Drafting contracts

10.1 Letter agreements and side letters

An agreement does not necessarily need to be embodied in the traditional structure of a contract (i.e. with a parties block, recitals, words of agreement, numbered articles and sections, and signature formula). Most types of agreements are equally enforceable when they take the form of a letter from one party to the other (and ‘accepted’ or ‘agreed to’ by the other). A letter agreement is a letter that contains the terms of the agreement and is signed by the sender and by the addressee. Usually, a letter agreement is used for short agreements (although there are lengthy exceptions).

Side letters. In the context of an M&A transaction, letter agreements are sometimes referred to as side letters. They are agreed in connection with a set of transaction documents. Occasionally, when an acquisition agreement is not conveniently suited to address an arrangement amongst the parties, side letters are used. A side letter would address one subject; a transaction may therefore involve several side letters.
Side letters often address a subject matter that is of a highly sensitive nature and not intended to circulate amongst all persons who are involved in the preparation or execution of the transaction. In the context of an M&A transaction, side letters could address pension arrangements or an agreement between the parties as regards the possible remedies they are willing to accept when submitting the transaction for approval by competition authorities (where including such agreement in the body of an acquisition agreement may inadvertently trigger the competition authority to demand such remedy). This may be a letter of intent where the nature of the business is ill suited for inclusion in the body of an SPA. Also other sensitive aspects, such as a specific indemnity for embarrassing claims, can be a reason to prepare a side letter. In many jurisdictions, the disclosures against warranties are made in the form of a letter (which would nevertheless be attached to the acquisition agreement despite its sensible nature).

M&A and works council involvement. In the Netherlands, it appears to have become appropriate to sign a letter agreement to which all transaction documents (including the SPA) would be attached. The background of this is that under the Dutch Works Council Act, the parties are (in effect) prohibited from entering into a binding agreement before obtaining the advice of the competent works council, even if the SPA is conditional upon receipt of such advice. Obviously, obtaining the works council’s advice is, in many cases, highly undesirable considering the dynamics of the transaction and the turbulence that involving the works council could potentially trigger. In such case, the letter agreement prevents one of the SPA parties, which have typically concluded heavy negotiations, from taking advantage of the existence of the not-yet-signed SPA to renegotiate certain terms once the other party has formally requested the advice and made public announcements. Whilst such letter agreement is not entirely consistent with the spirit of the Works Council Act, for major transactions it is probably an optimal solution to adapt to the international M&A practice.

Contents. A letter agreement is typically printed on the letter head of the sender and will have the following elements:

  • the sender’s address;
  • the place and date;
  • a subject line (but not a title);
  • the addressee’s address;
  • a salutation (generic – Dear Madam, Sirs – or to the individual representing the other party);
  • an introductory sentence referring to the background of the letter or to an agreement to which it pertains;
  • the substantive terms of agreement;
  • a closing sentence requesting the addressee to countersign a copy;
  • the sender’s signature; and
  • the addressee’s signature (underneath) (preceded by the words “for acceptance” or “for agreement”).

The introductory sentence typically identifies the transaction in connection with which it is agreed or otherwise its purpose. For example:

We refer to the Share and Asset Purchase Agreement between Weagree B.V. (“Weagree”) and WW Legal Solutions B.V. (“WW”) and entered into on 9 March 2010 (the “Acquisition Agreement”). By this letter agreement (the “Agreement”) we agree that…

Note that the defined terms are not printed in bold, which is good practice (as opposed to defining in normal agreements). Many drafters of a letter agreement refer to the sender as we and to the addressee as you; this is not necessary. (Note that for convenience of reading, the introductory sentence started that way. It is appropriate to revert to the concept we and you in the concluding sentence.) Referring to we may even be ambiguous if “we” could also refer to “both parties”. It is more appropriate to name the parties or refer to them by their respective functions.
The substantive terms of a letter agreement are usually not subdivided in articles and subsections, except that a subdivision in paragraphs with simple numbers is often helpful. The substantive terms may well include miscellaneous provisions, such as a choice of law and a choice of jurisdiction.
The closing sentence could be as follows:

If you agree to the above, please sign one copy of this Letter Agreement and return it to me at the above address.

The signature blocks should fit the nature of the parties to the letter agreement. The individual signing the letter agreement does so (when duly authorised) on behalf of the legal entity. The signature blocks are therefore formatted the way they are formatted in normal agreements.
The addressee’s signature block is typically preceded by the words For acceptance (suggesting that the letter itself is an ‘offer’ in the legal sense), For agreement (reflecting the truly mutual nature of the letter agreement) or For acknowledgement (in case the letter agreement contains the disclosures that a seller makes in discharge of its duty to inform.