©2002 A. Paul Mahaffy. All rights reserved.

Introduction

The parties involved in the purchase and sale of a business will often follow a certain path in going from their preliminary discussions through to the eventual closing of their deal. In attempting to document the progress of the parties along this "deal continuum", their counsel will generate certain agreements and carry out various investigations. Counsel will usually prepare a confidentiality agreement to be signed by the parties at the initial stage of discussions, and then later on, when the parties have come to an understanding of the principal business terms of the deal, a letter of intent will be prepared. Still later on, and depending upon the results of the investigations and other due diligence activities being carried out, a comprehensive purchase and sale agreement expanding upon the provisions of the letter of intent will be prepared, negotiated, and possibly signed. And eventually, if all of the conditions prescribed in the purchase and sale agreement are satisfied, including the preparation and execution of numerous other definitive agreements, the deal may be closed.

This paper will examine some of the issues relating to the preparation of confidentiality agreements and letters of intent, and the due diligence process, for the purchase and sale of a business. While many of the issues to be examined will apply whether the deal is structured as an asset sale or a share sale, the issues specific to deals involving public companies will not be examined, nor will the issues involving businesses located outside of Ontario.

Although the clients may prefer to involve counsel in the deal only when the purchase and sale agreement needs to be prepared, there are advantages to the clients in retaining counsel at the earlier stages. What is decided between the clients when preparing the letter of intent is generally to be reflected in the purchase and sale agreement and other definitive agreements. In theory, at least, the definitive agreements are not to be inconsistent or in conflict with the letter of intent. Furthermore, due diligence investigations can be started once the confidentiality agreement is signed. A significant problem with the business being purchased might be identified by the buyer through such investigations, thereby creating an opportunity early on to address the problem in the letter of intent.

However, although the buyer and perhaps the seller may want to investigate each other as early as possible, neither will want to incur any significant expense in the absence of a binding letter of intent or purchase and sale agreement. Until then, each may restrict its due diligence efforts to only preliminary searches and cursory document reviews. And given the confidentiality agreement between them, each may be prevented from approaching third parties for confirmation of what the other may have represented until the purchase and sale agreement is actually signed.

CONFIDENTIALITY / NON-DISCLOSURE AGREEMENTS

Before the parties begin to exchange specific information about each other in an effort to determine whether a deal between them might be possible, they will often enter a confidentiality or non-disclosure agreement as the first step in the deal continuum. Some parties, particularly venture capital firms considering a share purchase, initially refuse to sign confidentiality agreements when requested, simply on the grounds that they receive so many business plans to look at which are all so similar, that they can't keep them all straight. Ordinarily, however, the parties entering into negotiations for the purchase and sale of a business aren't so reluctant.

Confidentiality agreements can be either "one-way", when only one party is disclosing confidential information to the other, or "two-way", when both parties are exchanging confidential information with each other. Although a confidentiality agreement covering the purchase and sale of a business may be just one-way when only the seller is disclosing information to the buyer, it is ordinarily two-way if disclosure is also being made by a buyer to support the seller's concerns about the buyer's ability to actually close the deal or to pay any installments of the purchase price due after closing.

Although many confidentiality agreements are quite brief and merely recite the duty of each party to keep confidential any information disclosed to it by the other party, the provisions discussed below are often found in confidentiality agreements for the purchase and sale of a business.

Definition of Confidential Information

A comprehensive definition of what is regarded as confidential information and what is not confidential information should be set out. Information which is already in the public domain, or becomes known to the receiving party through other sources, or has been independently developed by the receiving party, is usually exempted. In order to provide certainty, some agreements require that each document to be disclosed by one party to the other be marked "confidential" in order for it to be caught by the agreement as "confidential". However, in practice, such a marking rule is observed more in the breach and places an extremely high standard on the seller which is required to produce the vast majority of documents relating to the deal.

Scope of Use and Further Disclosure to Others

The extent of the permission granted to use the confidential information should be clearly set out. Ordinarily confidential information is disclosed only for the purposes of evaluating the deal during a prescribed period of time, and the information is not to be used by the recipient for any other purpose nor disclosed to any other party. However, further disclosure is usually permissible to employees and certain outside advisers such as lawyers and accountants provided they have a need to know the information in order to assist in evaluating the deal. Disclosure to any advisers should only be permitted if satisfactory confidentiality arrangements are in place with them, and any confidential information disclosed to them should be clearly marked as being confidential.

A further exception for disclosure to others is generally made for disclosure required under court order or pursuant to applicable statutory or regulatory authority. However, some confidentiality agreements provide that if the recipient is required to disclose confidential information to third parties, the party originally disclosing the information to the recipient must first be given notice, often within a very short time frame, to review and approve the contents of any statement that is to be released or filed by the receiving party with the applicable authority.

Errors and Omissions Excepted

The disclosing party should not be held responsible for any loss incurred by the receiving party in the event that the disclosed information turns out to be incomplete or inaccurate. A duty of care during negotiations is not imposed upon negotiating parties under common law, as confirmed in the case of Martel Building Ltd. v. Canada [2000], 2 S.C.R. 860, 2000 SCC 20. Such a duty should be imposed, however, by way of the representations and warranties contained in the purchase and sale agreement, since the parties are given ample opportunity during the preparation of that agreement and the various schedules to it to ensure the accuracy and completeness of the information provided.

Remedies for Breach

Each party ordinarily agrees to indemnify the other for any damages incurred by the other resulting from disclosure in breach of the agreement. However, in addition to the right to sue for damages under the indemnity in the event that the confidentiality agreement is breached by one party, the other party should also be given the right to apply for injunctive relief. Many confidentiality agreements state that breach will cause irreparable harm to the innocent party which cannot be adequately compensated by damages.

No Property Rights Granted

A specific statement should be added in the confidentiality agreement that the disclosing party is and will remain the owner of the information being disclosed, and that no property rights in the disclosed information are being granted by the disclosing party to the receiving party.

Term

Although some confidentiality agreements contain an expiry date, somewhere between two and five years from the date of the agreement, many such agreements will impose an indefinite term, especially if the disclosed information will remain confidential and proprietary to the disclosing party. While the provisions of the confidentiality agreement may be incorporated by reference into the letter of intent between the parties, it is often replaced by the confidentiality provisions contained in the purchase and sale agreement which are usually specified to survive indefinitely, whether the deal closes or not.

Duty to Return Information

The disclosed information should be returned to the disclosing party by the receiving party when the purpose for the original disclosure has been accomplished. Such return is normally required when the deal is terminated by the actions of the parties or upon a specified date or the occurrence of a specified event.

LETTERS OF INTENT

The basic terms of a proposed purchase and sale of a business are often set out in a preliminary document variously described as a letter of intent, term sheet, memorandum of understanding, or heads of agreement. Whatever it may be called, and for the purposes of this paper it will be referred to as a letter of intent, the terms set out in the letter of intent are generally repeated and expanded upon in a definitive purchase and sale agreement which is intended to replace the letter of intent. However, the letter of intent can become quite a detailed and comprehensive document. Some letters of intent are not legally binding at all. Others are fully binding, although they are often so loaded with conditions precedent that the obligations which they set out may be difficult to enforce. For example, fully binding letters of intent are often conditional upon the approval by the boards of directors of each of the signing corporate parties.

However, the "hybrid" form of letter of intent, part of which is non-binding and part of which is binding, is becoming more commonplace in practice. The non-binding part usually contains the principal business terms of the deal. The binding part usually sets out the rights of the parties and the process to be followed up to the signing of the definitive purchase and sale agreement, or to the termination of the deal in the absence of such a signing.

