The Non-Binding Offer (NBO) – Characteristics and Negotiation

In an M&A process, after the parties’ initial approach, it is common for the process to move forward through what is known as a Non-Binding Offer, or NBO, set out in documents also called a Letter of Intent (“LoI”) or a Memorandum of Understanding (“MoU”), which expresses the parties’ shared willingness to move forward with the negotiation, indicating the main guidelines and the actions to be taken jointly with a view to a possible transaction.

In this article, the term NBO is used to refer to the document that should reflect the parties’ willingness to advance in the negotiation and ensure a meeting of minds, mainly on the price of the asset in question and the main conditions of the possible transaction, before the parties go deeper into the discussions, take on any exclusivity obligation and invest significant time and resources in audits and in hiring legal advisors.

Therefore, without any intention of exhausting the subject, since each NBO must accommodate the specifics, exceptions and sophistications of each case, this article addresses the characteristics of an NBO and the main aspects that can and/or should be addressed until it is formalized.

Is an NBO 100% non-binding and unilateral?

First, it should be noted that an NBO starts out as a unilateral document, since it generally reflects the will of the party making the initial offer, setting out the conditions it intends to establish to develop the transaction; however, in the end, if signed by the parties, it will be a bilateral contract, establishing rights and obligations for both parties. Naturally, the recipient of the initial offer may be satisfied with the original terms and accept the offer as is; however, experience shows that, in general, the parties end up negotiating the terms of this contract.

It is no exaggeration to say that reviewing and negotiating the terms of an NBO is mandatory, because even though it is non-binding with respect to several points, establishing conditional and/or suspensive obligations, this contract does create binding obligations and has repercussions that can create and/or destroy value, sometimes with harmful effects on the progress of the business or on the reputation of the parties involved, requiring proper balance and an accommodation of the parties’ interests and responsibilities.

Thus, the party that receives or submits an NBO should regard it as natural to submit or receive a counteroffer and to negotiate the terms of this document, which should reflect the shared intentions of both parties and which, in our modest opinion, is therefore better named a Memorandum of Understanding.

On the other hand, it should be noted that a non-binding NBO is not entirely devoid of binding rights and/or obligations; in other words, the NBO generally does not oblige the parties to complete the intended deal, which, if all goes well, will be formalized in another specific document, the so-called Sale and Purchase Agreement (“SPA”).

An NBO proposes conditional or indicative rules, that is, it does not bind matters relating to price, form of payment, price adjustment rules, among others; however, it has, or rather should have, binding clauses and obligations relating to the exclusivity period, confidentiality, governing law, dispute resolution, termination, costs and expenses, among others, which allow the relationship to be pursued between the parties to be regulated fairly and effectively, as well as the scenarios in which the deal fails, minimizing risks for those involved and defining safe paths for the deal to be completed or not, making the participation of experienced professionals essential in the negotiation and effective drafting of the terms of an NBO.

What are the main terms addressed in an NBO?

As already mentioned, there is no standard NBO template, since each case requires a unique document, aligned with the parties’ will and with the dynamics of the business and the discussions. Below are terms that are generally part of the rationale behind drafting and negotiating NBOs. It is worth noting that the table below is illustrative, and other terms and/or issues may arise or be mandatory depending on the dynamics of each transaction.

The topics highlighted in gray are generally binding; the others may or may not be binding.

Binding and non-binding terms

An NBO, as its name suggests, reveals intentions and understandings and does not express definitive, 100% enforceable wills; for that reason it contains the so-called non-binding offer, with the exception, as already stated, of certain provisions.

The non-binding nature of the document is due to the fact that only in the course of the negotiation and after the due diligence will the parties have the clarity needed to decide whether or not to sign the definitive Sale and Purchase Agreement and, if so, which conditions should apply. The NBO thus serves to bind the parties to start the path of the transaction, but without the obligation to conclude it; however, to protect the interests of the parties involved, certain provisions are commonly 100% binding, as indicated in the table above.

It is worth stressing that good practice teaches that the LoI should state specifically and expressly which of its terms are binding and which are non-binding, since a lack of assertiveness in this regard, in the event of a conflict, may result in a given rule being applied or not, contrary to the parties’ original will.

What factors influence the form and content of an NBO?

An NBO may be more or less detailed according to the interests of those involved but, in general terms, negotiating specific points more fully tends to make the rest of the process more assertive and helps identify, from the outset, any insurmountable issues (deal-breakers), avoiding unnecessary investment. On the other hand, bringing sensitive discussions forward may also result in the premature end of the negotiation over points that could have been better handled in the course of the negotiation.

In more dynamic situations, a concise NBO is entirely appropriate, setting out conditions relating to value, general guarantees and exclusivity, with mostly non-binding obligations. The advantage of concise NBOs lies in the fact that they speed up the progress of negotiations and can be useful to the buyer in competitive processes, serving to secure exclusivity and/or maintain engagement with the target. The disadvantage is that they postpone dealing with issues that may become obstacles in the future, leading to premature investments of time and resources.

Moreover, the form of an NBO is also influenced by the party with the stronger position in the negotiation. A well-positioned buyer tends to prefer a more general NBO and a long exclusivity period. The seller, in turn, tends to prefer detailed NBOs with specific rules, since once it grants exclusivity it will naturally give the buyer greater strength and decision-making power. It is therefore even advisable for the seller to seek the greatest possible degree of detail and commitment, especially regarding price and price adjustment rules, before stopping negotiations with other potential investors, since it is obviously more convenient to negotiate and secure certain conditions while the other party faces the threat, or the sense of threat, of other competitors, which dissolves once exclusivity is granted.

Conclusion

As to whether an NBO should be concise or detailed, and as to the topics identified as binding or non-binding, there are countless variables that can influence the equation in the search for the ideal NBO; indeed, as stated, in certain cases other specific issues may arise that need to be addressed so that it serves as a precise, balanced document aligned with the parties’ interests.

Therefore, in order to obtain the expected results and preserve interests, the importance of an NBO in the course of an M&A transaction is evident. There is no ready-made recipe for drafting and/or negotiating it: surgical precision is needed to maneuver the forces at play, weighing advantages and disadvantages, and experience is required to avoid mistakes and to avoid precipitating or postponing undesired results.