The Billion Dollar Mistake- Pitfalls of a Letter of Intent

Have you ever purchased or sold a business? How about a piece of commercial real estate?  If so, you have probably seen a Letter of Intent.  The purpose of a Letter of Intent is to outline the basic terms of a transaction in order to create a framework for the deal to proceed towards a formal agreement and closing.  However, the language of a Letter of Intent, and the actions of the parties, can have serious unintended consequences.

In the late 1980’s, Getty Oil and Pennzoil, Co. signed a letter of intent outlining the terms of Pennzoil’s planned acquisition of Getty Oil.  Although there was no formal agreement, the Letter of Intent outlined details such as stock price, the restructuring of Getty, and the Getty board’s involvement in the deal.  Getty and Pennzoil made press releases announcing an “agreement in principle,” and there appeared to be a clear path towards finalizing the sale.  Late in the game, another oil giant, Texaco, Inc., approached Getty with an even sweeter offer.  Getty backed away from Pennzoil and struck an agreement to sell to Texaco.  Irritated by Texaco’s meddling, Pennzoil sued Texaco for interference with its contract with Getty, claiming the Letter of Intent was a binding agreement between Pennzoil and Getty.  After trial, a jury agreed with Pennzoil, and entered a judgment against Texaco for $10.6 Billion even though there was never any formal agreement. That’s a costly mistake!  And similar mistakes occur every day in business transactions.

If you are buying or selling a business, or a piece of commercial real estate, you’re probably not risking a billion dollar judgment.  But for many business transactions, hundreds of thousands, or even millions of dollars are at stake.  A Letter of Intent must be drafted appropriately for the circumstances, and must clearly and unequivocally state which provisions are binding, and which are not.  The parties’ actions surrounding the deal must be consistent with the written terms of the Letter of Intent, or they risk making terms binding, even though that is not the intent.

If you are buying or selling a business or commercial real estate, it is essential to have good legal counsel from the very beginning.  This can help prevent the unintended, and expensive, consequences of a poorly drafted Letter of Intent.

About the Author

Neal Rice | Rice Law FirmNeal is a former Army Officer turned estate planning, real estate & business law attorney.  He is the founding attorney of the Rice Law Firm, in Lancaster County, Pennsylvania. Outside of work, Neal enjoys time with his wife and family, serving his church, boating, traveling, and a good Philly cheese steak. You can email Neal at nrice@ricelegalfirm.com, or visit the Rice Law Firm.

This blog entry is for general information purposes only.  It is not intended to provide specific advice on individual legal, financial, or tax matters. It is not intended to and does not establish an attorney-client relationship.  Please consult an appropriate legal or tax professional for advice pertaining to your unique situation.