The letter of intent provisions discussed below may be used either in binding or non-binding formats, although the expense reimbursement, deposit, exclusivity and confidentiality provisions are almost always made binding. The provisions described below can take on many possible variations, and should not be taken as reflecting a "best practice" or as favouring one party over the other.

Some letters of intent are considerably more detailed than others, even though they may all cover the same basic terms. Though some may simply refer to such other "standard" terms and conditions as are used in "generally comparable transactions", others may be quite specific, sometimes attaching certain portions of the definitive agreements as schedules to the letter of intent. Some letters of intent prescribe specific definitive agreements to be produced, which may include, in addition to the purchase and sale agreement, a shareholders agreement, employment and consulting agreements, confidentiality agreements, non-competition agreements, revised articles and by-laws or other charter documents, option agreements, and possibly many more.

Where a deal presents any concern which is particularly important to one of the parties, it should be addressed in the letter of intent in an effort to determine early on, before both parties have incurred considerable time and expense, whether the other party takes a strongly opposite position as to how such concern might be resolved. In other words, the "deal killers" should be identified and resolved in the letter of intent.

The comprehensiveness of the letter of intent depends to some extent upon the relative bargaining power of the parties involved, the importance of the deal to each party, and how quickly each of the parties wants or needs the deal to be closed. Whether the business being sold is profitable or unprofitable, whether the seller has "deep pockets" or is selling off assets to stave off bankruptcy, or whether the buyer needs to add the business to its current lines to match its closest competitor, can all affect the level of detail found in a letter of intent.

The Non-Binding Provisions

In the non-binding part of the letter of intent, the parties acknowledge that they are not legally bound by these provisions but intend to proceed to negotiate and execute a definitive purchase and sale agreement which may contain many of these provisions. The words used in these provisions often suggest a less than binding obligation, such as "may" and "would", or "possible" and "proposed", in contrast to the wording used in the binding provisions, such as "shall" and "agree".

Identity of the Parties

All of the parties expected to eventually sign the purchase and sale agreement should be made a party to the letter of intent. If the parties signing the letter of intent will not, or may not, be the parties signing the purchase and sale agreement and the other definitive agreements for closing, the letter of intent should allow for substitute parties. Many letters of intent provide for other members of a party's corporate group to acquire the shares or assets involved, often to achieve the most tax-effective structure. Sometimes a special purpose entity will be incorporated by the buyer for the purpose of the acquisition, or a seller will incorporate a new company to hold only the assets and liabilities desired by the buyer and proceed to sell the shares of such new company to the buyer. Either way, the other party may insist that the covenants and indemnities to be contained in the purchase and sale agreement and the other definitive agreements should be given by, or at least guaranteed by, the original party signing the letter of intent.

In other circumstances, it may be intended that certain parties be bound only by a few, selected provisions, such as the confidentiality or exclusivity provisions, or have their liability restricted to only a few warranties. Other parties may be intended to guarantee only certain financial obligations. However restricted the role certain parties may play in the deal, those who are intended to be liable for any part of it should be made parties to the letter of intent.

Included and Excluded Assets

If the seller is selling assets, the main assets desired by the buyer, especially the "jewels in the crown", should be specifically set out in the letter of intent as included assets. Those which the buyer wants to reject should be specifically set out as excluded assets. However, many letters of intent identify the assets being sold as simply all of the assets used in the purchased business, and thereby lead to the conveyance to the buyer of many things which aren't necessary for carrying on the business. Stale accounts receivable, unmarketable inventory, obsolete technology, malfunctioning equipment, personal use vehicles and undesirable leasehold premises are all examples of the kinds of assets which may be used in the purchased business but are often specifically excluded from the deal.

If the parties decide that the deal should be structured as a share sale instead of an asset sale, the assets desired by the buyer might first be transferred to a newly incorporated company, the shares of which are then made the subject of the share sale. Alternatively, the assets which the buyer wants to exclude might be transferred to another company before the shares of the transferring company are to be sold to the buyer. Either way, those assets to be transferred should be itemized in the letter of intent, and the proper completion of such transfer made a condition to the closing of the share sale.

Included and Excluded Liabilities

Just as the assets being included or excluded from the sale should be itemized in the letter of intent, those liabilities of the purchased business which are to be assumed by the buyer or which are to stay with the seller should also be set out. Identifying such liabilities early on in the deal process serves to address what mortgages, security interests, leases and other charges will be "permitted encumbrances" when the purchase and sale agreement is eventually prepared, or alternatively will have to be discharged on or before closing. Knowing well in advance what liabilities will have to be paid off for closing will accelerate arrangements with the financial institutions involved and reduce the need for closing on the basis of an undertaking by the seller to obtain the required discharges. Any material liabilities which have been incurred outside of the ordinary course of business, particularly those which represent long term commitments, should be identified as being either included or excluded.

In the letter of intent for an asset sale, it is desirable to identify whether provision will be made for the payment of the seller's trade creditors in general after the sale, or otherwise address how the Bulk Sales Act (Ontario) might be complied with on closing. If compliance with that Act is to be waived and an indemnity of the seller in favour of the buyer is to be given instead, the letter of intent should clearly set this out.

Purchase Price, Payment Holdbacks and Security

The amount of the purchase price, and whether it is to be paid in one lump sum or in a number of installments, whether security for the unpaid installments is to be given, whether the purchase price is to be allocated amongst various sellers, whether the purchase price is to be adjusted following a post-closing audit, and whether it is to be calculated upon reference to post-closing earnings of the purchased business, should all be clearly set out in the letter of intent. The applicable formula to be used in any such adjustment should also be set out. For example, the letter of intent may provide that the purchase price is to be adjusted to reflect the financial position of the company indicated in audited financial statements prepared as of the closing date. Adjustments are often provided for in the event that the receivables or inventory, or the net book value, or perhaps the earnings for the latest period, fall outside of an agreed upon range.

If any part of the purchase price is to be paid to a third party to be held in escrow pending determination of certain conditions, such escrow requirements should be identified in the letter of intent. For example, the letter of intent may provide that funds are to be held by an escrow agent for a specified time as security for any undisclosed liabilities and breaches of representations, warranties and covenants, with the cost of such escrow being shared by the parties equally.

Representations and Warranties

While many letters of intent simply describe the representations and warranties applying to the deal as those which are generally used in comparable transactions, mention should be made of those representations and warranties which either party is particularly concerned about or feels may be too contentious to defer until the purchase and sale agreement is being prepared. If the buyer is likely to want the seller to make certain representations and warranties which the seller will not be in a position to give on closing, the limitations or qualifications which the seller will need in order to make such representations and warranties should be clearly set out in the letter of intent.

For example, if the business being purchased consists almost entirely of intellectual property, the representations and warranties regarding intellectual property ownership and non-infringement should be settled at the time the letter of intent is being prepared and made a schedule to it. Also, if the seller knows at that time that certain representations and warranties will have to be restricted to the actual knowledge of certain people, or made subject to materiality thresholds, those people or thresholds should be specified.

Indemnities and Survival Periods

Since the remedy for a false representation is ordinarily provided by way of a claim under the indemnity sections of the purchase and sale agreement, the basic scope of such indemnities and any general limitations of liability should be addressed in the letter of intent. The length of time after closing or "survival period" during which an indemnity claim can be made for a misrepresentation, and whether the liability under the indemnities is unlimited or is to be capped at a specified dollar amount, should be clearly described in the letter of intent. It may also be desirable to even set out any de minimus or deductible levels for an indemnity claim.

