The 'freeze letter' is on the rise in M&A practice. But what exactly is it? What can you do with it and what should you pay attention to?
Freeze the situation
A freeze letter is increasingly used in long-term transactions involving external parties. Think, for example, of a bank. Suppose the parties have reached a general agreement on the contents of the transaction documents. Then it often takes several weeks before the well-known finishing touches are added.
A freeze letter prevents parties from having a different view on the proverbial dot on the i's. Or that buyer or seller backs out on certain points. The situation is frozen, as it were.
When to use a freeze letter?
Sometimes parties agree in a freeze letter that they have agreed on everything except the points listed in the freeze letter. However, such an agreement is not without danger. After all, legally speaking, a purchase agreement arises when the parties have reached consensus on the essentials. The "dots on the i" often are not.
Usually, transaction documents are ingeniously put together and the individual documents form a coherent whole. Prevent the freeze letter from creating a perfect purchase agreement. Because then the puzzle can no longer be put together as intended.
For this it is important to explicitly clarify the parties' intentions. Namely, that the freeze letter is not a purchase agreement and that even the outstanding items are still essential parts of the purchase agreement.
Letter of intent and to-do list in one
In essence, a freeze letter should be a statement of intent and a to-do list. Nothing more and nothing less. However, do declare some provisions from the purchase agreement to be signed to apply mutatis mutandis to the freeze letter. Consider, for example, the confidentiality clause.
In short, under circumstances the freeze letter can be a great outcome. But as always, the devil is in the details. Consult an M&A specialist to avoid nasty surprises.
