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LOI Disclaimer Clause Rescues Investment Bank

Many letters of intent contain a clause stating that the parties do not intend to enter into a contract at that time and that neither party will be bound except by a final, formal, signed, written agreement. Earlier this month, such a clause rescued an investment bank from a lawsuit over a failed IPO.

The players in this saga were Schneider Securities and its would-be client Café La France, apparently a Starbucks wannabe. In 1996, Schneider and Café La France signed a letter of intent for an IPO. For several months they made extensive preparations for the IPO, but they never signed the final underwriting agreement. For a variety of reasons, the relationship deteriorated, and Schneider began to get uncomfortable with the deal. Eventually another investment bank appeared on the scene, and Schneider withdrew from the deal, saying that it considered itself fired. The new investment bank proceeded with the IPO, which didn’t go nearly as well as hoped. Café La France ultimately withdrew its registration statement, returned the money it had raised, and did the all-American thing: it filed a lawsuit against Schneider.

At the conclusion of the trial, the judge made short work of Café’s claims against Schneider, primarily because the LOI between Café and Schneider had created only a few binding legal obligations and had expressly disavowed all others:

This document is a statement of intent. Its execution does not, either expressly or by implication constitute a binding agreement by [the parties] to undertake the financing outlined above or an agreement to enter into an underwriting agreement except as set forth in paragraphs 5(d), 8 and 9 hereof. Any legal obligations between the parties shall be only as set forth in a duly negotiated and executed underwriting agreement (the “Underwriting Agreement”).

Café tried to claim that Schneider was nevertheless obligated to market the IPO under a combined written and oral contract. The judge would have none of it. He said that “Café may have expected Schneider to [market the IPO], and at some point Schneider may have intended to, but that expectation was not *incorporated into the binding portions of the LOI.” (Emphasis added.) He also said that:

[T]he LOI bound the parties . . . only to paragraphs 5(d), 8 and 9, and that in the absence of an underwriting agreement there would be no other legal obligations with respect to the IPO. Schneider has not breached any of those provisions, and in fact, appears to have exercised its right, memorialized in paragraph 8, not to proceed with the offering if “in its sole judgment … information comes to [Schneider’s] attention relating to the Company, its management or its position in the industry which would, in its sole judgment, preclude a successful offering.” [Emphasis by the court]

LESSON: Business people like LOIs for various reasons. But from a lawyer’s perspective, the real title of such a document should be “letter of non-intent.”

(Café La France, Inc. v. Schneider Securities, Inc., D. Rhode Island, Sept. 8, 2003.)

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