Joint and Several Liability and Guarantors

If liability under the non-binding provisions of the letter of intent is intended to be jointly instead of just severally imposed upon any of the parties in the purchase and sale agreement, the letter of intent should state so. Furthermore, if one of the parties expects a third party to guarantee the performance of the other party's obligations under the transaction, the letter of intent should clearly refer to the guarantee and, as mentioned above, provide for signature by the guarantor.

Employees

While employee issues aren't ordinarily mentioned in a letter of intent for the purchase and sale of shares, except perhaps for certain employment or consulting contracts which may be conditions of closing, letters of intent for the purchase and sale of assets should describe how the employees of the seller are to be treated in light of the sale, given that the buyer has various liabilities as a successor employer under applicable employment legislation. If it is foreseeable that any employees are to be terminated, the letter of intent should address the extent to which each party is to be responsible for compensating the employees terminated. The seller's obligations for employee compensation are usually coupled with an indemnity from the seller in favour of the buyer, and can be subject to a survival period and monetary cap in the same way as other indemnities referenced in the letter of intent.

Often a letter of intent for an asset sale simply provides that the seller shall terminate all of the employees, and that the seller shall be responsible for all severance costs associated with those employees who are not re-hired by the buyer upon closing.

Non-Competition and Non-Solicitation Covenants

The buyer usually insists that the seller agree not to compete with the buyer, or not to solicit the employees and customers of the purchased business, after the deal closes, especially if the seller is to retain a related business or is reasonably expected to establish a new business similar to the purchased business. Since such covenants are usually more contentious than other matters which are discussed between the parties during the preparation of the purchase and sale agreement, the letter of intent should at least describe how long such covenants should remain with the seller and in which geographical areas they should apply.

These covenants are in contrast to the agreement of the buyer not to solicit the employees and customers of the seller which ordinarily appears in the letter of intent as a binding provision, as discussed below.

Conditions of Closing

Although the numerous conditions for closing the sale of a business are set out in considerable detail in the purchase and sale agreement, they are usually glossed over in the letter of intent unless they are expected to be quite difficult and time consuming to satisfy, or are of such specific importance to one of the parties who wouldn't consider doing the deal unless such conditions are first satisfied. These stated conditions often relate, as with the identification of the included assets, to the "jewels in the crown" of the purchased business. They might cover the re-issuance of an essential government permit, or the receipt of a favourable environmental report, or the extension of the term of a crucial customer contract. Or they might just require the execution of employment contracts with certain key executives currently employed by the seller, or require the consent of a landlord to waive the "non-assignment" or "change of control" prohibitions found in the seller's lease which is for a particularly valuable location at below market rental. Such essential conditions, therefore, should be included in the letter of intent.

The Binding Provisions

In the binding part of the letter of intent, the parties acknowledge that they are legally bound by these provisions even though they intend to proceed to negotiate and execute a definitive purchase and sale agreement which may contain many of these provisions and which will generally replace these provisions. The words used in these provisions, such as "shall" and "agree", suggest binding obligations. This part should clearly indicate if liability is being imposed jointly and not just severally on any of the parties.

Confidentiality and Non-Disclosure

In addition to the confidentiality agreement which the parties signed at the outset of the deal, the duty of confidentiality which each party owes to the other should be reinforced by affirming in the letter of intent the continuing application of that agreement to the deal, or setting out any exceptions to that agreement which may have become necessary. The letter of intent should also provide that the confidentiality agreement and the duties prescribed under it are to survive the failure of the deal to close. Reiterating these duties of non-disclosure and confidentiality also serves to reinforce the duty of exclusivity, discussed below, imposed upon the seller who might otherwise be tempted to "shop" the letter of intent around in the hope of a better offer from third parties.

There will often be a "private and confidential" notice on the top of the first page of the letter of intent to reinforce its confidential nature. Furthermore, the letter of intent may provide that if any disclosure to a third party with respect to the deal is felt desirable or necessary, the parties should agree to cooperate with each other in the preparation of the announcement to be made.

Access for Inspection and Phased Disclosure

To facilitate the buyer's due diligence investigations, the letter of intent may give the buyer access to the seller's place or places of business during regular business hours upon reasonable written notice to look at the seller's books and records, and interview certain employees, relating to the business. Alternatively, in an effort to reduce disruption to the ongoing operations of the business and maintain confidentiality, the letter of intent may specifically provide for the establishment of a "data room", possibly located away from the seller's place of business, which contains copies of all of the relevant minute books, accounting and tax records, contracts, and other materials, and provide that the buyer's access is restricted to that room only.

The extent and timing of permitted access and due diligence disclosure often depends upon the amount of trust and comfort the parties share with each other. If they are direct competitors in the same market, access to and disclosure of sensitive financial and customer information may be delayed until the signing of the purchase and sale agreement. If it is expected that signing of the purchase and sale agreement and closing will occur at the same time, such access and disclosure may not be given until a relatively short time before the expected closing date. Often the parties will use the letter of intent to set out a phased disclosure schedule, itemizing when particular categories of documents will be made available for inspection, or when certain customers, suppliers or employees may be interviewed.

Expenses, Deposits and Break-up Fees

The process for buying and selling a business generally involves considerable time and professional fees being spent by the parties during the due diligence and document preparation stages without any assurance that the deal will actually close. Most letters of intent state that each party will be responsible for its own fees and expenses. Yet both parties incur not only out-of-pocket expenses but, more significantly, an "opportunity cost" of pursuing the deal instead of using their resources to pursue alternative business opportunities which could prove to be even more financially beneficial.

In other words, both parties make a considerable investment in attempting to close the deal, and therefore each party explores the possibility of recovering its investment from the other party should that other party prevent the deal from closing. The letter of intent will often set out one or more of a number of possible mechanisms to enable a party to recover its investment from the other. Which party receives such a right of recovery in the letter of intent often depends on the bargaining power of the parties and how anxious each party is to close.

For example, a seller may insist that the buyer advance a fixed amount on signing of the letter of intent which is to be held by the seller as a deposit and applied on closing to the purchase price owing, or be forfeited by the buyer should the buyer fail to close. Alternatively, the buyer may be required to pay the seller's professional fees and other expenses incurred in respect of the deal, up to a prescribed amount, in the event the buyer fails to close. Or, the seller may be required to pay the buyer's fees and expenses, again up to a stated maximum amount, should the seller fail to close. These latter obligations of one party to pay the fees and expenses incurred by the other are sometimes called "break-up fees", although the party entitled to be reimbursed runs the risk of being unable to collect from the other.

In addition to addressing the fees and expenses directly incurred by one party for its own benefit, there are often fees and expenses incurred by one party for the benefit of the other party, or for the benefit of both parties, such as the cost of environmental audits, property surveys, mechanical inspection reports, or government approvals to the deal. Such costs should be identified and allocated amongst the parties in the letter of intent.

Consulting Agreements

Many of the agreements with third parties which the buyer or seller may enter into as part of the due diligence process create more than just cost issues which should be addressed in the letter of intent. These agreements, sometimes referred to as consulting agreements, involve the retention by either the buyer or seller of certain consultants to conduct various studies and carry on certain analyses for due diligence and business valuation purposes. They might involve environmental reports (Phase I and II), technology audits, insurance adequacy reports, mechanical fitness inspection reports, property surveys, furniture and equipment valuations, and so on.

The letter of intent should address not only who pays for these reports and related services as suggested above, and whether the payment by one party or the other should be contingent on the closing of the deal, but also who owns the work product created by the consultant, or who has the copyright in the delivered report, should the deal close or fail to close.

