Keeping it Clean
In the context of M&A transactions, the use of “clean rooms” (i.e., data rooms containing commercially sensitive information concerning a target only available to clean teams) and “clean teams” (i.e., isolated work groups often made up of third party experts having access to clean rooms) to isolate commercially sensitive information concerning a target from the prospective bidder(s) can sometimes help clear the path to a negotiated deal.
Clean teams are generally used to ensure the isolation of a party’s commercially sensitive information in transactions in which there are anti-trust and other regulatory concerns. Isolated third party experts are required to execute NDAs preventing the sharing of confidential information with parties to the transaction except in certain limited situations (e.g., subject to all relevant commercially sensitive information having been redacted). This allows the parties to assess integration issues, potential synergies and risks while ensuring that the commercially sensitive information of one or both parties is not disclosed to the other party (and that anti-trust and other regulatory requirements are therefore respected).
Clean teams may serve as a negotiation tool even where anti-trust and regulatory issues are not a significant concern. We have seen the use of the clean team approach as a way to allow parties contemplating an M&A transaction to entertain and advance discussions without the typical safeguard of a standstill agreement (i.e. an agreement pursuant to which, as a condition to receiving confidential information regarding the target, the bidder agrees not to acquire securities of the target for a certain period of time (except in limited permitted situations)).
Generally, a target is reluctant to allow a potential bidder access to its confidential information without the bidder executing an NDA (to keep such information confidential) and also agreeing to a standstill agreement. Conversely, in certain situations a bidder may be unwilling to be tied down by a standstill agreement. In circumstances where discussions cannot advance mainly as a result of the parties inability to agree on the treatment and use of the target’s confidential information, but both parties believe that it is in their best interests to continue assessing whether a transaction is possible, it may be worth considering the clean team approach as a way to allow the parties to nonetheless entertain limited discussions that may lead to an agreement.
There are many reasons why this approach may not be appropriate for a given transaction. The target may feel that disclosing the information, even if it is to a clean team that is bound by an NDA, is an unacceptable risk without a standstill agreement in place. Furthermore, the use of clean teams may not be practical in a context where an extensive due diligence review of the business and affairs of target is required. However, if the bidder only wishes to validate certain key assumptions/metrics regarding the target before agreeing to proceed with a transaction, the clean team approach may be an alternative to be considered. The parties will have to agree to the extent of disclosure of confidential information by target to the isolated clean teams and the terms and conditions of the use of such information by the clean teams. The parties will also have to agree on what precisely can be communicated to the bidder by the clean teams to permit the bidder to draw conclusions in respect of its key assumptions/metrics (e.g., green/yellow/red light) while protecting the confidential nature of the information. Also, if using this method, parties should consider indicating in the purchase agreement the implications of the target having shared confidential information to the clean teams (e.g., whether the disclosure of the confidential information to the isolated clean team shall, for the purposes of the agreement, be treated as disclosure of such information to the bidder).
In summary, the use of clean teams may in limited circumstances be a way to resolve a deadlock and allow the parties to continue to advance discussions with respect to a potential transaction that may be in the best interests of all stakeholders.