Does a letter of intent commit you to sell in France?

The letter of intent is the first document of a French share deal. It sets the scope of the transaction, the price or its method of calculation, the timetable and the framework for the discussions to come. Signed too early, it locks in positions that should have stayed open; signed too late, it lets the buyer conduct due diligence without a framework. Its legal force is assessed clause by clause.

1. What the letter of intent settles and what it leaves open

The letter of intent records the points already agreed: the object of the transaction, a price range or a valuation method, the main steps up to signing, the scope and duration of due diligence. It leaves open the points that depend on due diligence: the final price, the extent of the warranties, the conditions precedent. That distinction must be legible in the text itself, because an agreement that is too precise on the essential terms of the sale may be recharacterised as a binding agreement.

Each party should re-read the letter asking, clause by clause, whether it would accept to be bound by what it says: whatever is not yet agreed must be expressly presented as remaining to be negotiated.

2. The provisions that bind from signature

Even where it does not bind as to the sale, the letter contains immediate obligations. Confidentiality covers the information exchanged during the discussions; independently of any clause, whoever uses or discloses without authorisation confidential information obtained in the course of negotiations incurs liability (article 1112-2 of the French Civil Code), but the clause remains useful to define what is confidential, for how long and with what sanction. Exclusivity, an obligation to negotiate in good faith within a timetable, the allocation of costs and the governing law are frequently added. These provisions are genuine contracts: their breach is sanctioned as such.

Before signing, these clauses should be isolated from the rest of the letter and negotiated with the same care as a definitive agreement, because they will apply even if the sale never happens.

3. Exclusivity: duration, scope, sanction

Exclusivity prohibits the seller from negotiating with a third party for a given period. It is the heaviest provision of the letter: it takes the seller off the market with no certainty of selling. Its negotiation turns on three points. The duration, which should track the real timetable of due diligence and drafting, with express rather than tacit extension. The scope: a prohibition on negotiating only, or also on soliciting and providing information. The sanction: the letter may provide for a fixed indemnity in case of breach, simpler to enforce than proof of a loss.

The seller should grant exclusivity only against a tangible commitment from the buyer, a due diligence timetable and evidence of financing first of all, and for a period it could afford to lose if the deal fails.

4. Breaking off negotiations and its limits

The initiation, conduct and termination of negotiations are free, but must satisfy the requirements of good faith (article 1112 of the French Civil Code). The freedom to walk away remains: what is sanctioned is fault in the circumstances of the termination, such as the abrupt ending of advanced discussions maintained without a serious intention to conclude. Damages may compensate neither the loss of the benefits expected from the contract that was not concluded nor the loss of the chance of obtaining those benefits: they cover the costs incurred, not the profit hoped for. The pre-contractual duty of information (article 1112-1 of the French Civil Code) moreover binds the party who knows information of decisive importance for the other party’s consent.

The party that wants to withdraw should do so with stated reasons and without abruptness, at a stage where the other has not been kept in the certainty of closing; the party facing the termination should document its costs, which alone are recoverable.

5. Binding or non-binding: how the drafting decides

The characterisation does not depend on the document’s title but on its content. A letter that settles the asset and the price without reservation, and makes the sale subject only to formalities, may amount to a binding commitment; a precise and firm offer, once accepted, forms the contract whatever label the document bears. Conversely, a letter that expressly makes any sale subject to the signature of a share purchase agreement, to satisfactory due diligence and to the approval of the competent corporate bodies remains preparatory. Practice combines the two registers: a non-binding body, and clauses expressly stated to be binding, listed as such.

The letter must itself say what binds and what does not, in a dedicated clause: it is the only way to control its characterisation in the event of a dispute.

6. What to negotiate before signing

On the seller’s side: the duration of exclusivity and what is obtained in return, the level of detail of the price (a range with a method rather than a bare figure, which will serve as an anchor), the fate of the information provided if the deal fails, and the freedom to withdraw without indemnity outside cases of bad faith. On the buyer’s side: the longest possible exclusivity, organised access to information, and the fixing at this stage of the structuring parameters of what follows, the price mechanism, the principle of warranty and indemnity provisions, the conditions precedent. The letter of intent shapes the balance of power for the whole negotiation: what is conceded there is hard to claw back later.

Neither party should sign without mapping the letter onto the full timetable of the transaction, due diligence, drafting, approvals, and checking that it keeps an exit at every stage.

Frequently asked questions

This information is general and does not constitute legal advice. Every transaction calls for its own analysis.