If completion of the deal is to be conditional upon delivery of satisfactory reports, the letter of intent should try to define what is meant by satisfactory, who decides and how much discretion can be exercised. If satisfactory is to mean that no additional cost is to be incurred in order to achieve a recommended standard, it's preferable to state this in the letter of intent.

Conduct of the Business up to Closing

Depending upon the amount of time expected to elapse between the signing of the letter of intent and the signing of the purchase and sale agreement, the letter of intent may generally require that the seller operate the business in this interim period in the same manner in which it has operated the business before, but leave it to the purchase and sale agreement to more comprehensively set out the specific rules for running the business up to closing. However, if the purchase and sale agreement is likely to be signed at the closing along with all of the other definitive agreements, a practice which occurs more frequently than not, the letter of intent should provide more specific guidance to the seller for the pre-closing period. A list of "major decisions" requiring the prior consent of the buyer, such as material capital expenditures, long term contracts, the hiring or firing of key officers or significant raising of compensation levels, the declaration of dividends, or borrowing for more than ordinary operations, might be agreed upon and either set out in the letter of intent or attached as a schedule to it.

Non-Solicitation of Employees and Customers

In an effort to deter a buyer from using the access afforded during the due diligence period to become familiar with the seller's employees and customers and then subsequently entice them away from the seller should the deal fail to proceed, the letter of intent often prohibits the buyer from soliciting the seller's employees and customers. This non-solicitation provision usually survives the termination of the letter of intent unless it is replaced by a similar provision in the purchase and sale agreement. Sometimes, this provision is made reciprocal, thereby preventing the seller from soliciting any of the buyer's employees who may be involved in carrying out some of the due diligence.

Exclusive Dealing

Often called a "lock-up" or "no-shop" provision, the letter of intent usually imposes a duty on the seller to refrain from talking to any other parties about possibly investing in the seller or buying a significant portion of the seller's assets for a certain period of time after the letter of intent has been signed. This is designed to reflect the "opportunity cost" of both parties and to focus their time and resources on closing the deal. The length of time covered by the exclusivity provision can be hotly debated, but is intended to reflect the amount of time which the parties anticipate is reasonably required to close the deal.

However, in an effort to get the highest possible price, a seller often wants to encourage other parties to submit offers and effectively create an auction. The seller may be able to avoid giving outright exclusivity to the buyer by substituting in the letter of intent a right of first refusal in favour of the buyer, so that the buyer will have the right to buy the business on the same terms offered to the seller by any third party.

Negotiation in Good Faith

Given some of the recent case law, such as Peel Condominium Corp. No. 505 v. Cam-Valley Homes Ltd., (2001) 53 O.R. (3d) (C.A.), which have held that parties do not have to exercise good faith when negotiating with each other, the letter of intent should state that the parties will exercise good faith during the preparation of the purchase and sale agreement. However, this duty should terminate in the event that the buyer comes to the conclusion that the due diligence results are unsatisfactory and thereby wishes to terminate the letter of intent, as discussed below.

Termination and Survival

The binding provisions may usually be terminated if the due diligence investigations prove to be unsatisfactory to the buyer, or if the purchase and sale agreement is not executed by the parties by a certain date. Some letters of intent also provide for termination if a crucial report or necessary third party consent, or up-to-date financial statements, are not obtained by a certain date. These termination dates are often called "drop-dead" dates.

The letter of intent usually provides that termination will not relieve any party from liability for breach of any of the binding provisions prior to termination, but usually provides that at least some of the binding provisions survive termination and continue to be enforceable. The non-disclosure and confidentiality provisions, along with the non-solicitation and expense provisions, are generally stated to survive the termination, but are usually superseded by comparable provisions in the purchase and sale agreement once that agreement is signed. However, the exclusive dealing and negotiation in good faith provisions are ordinarily applicable for only a specified period of time and do not survive termination.

Governing Law

Far from being an innocuous boilerplate provision, the law chosen to govern a transaction can have substantial cost significance to the party whose own local law is not chosen, and therefore should be addressed early on in the discussions and inserted as a principal term in the letter of intent. Although the law chosen is often the law of the place where the business is primarily conducted, a buyer located in a foreign jurisdiction may want to use for the deal the documents (and the law firm) it has used in previous deals in its own home jurisdiction and with which it is already quite comfortable. In addition to the parties having to then customize the buyer's forms to reflect the specific laws applicable to various assets of the purchased business, the seller will then be faced with the cost of retaining counsel in the buyer's home jurisdiction to assist with document reviews and rendering of a legal opinion regarding the enforceability of the documents under the law of the buyer's home jurisdiction.

DUE DILIGENCE PROCESS

The due diligence process essentially involves the buyer's evaluation of information relating to the seller or the purchased business, and the verification of this information through independent sources wherever possible. Such verification can be accomplished by searching public registers, examining accounting records and contracts, and interviewing third parties such as customers and suppliers. While the due diligence process may also involve the seller's evaluation and verification of information about the buyer, this paper will focus on the buyer's investigation of the seller and the purchased business.

Why conduct due diligence?

While due diligence requires time and money to be conducted properly, and often more time and money than a buyer might be prepared to expect, there are definite benefits to be gained from the due diligence process.

From the buyer's perspective, conducting due diligence helps to ensure that the purchase price is fair and falls within an acceptable range of appropriate values. It allows a buyer to rely on information provided by sources independent of the transaction, not just provided by the seller. It helps to determine whether any dealbreakers exist, and allows for the attempted removal or rectification of such dealbreakers early on in the process, even though in practice some of these dealbreakers are revealed only days before the closing. Due diligence assists in evaluating the likelihood of future claims being brought against the purchased business or the buyer by lenders, suppliers, partners, licensees and other parties having commercial dealings with the purchased business. Instead of having to wait for some time after the deal is closed to discover problems and then pursue legal remedies based upon the purchase and sale agreement and other closing documents, a buyer given advance warning of such problems may be in a position to renegotiate the basic business terms, perhaps by requesting an abatement of the purchase price or payment of the purchase price in installments, or by requiring certain third party consents, guarantees, discharges or subordinations.

From the perspective of the buyer's counsel, the results of due diligence investigations provide backup for any legal opinions which may be required as closing documents. Due diligence also provides guidance to those lawyers who are drafting the purchase and sale agreement and various closing documents, and gives support to the many representations and warranties that may be contained therein. The wording in draft documentation is often changed to reflect what has been learned from the investigations being carried out. The less conclusive the investigations, the more comprehensive the documentation tends to get, to cover all the questions and concerns that haven't been satisfactorily disposed of during the due diligence process.

But regardless of individual perspective and despite whatever is necessary to motivate those involved to carry out the investigations which ought to be done, the overriding purpose of the due diligence process and common goal of those acting on the buyer's behalf should be to make sure that the buyer's expectations are realistic and can be met once the deal is closed.

There are, however, limitations as to what can be accomplished through due diligence. No matter how thorough the professionals undertaking due diligence tend to be, many interests and encumbrances are simply not registered or documented. Searching various public registries won't disclose possessory and statutory liens and certain kinds of intellectual property. For those property interests which are registered, registration may not necessarily be proof of ownership or ensure priority, but merely give rise to a presumption of validity.

What's to be looked at?

Generally anything that confirms the status and capacity of the seller, and anything that confirms the assets and liabilities of the purchased business, should be the subject of a due diligence investigation.

