If a business divorce is not resolved through a court decision or an arbitration award, then the parties to the dispute must resolve their business divorce through a written agreement.
Form Follows Function
Before considering what terms to include in an agreement, the parties should think about what form of an agreement they should be seeking. Like a well-known principle often followed in architecture, engineering, and design, form should follow function.
Different Functions, Different Forms
Definitive Agreement. Ideally, the parties execute a Definitive Agreement to fully and finally resolve every issue germane to their business divorce.
If execution of the agreement and closing of the transactions it contemplates are simultaneous, then the parties will likely have no further negotiations or additional actions to take to end their dispute.
To achieve the comprehension and detail needed for a Definitive Agreement, however, requires time not only to negotiate terms but also to draft, review, revise and agree upon a lengthy written document. Circumstances sometimes call for another form of agreement.
Agreement in Principle. If the parties agree on all essential terms for a resolution contract but aren’t ready to draft and sign a Definitive Agreement, it may be prudent to enter into an Agreement in Principle. An Agreement in Principle can take the form of a Memorandum of Understanding or a Term Sheet.
Regardless of its name, the instrument sets out those essential terms in sufficient specificity to make the agreement a legally binding contract enforceable by a court. An Agreement in Principle expressly defers, however, the details of those terms and the manner of their implementation, as well as nonessential provisions, for future negotiations and drafting between the parties.
Time constraints can be one reason to choose an Agreement in Principle over a Definitive Agreement. For example, one or more parties may face a calendar or event deadline for entering into a binding agreement; lenders or other third parties may be pressing for a sign of resolution; or news of the pending divorce may be on the verge of going public and alienating the business’s customers, suppliers or employees.
Letter of Intent. A Letter of Intent — which can also take the form of a Memorandum of Understanding or Term Sheet — is sometimes a useful document for the parties to enter into during negotiations, especially at an early stage. A Letter of Intent is generally NOT a legally enforceable instrument. (Often a Letter of Intent will contain narrow mutual provisions that the parties agree will be enforceable, like the covenant to keep discussions confidential or to refrain from taking any actions that would jeopardize ongoing negotiations.)
A Letter of Intent can:
- Identify all of the principal issues to the dispute, outline the current state of discussions about those terms, and set parameters within which the parties will try to settle those issues.
- Serve as a guide and outline for future negotiations.
- Calm anxieties of lenders, employees, and other third parties who might hear of a brewing business dispute.
- Encourage the parties to continue negotiations by memorializing their progress on resolving issues and by reducing the number and scope of remaining problems to the ones enumerated in the Letter of Intent.