Description

Memorandum of Understanding (MOU)

Summary

A Memorandum of Understanding (MOU) is a document that identifies and frames a potential transaction.  An MOU also sets out certain terms agreed in principle between parties.  MOUs vary greatly in form and complexity, depending on the particular industry, transaction, and the parties involved.  While MOUs can be either binding or nonbinding, they most commonly consist of both nonbinding and binding provisions.  The nonbinding provisions usually relate to those business points that have already been agreed in principle.  The binding clauses are typically more legal or process-oriented in nature, such as confidentiality and due diligence.

Details

MOUs are used routinely in M&A transactions where exclusivity provisions during negotiations can be particularly important.  Parties typically use commercial transaction MOUs:

• In more complex or long-term transactions.
• When one or both parties seek reassurance regarding the intent of the other party to make the deal.
• To provide flexibility with timing considerations.

Memorandum of Understanding Versus Letter of Intent and Term Sheet

Individuals often use the terms “MOU,” “letter of intent,” and “term sheet” interchangeably to refer to a preliminary agreement.  There is generally little, if any, substantive difference among the three.  Attorneys can draft either binding or non-binding MOUs.  Courts typically focus on the intent of the parties rather than the particular title and format of the document to determine whether it is binding or nonbinding.  However, the type of preliminary agreement and its formatting may, in some cases, be considered one factor among many in determining the intent of the parties.

An MOU looks like a formal agreement.  It contains signature blocks and typically a preamble or introductory section, followed by an operative section consisting of numbered clauses.

One party drafts a letter of intent in the form of a letter that the other party then signs.  Sometimes, the other party contributes to drafting the letter of intent.

Benefits of Entering into an MOU

The main purpose of an MOU is to enable parties to a transaction to more efficiently reach a definitive agreement.  MOUs serve to streamline negotiations and expose obstacles to consummating the transaction.  A well-drafted MOU can therefore reduce the costs associated with consummating the transaction.

A party may also wish to ascertain a certain level of commitment or moral obligation from the other party before proceeding with more costly and time consuming matters.  Such matters may include conducting due diligence on the transaction or the counterparty or granting access for due diligence by the counterparty.

Risks

The most common risk associated with an MOU is that it may create unexpected binding obligations for a party. If the author is not careful a court may deem a provision binding despite the fact that the author deemed the provision non-binding.  Conversely, a party may treat the MOU as a formal and binding agreement and make premature investments or other contractual commitments.

Assumptions

This Memorandum of Understanding assumes that:

• There are two parties to the transaction. The parties should adjust the MOU as necessary if additional parties, such as third-party suppliers or service providers, also have rights or obligations under the proposed agreement.
• The parties to the agreement are US entities and the transaction takes place in the US. Parties may need to modify these terms to comply with applicable laws in relevant foreign jurisdictions.  Such circumstances may arise when any party organizes in, operates in, or any part of the transaction takes place in, a foreign jurisdiction.
• Parties use these terms in a business-to-business transaction. The parties should not use this Memorandum of Understanding in a consumer contract.  Such contracts may involve legal and regulatory requirements and practical considerations that are beyond the scope of this resource.
• The terms are not industry-specific. This MOU does not account for any industry-specific laws, rules, or regulations that may apply to certain transactions, products, or services.