On-site inspections of the tangible assets of the purchased business may have already been conducted by the buyer to determine their operating condition long before the time when counsel is retained to act on the deal. But additional physical inspections may be required throughout the due diligence period and extend even beyond closing to a post-closing audit of inventory and other assets. Environmental assessments may necessitate a number of visits to the properties being acquired.

Numerous public records and registries may have to be searched. Records maintained by the provincial Registrar General for individuals, and by the companies branch for provincial corporations and business names and by the corporations directorate for federal corporations, will usually be searched at the outset to determine the status of the parties involved. Other records maintained by the Superintendent of Bankruptcy, Canada Customs and Revenue Agency, the various tax branches of the provincial Ministry of Finance, the Workplace Safety and Insurance Board, the Labour Relations Board, and the courts may also have to be searched. Title records and records of liens and other encumbrances concerning the assets of the purchased business which are maintained by the registry or land titles office, personal property security office, Ministry of Environment, local office of the Bank of Canada, Sheriff's office, bulk sales office, Canadian Intellectual Property Office, the federal Registrar General, the Registrar of Shipping, the Aircraft Registration and Leasing Division of Transport Canada, and the title records maintained by other offices may all have to be searched.

An examination of all required licenses, permits and other regulatory consents to operate in all jurisdictions where the purchased business appears to be carrying on business may have to be carried out. A comprehensive review of the business records of the purchased business, including employment records and benefit plans, its financial records, including financial statements and tax returns, and its corporate records, including minute books and share certificate books, may also have to be conducted, along with a review of its marketing and sales materials, insurance policies, environmental reports and many other types of documents.

And numerous kinds of agreements may have to be looked at: financing agreements, security agreements, equipment leases, premises leases, supply agreements, joint venture agreements, shareholders agreements, partnership agreements, non-competition agreements, customer contracts, trust agreements, sales agency agreements, employment contracts, licensing agreements, distributorship agreements, non-disclosure agreements, collective agreements, and so on. While emphasis may be given to detecting within the various documents certain types of restrictive covenants, such as those relating to assignability, change of control, type of business being carried on, territory of operations, and dealing with competitors, a comprehensive search for clauses covering early termination, cross-default, rights of first refusal, set-off, extended warranties and indemnities, and many other items imposing unexpected liability may nonetheless have to be done.

Ascertaining the existence of any unregistered or undocumented encumbrances, restrictions and other interests affecting a purchased business continues to be a challenge, particularly in respect of intellectual property. Consequently, it may not be possible to eliminate entirely the need to conduct personal interviews with those who may have a potential claim against certain assets, or who manage such assets, in order to discover unrecorded interests.

Where do you look?

The inspection of assets and review of records and documents generally take place at the various offices and plants of the purchased business where the assets and records are located, and at the offices of the seller where the seller's records may be located. While many of the records and documents to be reviewed may be brought together by the seller in a centralized data room, it may be impractical for the seller to assemble all the essential records and documents in just one location.

The various public records and registries mentioned above may have to be searched in those jurisdictions where the seller is incorporated and where it has its executive offices, and where the purchased business has its assets and where it is being carried on. Fortunately searches of many of these records and registries can be conducted without having to arrange for someone to actually attend at a government office, and can be completed either by fax or on-line.

Who do you look with?

While many of the searches and document reviews discussed above will be carried out by the lawyers retained by the buyer, the due diligence process often requires a multi-disciplinary team of professionals to work along side with the buyer in conducting some of the inspections and investigations. The buyer may directly or through its counsel retain accountants to examine financial records, actuaries to review any pension and benefit arrangements, environmental experts to conduct an environmental assessment of any real property, technology specialists to investigate any intellectual property, and various other consultants and advisors deemed necessary, including those recommended by the financial institution, venture capital firm or other party which may be financing the purchase.

The buyer itself may have, and often does have, greater expertise in conducting much of the due diligence, and may prefer to use its own staff, for the sake of expediency and cost-effectiveness, in carrying out some of the investigations and document review.

When do you look?

As part of the "deal continuum" mentioned above, many purchase and sale transactions have four stages during which due diligence may be conducted, although the length of each stage may vary from a few hours to many months, and some stages may be combined. The first commences before the signing of the confidentiality agreement, the second runs between the signing of the confidentiality agreement and signing of the letter of intent, the third runs between the signing of the letter of intent and signing of the purchase and sale agreement, and the fourth runs between the signing of the purchase and sale agreement and the closing.

Because carrying out comprehensive due diligence is very time consuming and expensive, the buyer is often influential in deciding what things should be done first. Ordinarily the basic status searches on the seller and preliminary title and encumbrance searches on only the most essential assets of the purchased business tend to be conducted before a letter of intent is signed. If some of the records and documents to be reviewed have been assembled by the seller in a centralized location for examination by a number of potential buyers, they may be accessible for review immediately after a confidentiality agreement is signed.

A larger part of the due diligence investigation may take place once the letter of intent is signed, especially if the letter of intent is legally binding and contains a clause providing for the buyer to be compensated by the seller in the event the deal doesn't close. If the letter of intent is non-binding, much of the due diligence may be deferred until the purchase and sale agreement is executed, despite the assistance earlier due diligence can provide to the drafting of representations and warranties in the purchase and sale agreement.

Do you look differently for share purchases than for asset purchases?

While the due diligence process is generally the same for share purchases and asset purchases, certain tasks may be given more emphasis than others depending upon the transaction structure. Whereas all of a target company's assets and liabilities need to be looked at in a share purchase, only the specific assets being acquired and specific liabilities being assumed need to be investigated in an asset purchase. For example, excluding certain inventory or equipment may obviate the need to review lengthy supply agreements and equipment leases or to conduct an on-site inspection around the time of closing.

For share purchases, considerable time may be spent conducting a thorough review of the minute books and share registers of the target company, with a view to determining what rectification efforts should be undertaken by the seller prior to closing. For asset purchases, the production on closing of a certificate of incumbency and a certified copy of the board resolution of the seller authorizing the deal may be about as close to the seller's minute book as the buyer's counsel gets.

How do you organize all this?

A checklist often serves as the main organizing tool for the due diligence process. Once the main business terms of the transaction have been agreed upon, the checklist can be tailored to fit the particular assets and liabilities of the purchased business. As mentioned above, the buyer may exercise some influence in determining priorities amongst the various items on the working checklist.

Assigning responsibility for carrying out certain items on the checklist to various members of the due diligence team can be a frustrating task if the team is comprised of professionals from different disciplines and different firms, engaged at different times throughout the process. Although it may not be necessary to prepare a formal critical path model indicating the various milestones to be met, each item on the working checklist should have a due date and a named individual assigned to its completion.

Someone should be selected as the team leader through whom the results of all investigations flow and are recorded. That person should also have the unenviable task of ensuring that the named individuals complete their assigned items by the applicable due date. More importantly, that person should be directly involved in negotiating and drafting the applicable documents, or work closely with those who are.

CONCLUSION

While not every deal will follow along the path described in this paper, buyers and sellers are generally advised to enter into confidentiality agreements and letters of intent, and to conduct a certain amount of due diligence, before they immerse themselves in all of the details of a comprehensive draft purchase and sale agreement. By starting the deal in the way suggested by this paper, the parties are given an opportunity early on to identify the principal interests and concerns of each other, and discover any major obstacles to proceeding, before they have spent considerable time and money, and suffered a lot of aggravation, in drafting, reviewing and redrafting numerous documents which may not be used in the end. Starting the deal in the way suggested increases the likelihood that the purchase and sale agreement will be signed and the deal closed because many of the potential "deal killers" will have already been addressed.

