Confidentiality Agreements - Part 1 - Some Initial Considerations
How often are you called upon to sign a confidentiality or non-disclosure agreement? Want to participate in the sale process for a business you’re interested in acquiring? Sign this confidentiality agreement first. Need access to important commercial information? Sign a confidentiality agreement. Want to meet with key executives as part of your due diligence? Not before you commit to the terms of this non-disclosure agreement. They are everywhere. And yet, they rarely get much attention until issues arise.
Ensuring confidentiality throughout the M&A process is essential to a successful deal. This is the first in a series of blog posts that will focus on confidentiality agreements in the context of an M&A transaction. Future blog posts will dig into material terms, review resources that are available online, look at best practices you should consider adopting in managing the myriad of confidentiality agreements into which your organization enters, and delve into some recent Canadian and cross-border court decisions that have focused on confidentiality agreements in the context of M&A transactions – some resulting in hard lessons.
First up, some initial considerations to keep in mind:
- It's Not Just a Confidentiality Agreement - A confidentiality agreement entered into at the very start of a sale process is often the only contractual nexus that the target has with each of the potential purchasers. As such, most targets will want to build in more than just terms intended to protect against the disclosure of sensitive commercial information. The agreement may attempt to bind potential purchasers to abide by a sale process that the target and its banker will typically have broad discretion to modify, suspend or terminate. This will often include a commitment to not solicit employees of the target and for a potential buyer to ‘standstill’ with respect to the purchase of securities of the target outside the formal sale process. In a contested sale process these agreements will be carefully scrutinized. By negotiating with some forethought, a potential purchaser can maximize flexibility during the sale process and afterwards.
- Information Flow: One Way or Two? - The parties will need to consider whether a unilateral or mutual agreement is appropriate in the circumstances. Clearly, a target will be disclosing confidential information to a potential purchaser but sensitive information may flow the other way, too. For example, the target will want to undertake due diligence on the potential purchaser’s business if the purchase price involves an exchange of equity. As well, during the course of negotiations a potential purchaser will often want a commitment to maintain the deal terms and related financing details in confidence. The dynamics of negotiating a mutual confidentiality agreement are different, given the reciprocal commitment, and may lead to quicker resolution of terms.
- What Gets Disclosed and When? – Putting a confidentiality agreement in place is a gating item for many other activities in the process. Despite any perceived pressure, impatient target representatives should resist the urge to ‘get on with the deal’ and disclose information before a formal confidentiality agreement is in place. Even with an agreement in place the target will want to carefully manage who gets access to what and how. Often, the scope of disclosure to potential purchasers will be limited at first. As potential purchasers are narrowed down to one or a qualified few, the target may provide access to more sensitive information. This may continue right up until a binding purchase agreement is signed. By carefully managing the dissemination of information a target can reduce the risk of rumours or premature disclosure – which might do irreparable harm to the business.
- Who Gets Access? – There is often significant tension around who gets access to confidential information. For many of the reasons described above the target will want to limit the universe of representatives among potential purchasers who can gain access to confidential information. On the flip side, a potential purchaser wants broad discretion to share information with its team. These will include financial, legal, tax, accounting and other specialist advisors assisting with due diligence and transaction structuring. Depending on the size of the transaction, the scope of representatives can also extend to equity co-investors, banks and other debt financing sources and their respective advisors. While most confidentiality agreements will allow for this broad sharing of confidential information, a potential purchaser will typically remain responsible for ensuring compliance on the part of its representatives. As such, it's prudent for the potential purchaser to limit disclosure in an as needed basis.
In the next blog post we will look into some of the material terms in a typical agreement and some of the challenges that can arise in negotiations.
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