good exit arrangement prevents later disputes.
- Have the document reviewed
An LOI may seem informal, but the legal implications can be significant. Have it reviewed by a lawyer experienced in transactions. A few hundred euros in legal fees now can save you tens of thousands of euros in claims later.
Checklist: the essentials for your LOI or Term Sheet
Before signing an LOI or Term Sheet, go through this checklist:
[] Parties: Are the correct entities named? Who signs on behalf of whom?
[] Scope: Is it clear what is being bought or invested in?
[] Price: Is the indicative price or valuation clear?
[] Pricing mechanism: CAM or LBM? Are the rules properly set out?
[] Conditions precedent: Which hurdles still need to be cleared?
[] Exclusivity: How long? What are the consequences of breach?
[] Confidentiality: Is there an NDA, and does it cover everything needed?
[] Timeline: Are there realistic deadlines for due diligence, signing, and closing?
[] Binding effect: Is it crystal clear which parts are binding and which are not?
[] Governing law and disputes: Which law applies? How are conflicts resolved?
[] Costs: Who bears which costs, even if the deal falls through?
[] Exit: What happens to the information provided if the deal collapses?
In conclusion: intentions are serious
A Letter of Intent or Term Sheet often feels like an intermediate step, a preliminary document on the road to the real deal. But do not underestimate its legal impact. Even a “non-binding” LOI can create obligations — and walking away from negotiations can become expensive if you are not careful.
The core message: be clear, be honest, and be aware of the stage you are in. Communicate openly with the other party about doubts or new information. Document important steps and considerations. And seek advice from professionals who handle these matters every day. Because in the end, dealmaking is not just about legal structures, but about trust. A well-drafted LOI helps build that trust — and protects both parties if things unexpectedly go wrong.
Written for entrepreneurs, investors, and anyone dealing with Letters of Intent and Term Sheets.
Questions or comments? Get in touch.
Sources
- HR 13 March 1981, NJ 1981, 635 (Haviltex), ECLI:NL:HR:1981:AG4158
- HR 15 November 1957, NJ 1958, 67 (Baris/Riezenkamp), ECLI:NL:HR:1957:AG2023
- HR 21 January 1966, NJ 1966, 183 (Booy/Wisman), ECLI:NL:HR:1966:AC4621
- HR 18 June 1982, NJ 1983, 723 (Plas/Valburg), ECLI:NL:HR:1982:AG4405
- HR 23 October 1987, NJ 1988, 1017 (VSH/Shell), ECLI:NL:HR:1987:AD0018
- HR 14 June 1996, NJ 1997, 481 (MBO/De Ruiterij), ECLI:NL:HR:1996:ZC2105
- Conclusions of the Advocate General, 26 March 2004, ECLI:NL:PHR:2004:AO6909