In other words, starting the deal this way should reduce the number of "surprises" just before closing. The "surprises" should already have taken place and the parties should already have decided to either terminate their discussions, or carry on with additional knowledge and possibly altered commercial terms.

Since most of us "don't know what we don't know", the real benefit to a buyer and seller in negotiating a letter of intent and carrying out due diligence early on is finding out what they don't know, instead of making assumptions based upon what they do know about each other. Once the good as well as the bad news is in, the buyer and seller and their respective advisers can evaluate all the news and decide what's really important and what isn't, and what constitutes an acceptable risk or reward. At least then they will have a greater chance of meeting the expectations they set when they first started talking to each other about buying and selling the business.

SCHEDULE A

CONFIDENTIALITY AGREEMENT

THIS AGREEMENT made this _____ day of ________ , 2000__ between ___________________ and _______________________.

FOR GOOD AND VALUABLE CONSIDERATION the receipt and sufficiency of which is mutually acknowledged, the parties hereto agree that the following terms and conditions form the basis on which they are prepared to allow each other access to certain information:

1.(a)For the purposes of this agreement, the "Information" shall mean all oral, written or machine readable information and data, and any accompanying support materials and documentation, disclosed directly or indirectly by one party to the other or any corporation associated with either of them relating to, without limitation, any discussions or negotiations between them concerning the evaluation of the potential business relationship between the parties.

(b)The Information is the property of the party disclosing same to the other party and the ownership of, and all right, title and interest therein shall at all times remain exclusively vested in the disclosing party.

2. Each of the parties hereto undertakes to the other:

(a) that unless it has received the prior written consent of the other party, it will hold all of the Information received by it in strict confidence and, without derogating from the generality of the foregoing, will not disclose such Information to any third party (other than its advisors as set out in paragraph (c)) nor use such Information for any purpose other than stated in paragraph 1;

(b) to use its best efforts to maintain the secrecy of all of the Information received by it; and

(c) that any of the Information received by it shall only be disclosed to those of its employees and advisors who need to know such Information for the said purpose, and warrant that such employees and advisors are obligated to and will maintain such Information in confidence.

3. The undertakings of paragraph 2 hereof shall not apply to any of the Information which:

(a) at the time of disclosure is in the public domain;

(b) after disclosure is published or otherwise becomes part of the public domain through no fault of the party receiving the Information (but only after it is published or becomes part of the public domain);

(c) a party can show was in its possession at the time of disclosure hereunder and which was not acquired by it under an obligation of confidence;

(d) a party can show that the Information was received by it after the time of disclosure hereunder from a third party who did not require the party to hold it in confidence and who did not acquire it directly or indirectly from the disclosing party and/or any associated corporation; or

(e) is disclosed by a party pursuant to requirements of law.

4. The disclosure of the Information shall not be construed as granting to the other party a licence of any rights under any copyrights, copyright applications or trade secrets in any country relating to any of the Information which the disclosing party or an associated corporation may now or hereafter own or under which the disclosing party or an associated corporation may now or hereafter hold licensing rights.

5. The receiving party shall return to the disclosing party the Information on or before any date as may be specified hereafter by the disclosing party in writing even though the receiving party shall not have completed the purpose for which the Information shall have been disclosed and delivered.

6. Immediately upon receipt of a request to return the Information, the party who received such Information shall discontinue and cease all further evaluation and forthwith deliver to the disclosing party all the Information of every kind in its possession, including any copies and summaries of the Information it may have made.

7. Each party acknowledges and understands that the other makes no representation or warranty in relation to any of the Information, its adequacy, accuracy, or suitability for any purpose, and except as expressly agreed in writing shall not be liable for any loss or damage arising from the use of any Information howsoever caused.

8. Each party acknowledges that notwithstanding the execution of this agreement, each party maintains the sole and absolute discretion to determine what, if any, of the Information it will release to the other party.

9. Any termination of the undertakings and covenants of a party hereto, be it actual, implied, constructive, or otherwise, shall not affect the other party's non-disclosure and non-use obligations hereunder, and such obligations shall survive any termination of this agreement.

10. It is understood that money damages may not be a sufficient remedy for any breach of this agreement, and it is hereby agreed that the parties will be entitled to specific performance as a remedy for any such breach. Such remedy shall not be deemed to be the exclusive remedy for any such breach but shall be in addition to all other remedies available at law or equity.

11. This agreement shall be deemed effective as of the date first written above and shall continue in full force and effect for a period of five years from the effective date of this agreement.

12. Except as otherwise provided in this agreement, any notice provided for under this agreement shall be in writing and shall be sufficiently given if and when delivered personally or mailed by prepaid registered post addressed to the parties at their respective addresses set forth below or at such other then current address as is specified by notice. During a period of actual or threatened postal disruption or dispute which may affect delivery to the address of either party, however, any such notice may not be mailed, but must be delivered personally. If notice is given by prepaid post in accordance with this paragraph 12, it shall be deemed to have been received on the fifth business day following the day of mailing.

13. The parties shall execute all such further documents and do all such things as may be necessary or desirable for the due carrying out of this agreement.

14. This agreement is not assignable by any party without the prior written consent of the other party, which consent may not be unreasonably withheld.

15. All of the terms and provisions in this agreement shall be binding upon and shall enure to the benefit of the parties and their respective successors and permitted assigns.

16. This agreement shall be construed and interpreted in accordance with the laws of the Province of ___________, and each of the parties hereto irrevocably attorns to the jurisdiction of the courts of the Province of __________.

17. This agreement constitutes the entire agreement between the parties pertaining to the subject-matter of this agreement and supersedes all prior agreements, understandings, negotiations and discussions between the parties, whether oral or written. No supplement, modification, waiver or termination of this agreement shall be binding, unless executed in writing by the parties.

18. If any term of this agreement or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable or shall terminate in the normal course, the remainder of this agreement or the application of that term to persons or circumstances other than those to which it is held invalid or unenforceable shall not be affected thereby and each term of this agreement shall be separately valid and enforceable to the fullest extent permitted by law.

IN WITNESS WHEREOF the parties have executed and delivered this agreement as of the date first written above.

SCHEDULE B

LETTER OF INTENT FOR ASSET PURCHASE INVOLVING A PRIVATE VENDOR

Provided by Paul D Wickens and Carmen Ellis of Heenan Blaikie (Toronto)

STRICTLY PRIVATE AND CONFIDENTIAL

[DATE]

[NAME AND ADDRESS OF VENDOR]

and to:

[NAME OF PERSONS OTHER THAN VENDOR TO BE BOUND BY BINDING PROVISIONS] {NOTE TO DRAFT: The Purchaser may want to bind one or more senior officers or related persons of the Vendor (the "RP(s)") by certain clauses; for example: the exclusive dealing, non-disclosure and confidentiality clauses.}

Dear Sirs/Mesdames:

Re: Proposed Purchase of Assets of [INSERT VENDOR NAME]

This letter of intent (the "Letter of Intent") is further to the discussions to date between [RP(s), if applicable], [INSERT VENDOR NAME] (the "Vendor") and [INSERT PURCHASER'S NAME] (the "Purchaser"). The Purchaser understands that the Vendor conducts the business of [DESCRIBE BUSINESS] (the "Business"). The provisions of this Letter of Intent will confirm the present interest of the parties with respect to the Purchaser's proposed purchase from the Vendor of [certain assets (or) substantially all of the assets of the Business] as set forth below (the "Proposed Transaction").

