Memorandum of Understanding: The path to business acquisition

Legal Insight

March 2025

George Psarakis, LL.M. (mult.)

Abstract: Having already addressed confidentiality agreements in the context of business acquisition, in this article we will examine some key points of interest regarding the Memorandum of Understanding (hereinafter "MOU"). The MOU is the document where the parties, before beginning the financial and legal due diligence of the business to be acquired, and before drafting the final agreement, record both the points where consensus already exists and those for which the parties commit to continue negotiations. It is a "chameleon" text that sometimes may constitute a simple "gentlemen's agreement" without any legal binding force, while other times it can fully bind the parties with serious consequences and penalties in case of non-compliance with the agreements therein.

In this article, we will comment on certain interesting points of Memoranda of Understanding (MOU/LOI/HOT). After our reference in a previous article to confidentiality agreements, the next usual stage in a business acquisition process is the drafting of an MOU. This agreement precedes the legal, financial, and technical due diligence of the business and constitutes a preliminary agreement between seller and buyer on certain negotiated points and a record of issues where consensus has not yet been reached. Below we will try to provide answers to the most frequent questions regarding the MOU.

1. What is an MOU?

"MOU," the acronym for "Memorandum of Understanding," is a document signed by the prospective parties to the acquisition, confirming their intention to complete the agreement and usually serves as a roadmap for the final agreement to follow. It outlines the main points of the agreement, as they have been defined at that specific point in the negotiations: the price, payment method, time for concluding the final contract, confidentiality/exclusivity terms, and many others.

If we view an acquisition as a marriage, then the MOU is the engagement, the signing of the contract is the marriage proposal, and its execution (closing) is the wedding ceremony itself. So just as engagement is not the same as marriage, the MOU is not the same as the final contract, but it does represent a first formal commitment by the potential buyer that they are genuinely interested and wish to initiate the due diligence and acquisition processes. With the MOU, the buyer, among other things, declares that they wish to buy and the seller that they wish to sell. However, just as an engagement doesn't always lead to marriage, an MOU doesn't always lead to the signing of the final contract.

The function of an MOU is primarily to confirm intentions: the parties feel the security of a written text containing a large portion of the individual terms of the agreement, while negotiations can simultaneously be conducted on additional specific issues and the due diligence of the business.

2. What is the basic content of an MOU?

An MOU usually begins with a basic description of the intended transaction. This is followed by an outline of the "roadmap" for completing the agreement. This includes the drafting of the MOU, conducting legal, tax, and financial due diligence of the business, and then the preparation of the final contract (signing, closing). Subsequently, there is a reference to the individual terms on which agreement has already been reached. Finally, the points on which the parties have not yet reached agreement and for which negotiations are pending are mentioned. This may be followed by terms regarding confidentiality and exclusivity (No-shop, No-talk clauses), possible representations regarding the business, and potential conditions regarding regulatory approvals, etc.

3. What is the legal binding force of an MOU?

The answer to this question depends on the terms contained in the MOU. The more points of the agreement that have been outlined in the text of the MOU, the closer we are to a fully binding document. To accept a binding agreement, unless something different is specified, the parties must have clearly and definitively agreed on all issues that were raised during discussions as necessary for the existence of an agreement, i.e., not only on the essential parts of the agreement (e.g., price and shares being sold) but also on the non-essential parts (e.g., time of payment), provided they were considered by the parties as necessary for the agreement to exist.

Usually, there is also an explicit term that the parties reserve their rights until the final contract is signed ("subject to contract clause") or that the agreement is not binding on the parties ("non-binding clauses"). In these cases, the contracting parties usually specify that the validity of the MOU depends on the conclusion of the final acquisition agreement. Therefore, it cannot be enforced against any contracting party, unless subsequent behavior of the parties overturns what they had agreed.

4. If the MOU is deemed not to bind the parties to proceed to the signing of the final contract, what is its value?

In most cases, an MOU will not bind the parties to conclude the final acquisition agreement (e.g., sale of shares). Its practical value is manifested on three levels: a) initially, it may contain fully binding agreements on confidentiality and exclusive negotiation which can also be secured with penalty clauses, b) secondly, it assists in the negotiation as it records the terms agreed upon up to that point and contributes to the establishment of mutual trust by exerting psychological influence on the parties, and c) finally, it may be possible to establish liability for the party that did not transact/negotiate in good faith to compensate the other party.

5. Can the seller negotiate with other potential buyers after signing an MOU?

The answer to this question depends on whether an exclusivity clause has been agreed upon or not. Sometimes an MOU includes a commitment by the prospective seller not to engage in discussions with other potential buyers for the sale of the business for a specific period until the final contract is signed (no talk/no shop clause). This agreement is often secured with a corresponding penalty clause of a high monetary amount, which reflects not only the costs of the prospective buyer (cost of due diligence, legal advisors, etc.) but also the opportunity cost due to the loss of time during which they could have acquired another business.

6. What usually follows the signing of an MOU?

After the preparation of an MOU, the parties usually proceed with the pre-contractual due diligence of the business being sold (Due Diligence). This stage is one of the most important in the acquisition process because it determines the "well-being" of the business. The business is examined mainly at economic, legal, tax, and technical levels. The results of the due diligence will largely determine the final outcome of the agreement and especially its basic terms (e.g., price).