2020. 11. 24. TUE. Los Angeles, CA.
To be honest, I used to think that the MOU (Memorandum of Understanding) was not always binding and was signed easily. It seems that the importance of the MOU which is related to the M&As of workout companies or restructuring companies is stronger, but in my experience, in some M&A cases, I had negotiated and reviewed dozens of pages of MOU.
The MOU comes out after the NDA usually, and the parties sign the MOU after the M&A deal has progressed to a certain extent, but before due diligence which buyer investigate the target company. As such, the ambiguous point at which the MOU is signed helps to understand the nature of the MOU and its key issues.
So, why do the parties sign the MOU before the buyer get to know the target company's status and issues in detail through due diligence? I would say "to make sure that we (M&A parties) are on the same page."
Although the parties sign MOU before due diligence usually, they have communicated with each other and have a consensus on some issues at the time. At this point, Seller's desire to increase the deal certainty is growing, but also Buyer’s desire to have an exclusivity to the deal and a flexibility to exit for contingencies as well.
Because of this ambiguous situation, issues regarding the legal binding and the implementation of the MOU are mainly problematic.
First issue is legally binding of the MOU (i.e., whether it is enforceable or can claim damages when a breach). It totally depends on whether the parties agree. Generally, the contract would be binding, so if the parties don’t want to have the legal binding, they have to put the words in the contract. Most MOUs have a provision that some provisions are legally binding, while others are not.
So, why do they put non-binding provisions into the MOU? Like I said before, they would do “to make sure that they are on the same page." And, even if the provisions are not legally binding, it is difficult to claim different than the MOU, unless material changes are found through due diligence or in the progress. If one party claims to reverse what is stipulated in the MOU, that can have a significant negative impact on the party’s reputation.
Next time, I will talk about the issue regarding the implementation of the MOU.