The purpose of this Letter of Intent is to describe in broad terms the basis upon which the Vendor, [RP(s)] and the Purchaser are prepared to complete the Proposed Transaction by setting forth certain non-binding understandings (the provisions of Part I, (collectively the "Non-Binding Provisions")) and certain binding agreements (the provisions of Part II, (collectively the "Binding Provisions")) among the Vendor, [RP(s)] and the Purchaser.

PART I - NON-BINDING PROVISIONS

The Non-Binding Provisions of this Letter of Intent are intended only to outline the principal terms and conditions upon which the parties will attempt to negotiate the Proposed Transaction and do not create or constitute any legally binding obligations between the parties, nor impose any liability on any party to another.

1. Definitive Agreement

The precise terms of the agreements between the parties relating to the Proposed Transaction will be contained in a definitive agreement of purchase and sale to be prepared by the parties' respective counsel (the "Definitive Agreement"). The Purchaser and its counsel shall be responsible for preparing the initial draft of the Definitive Agreement. No party shall have any liability to any other party (other than obligations referred to in the Surviving Binding Provisions hereto) if the Definitive Agreement is not prepared, authorized, executed or delivered for any reason.

{NOTE TO DRAFT: Consider whether the Vendor and/or the Purchaser may need to incorporate a special purpose company or cause an already existing related company to enter into the Definitive Agreement and complete the Proposed Transaction.}

2. Assets to be Acquired

The Purchaser will purchase from the Vendor the following assets (the "Purchased Assets") used in connection with the Business for the purchase price as set forth below: {NOTE TO DRAFT: Categories of assets are to be listed, together with references to any particularly significant items.}

3. Excluded Assets

The offer to purchase the Purchased Assets does not include any other assets used in connection with the Business (the "Excluded Assets"), including but not limited to the following: {NOTE TO DRAFT: Insert list of Excluded Assets, focusing in particular on controversial or unusual items.}

4. Purchase Price

The aggregate purchase price for the Purchased Assets will be $ [INSERT $ AMOUNT], payable by certified cheque or wire transfer on the Closing Date (as defined below in section 8), subject to the following adjustments: [INSERT BASES FOR ADJUSTMENTS].

{NOTE TO DRAFT: This section should cross-reference section 16 ("Deposit"), if applicable and explain how the Deposit will be applied on closing. Clarify whether part of the purchase price is to be satisfied by the assumption of liabilities and, if so, how much.}

The purchase price is based on the financial statements for the year ended [INSERT RELEVANT DATE]. The Vendor will also provide to the Purchaser as soon as they are available, all financial statements relating to the Business prepared after [INSERT RELEVANT DATE].

The adjustments referred to above will be determined by the parties in accordance with Canadian generally accepted accounting principles or, failing such agreement, by ·. {NOTE TO DRAFT: Consider whether an arbitration mechanism should be outlined.}

5. Assumed Liabilities

The Purchaser will not assume any of the liabilities or obligations of the Vendor of any nature or kind whatsoever, contingent or otherwise, other than liabilities of the Vendor related to the Purchased Assets and certain liabilities to be determined in respect of employees of the Vendor offered employment as described in section 6.

6. Employees

Prior to or on the Closing Date, each of [INSERT NAMES] shall have entered into employment agreements with the Purchaser, on terms and conditions satisfactory to the Purchaser and [INSERT NAMES], respectively, each acting reasonably.

Subject to the Purchaser being satisfied with its due diligence regarding the employees of the Vendor, the Vendor will terminate all employees [in the following divisions [INSERT DIVISIONS] [(or) of the Business] and the Purchaser will offer employment to such employees on substantially similar terms and conditions. {NOTE TO DRAFT: This approach would not be appropriate if the employees were unionized}.

7. Non-Competition/Non-Solicitation

The Definitive Agreement will provide that the Vendor and each [RP] will enter into a [two] year non-competition/non-solicitation agreement, pursuant to which each such party agrees that such party for [two] years after the Closing Date: (a) will not directly or indirectly be engaged in any business or undertaking which is competitive with the Business in [INSERT TERRITORY]; and (b) will not directly or indirectly solicit any employees of the Business for employment by such party or any undertaking with which such party is associated, or solicit the customers/clients of the Business and the Purchaser.

8. Closing and Conditions of Closing

The parties intend that the closing of the Proposed Transaction will occur on or before [INSERT PROPOSED CLOSING DATE] (the "Closing Date"). The closing of the Proposed Transaction is subject to the usual conditions of closing in favour of the Purchaser, all of which will be included in the Definitive Agreement, including, without limitation, the following:

all requisite governmental and regulatory approvals of, exemptions from and consents to the Proposed Transaction shall have been obtained and all waiting periods prescribed by law shall have expired;

all requisite Vendor and Purchaser board and shareholder approvals shall have been obtained;

the Vendor shall have obtained all consents and approvals to the transfer of any contracts, licenses and other instruments being transferred which the Purchaser considers material to the Business;

all Purchased Assets shall be free and clear of all encumbrances, except those to which the Purchaser specifically agrees;

there shall have been no material adverse change to the Business since the date of the last audited financial statements and the Business shall have been carried on in the ordinary course;

the execution and delivery of the employment agreements and non-competition/non-solicitation agreements described in sections 6 and 7;

the Purchaser shall be satisfied with its due diligence investigations; and

customary legal opinions, closing certificates and other usual closing documentation shall have been delivered.

9. Representations and Warranties

The Definitive Agreement shall include representations and warranties of a nature and type appropriate for transactions similar to the Proposed Transaction. {NOTE TO DRAFT: The parties may wish to clarify in the Letter of Intent (a) which persons shall be required to give representations and warranties; (b) the survival periods for various classes of representations; (c) dollar thresholds of materiality; and (d) which representations, if any, may be on a "to our knowledge" basis.}

10. Indemnities

The Definitive Agreement shall include standard indemnities by the Vendor and [RP(s)], jointly and severally, in favour of the Purchaser.

PART II - BINDING PROVISIONS

In recognition of the significant costs to be borne by each of the parties in pursuing the Proposed Transaction and further in consideration of their respective undertakings as to the matters described herein, the Binding Provisions shall be legally binding upon execution of this Letter of Intent. Sections 11 through 14 of the Binding Provisions survive in the event that this Letter of Intent is terminated (the "Surviving Binding Provisions"). Sections 15 through 21 of the Binding Provisions terminate upon termination of this Letter of Intent (the "Non-Surviving Binding Provisions").

PART II(a) - SURVIVING BINDING PROVISIONS

11. Confidentiality

{NOTE TO DRAFT: Use this or similar language if a separate Confidentiality Agreement has been entered into by the parties.}

The parties acknowledge that they remain bound by a Confidentiality Agreement dated [INSERT DATE] made between them relating to the Proposed Transaction (the "Confidentiality Agreement"). The parties further acknowledge that for purposes of this Letter of Intent, "Confidential Information" shall have the meaning defined in the Confidentiality Agreement.

