Letter of intent

A letter of intent (LOI) is a preliminary document in which parties to a proposed transaction, such as an acquisition, merger or licensing deal, outline the key terms they expect to agree on, including price, structure and timing. Its economic terms are usually non-binding; the deal is not done until a definitive agreement is signed.

How it works

An LOI typically covers the proposed price or valuation, form of consideration, major conditions and a target timeline. A few provisions are usually binding: confidentiality, an exclusivity or no-shop period during which the seller agrees not to negotiate with others, and expense terms. The buyer then runs due diligence and the lawyers negotiate a merger agreement.

Public companies are not generally required to disclose a non-binding LOI, because an 8-K Item 1.01 filing is triggered by a material definitive agreement. Many small caps announce LOIs by press release anyway, particularly for reverse mergers, SPAC targets and acquisitions they want investors to know about early.

Why it matters for traders

An LOI headline can move a small-cap stock sharply, but the conversion rate from LOI to closed deal is far from guaranteed. Watch for the language "non-binding," the length of exclusivity, and whether financing is in place. Repeated LOI announcements that never become definitive agreements are a red flag. The meaningful catalyst is usually the definitive agreement, filed as an exhibit to an 8-K.

Example

Hypothetical Northwind Energy (NWEN), a $60 million market cap company, announces a non-binding LOI to acquire a private solar developer for $40 million in stock, with 60 days of exclusivity. NWEN rises 25% on the news. When exclusivity lapses without a definitive agreement, the company says talks have ended and the stock gives back the entire gain.

FAQ

Is a letter of intent legally binding?

Mostly not. The price and deal terms are typically non-binding, while confidentiality and exclusivity clauses usually are.

What comes after a letter of intent?

Due diligence and negotiation of a definitive agreement. Only a signed definitive agreement commits both sides to the deal, subject to its closing conditions.