{NOTE TO DRAFT: If no Confidentiality Agreement has been entered into at the time this Letter of Intent is executed, a provision similar to that below will be required.}

Except as and to the extent required by law, the Purchaser shall not disclose or use, and it shall cause its officers, directors, employees, agents and other representatives not to disclose or use, any Confidential Information (as defined below) with respect to the Vendor and its Business furnished, or to be furnished, by any representative of the Vendor, at any time or in any manner, except for its use in connection with its evaluation of the Proposed Transaction. For purposes of this Letter of Intent, "Confidential Information" means any information about the Vendor and its Business whether communicated in written form, verbally, visually, technically or pursuant to any other media. Such information if disclosed in writing shall be marked "confidential" or a similar designation, or if orally or visually disclosed shall be identified as the confidential information of the Purchaser at the time of disclosure. The term "Confidential Information" shall not be deemed to include information which the Purchaser can demonstrate: (i) is generally available to or known by the public other than as a result of improper disclosure by the Purchaser or any of its representatives or (ii) is obtained by the Purchaser from a source other than the Vendor or any of its representatives bound by a duty of confidentiality to the Vendor, provided that such source was not bound by a duty of confidentiality to the Vendor. If the Binding Provisions are terminated pursuant to section 21 below, the Purchaser shall promptly return to the Vendor any Confidential Information in its possession.

12. Disclosure/Public Announcements

Neither the Vendor, the Purchaser nor [RP(s)] will make any public announcement concerning the Proposed Transaction or related negotiations without the other parties' prior written approval, except as may be required by law. Where such an announcement is required by law, the party required to make the announcement will inform the other parties of the contents of the announcement proposed to be made and will use its reasonable efforts to obtain the other parties' approval for the announcement, which approval may not be unreasonably withheld.

13. Non-Solicitation of Employees and Customers

In the event that a Definitive Agreement is not entered into for any reason, Vendor, [RP(s)] and Purchaser agree not to, directly or indirectly, solicit employees or customers of the other party for employment, services or business for a period of [INSERT NUMBER OF YEARS FROM A CERTAIN DATE].

14. Responsibility for Fees and Costs

The Vendor and the Purchaser shall each be responsible for their own internal costs and legal, accounting and other professional fees incurred in connection herewith, the negotiation, preparation and execution of the Definitive Agreement, or otherwise relating to the Proposed Transaction. Any filing fees or costs payable to any governmental or regulatory agency or for environmental audit fees shall be paid for by the [Vendor/Purchaser].

PART II(b) - NON-SURVIVING BINDING PROVISIONS

15. Good Faith Obligation

Subject to the right of the Purchaser to decide that it is not in its best interests to proceed for any reason with the Proposed Transaction as a result of its dissatisfaction with its due diligence investigations, the parties shall negotiate in good faith to arrive at a mutually acceptable Definitive Agreement for authorization, execution and delivery on the earliest reasonably practicable date.

16. Deposit

Upon execution by the parties of this Letter of Intent, the Purchaser provided the Vendor with a deposit of [INSERT $ AMOUNT] (the "Deposit"). If the Proposed Transaction is completed, the Deposit and any accrued interest will be applied against the Purchase Price. If the Proposed Transaction is not completed for any reason, the Purchaser forfeits the Deposit and any accrued interest thereon to the Vendor, except in the event: [INSERT EXCEPTIONS]. {NOTE TO DRAFT: Consider issues such as: interest terms; escrowing the Deposit; partial refunds; conversion of Deposit into purchase price holdback; etc.}

17. Due Diligence

The Purchaser and its duly authorized representatives shall be entitled to make such investigations of the financial position of the Vendor and of its Business, properties and assets and such other matters relating to the Proposed Transaction as the Purchaser deems advisable so as to satisfy itself as to the financial position, future profitability, property, assets of, and other matters affecting the Vendor and its Business.

18. Access

Upon acceptance of this Letter of Intent and up until the Closing Date, the Vendor will provide the Purchaser and its agents, employees, representatives, consultants and advisors with access to, and will make available to them for inspection and review, all books of account, audit work papers, business and financial records, leases, agreements and other documents of or relating to the Business. The Vendor will make its officers, auditors, counsel and other representatives available for consultation and verification of any information so obtained. This information will be treated as "Confidential Information" [and subject to the Confidentiality Agreement]. The Vendor also agrees to give the Purchaser access to the premises from which the Business is carried on for the purpose of inspection and verification of the physical plant and facilities of the Business.

19. No Negotiations with Other Parties

The Vendor and [RP(s)] acknowledge that the Purchaser will be incurring substantial costs, directly and indirectly, in evaluating and investigating the Proposed Transaction and in consideration of the Purchaser doing so and its execution of this Letter of Intent [and the Deposit], the Vendor and [RP(s)] agree that from the date hereof until [INSERT RELEVANT DATE], not to enter into or continue negotiations or discussions with any third party, in respect of the sale of the Business or any part thereof, in any manner whatsoever or in respect of any proposed amalgamation, merger or combination of the Business and the business of any person or in any manner which would be inconsistent with the matters contemplated by this Letter of Intent. In addition, the Vendor and [RP(s)] agree that not until [INSERT RELEVANT DATE], will access be given to any third party to any of the Vendor's premises, to any Confidential Information or to any other information relating to the Business for the purpose of enabling that third party to make a determination as to whether to enter into a transaction with the Vendor or other persons which would be inconsistent with this Letter of Intent.

20. Conduct of Business

Until the Definitive Agreement has been duly executed and delivered by all of the parties or the Letter of Intent has been terminated pursuant to section 21, the Vendor shall conduct the Business only in the ordinary course, and not engage in any extraordinary transactions without the Purchaser's prior written consent. {NOTE TO DRAFT: Some Purchasers will want to spell out restrictions in detail.}

21. Termination

This Letter of Intent may be terminated:

(a) by mutual written consent of all parties; or

(b) by written notice from the Purchaser to the Vendor, if it is not satisfied with its due diligence investigation for any reason; or

(c) by written notice from the Vendor to the Purchaser, if the parties have not entered into a Definitive Agreement on or before [INSERT DATE REFERENCED IN SECTION 19];

provided however, that the termination of this Letter of Intent shall not affect the liability of a party for breach of any of the Binding Provisions prior to the termination, nor the survival of the Surviving Binding Provisions. Upon termination of this Letter of Intent, the parties shall have no further obligations under this Letter of Intent, except with respect to the Surviving Binding Provisions which shall survive in full force and effect, unamended.

PART III - INTERPRETATION

22. General

22.1. Waiver. No party will be deemed to have waived the exercise of any right that it holds under this Letter of Intent unless such waiver is made in writing. No waiver made with respect to any instance involving the exercise of any such right will be deemed to be a waiver with respect to any other instance involving the exercise of the right or with respect to any other such right.

22.2. Counterparts. This Letter of Intent may be executed in any number of counterparts, and all such counterparts taken together shall be deemed to constitute one and the same instrument. Any party delivering an executed counterpart by facsimile shall also deliver a manually executed counterpart of this Letter of Intent.

22.3. Time. Time is of the essence hereof.

22.4. Severability. If any provision of this Letter of Intent or the application of such provision to any party or person or circumstance shall be held illegal, invalid, or unenforceable, the remainder of this Letter of Intent, or the application of such provision to a party or person or circumstance other than those as to which it is held illegal, invalid, or unenforceable shall not be affected thereby. Each provision of this Letter of Intent is intended to be severable, and if any provision is illegal, invalid or unenforceable in any jurisdiction, this will not affect the legality, validity or enforceability of such provision in any other jurisdiction or the validity of the remainder of this Letter of Intent.

22.5. Governing Law. This Letter of Intent will be interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.

[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

To confirm the foregoing, please sign the enclosed duplicate copy of this Letter of Intent where indicated below and return the same to the Purchaser prior to · p.m. on [INSERT DATE], failing which, the proposal set forth herein expires automatically at such time.

To confirm the foregoing, please sign the enclosed duplicate copy of this Letter of Intent where indicated below and return the same to the Purchaser prior to · p.m. on [INSERT DATE], failing which, the proposal set forth herein expires automatically at such time.