Parties to a potential mergers & acquisitions (M&A) transaction will typically enter into a confidentiality agreement (also known as a non-disclosure agreement (NDA)) during the early stages of their negotiations. A vendor (generally the seller) will provide the purchaser with confidential information to determine whether to acquire the vendor’s businesses or assets. The confidentiality agreement then protects the information that the parties exchange before any negotiation.
Parties should enter into a confidentiality agreement before the commencement of either:
- the due diligence process (particularly if the parties undertake due diligence by way of a data room);
- execution of a transaction term sheet (either binding or non-binding); or
- any definitive transaction documentation.
Importantly, parties should tailor the confidentiality agreement to the M&A transaction. If the parties intend to rely on a previously executed confidentiality agreement, they should review the terms and ensure they are relevant to the current transaction. Below, we set out some of the key terms an M&A confidentiality agreement should include.
The parties to the confidentiality agreement will be the purchaser and the vendor in the transaction. If the person receiving the confidential information (i.e. disclosee) is a holding company with few or no assets, the vendor (i.e. the discloser) may require that a ‘guarantor’ also be a party to the agreement. The guarantor then guarantees that the disclosee (usually the purchaser) will meet the obligations under the confidentiality agreement.
2. Disclosure of Information
The confidentiality agreement will usually define the ‘purpose’ of the agreement. The purpose will include the assessment by the purchaser and its ‘permitted persons’ (discussed below) to evaluate the particular transaction under negotiation.
3. Permitted Disclosure
The parties to the confidentiality agreement are not permitted to disclose the information provided by the other party, except:
- to ‘permitted persons’ that have been specifically set out in the confidentiality agreement; or
- where the confidentiality agreement expressly excludes the information (discussed below).
Permitted persons are the party’s directors, officers, employees and professional advisors. These parties usually need to know the confidential information to facilitate the transaction process. In circumstances where there are syndicates, co-investors or potential providers of finance (such as banks) to the transaction, the parties may also negotiate them as ‘permitted persons’.
Where the parties will exchange highly sensitive information, the disclosing party may require that each of the individual ‘permitted persons’ also execute a separate confidentiality agreement (in their personal capacity) with the disclosing party. This separate agreement further confirms that they will keep the confidential information private.
4. Public Announcements
Usually, both parties will expressly prohibit the making of a public announcement about the negotiations of a potential M&A transaction until after the parties have finalised the deal. This prohibition is important because it can have potentially negative ramifications for customers, suppliers and employees of either party if not handled properly.
Further, confidentiality agreements will typically include a clause which requires the parties to consult each other before they make announcements. Where the law doesn’t allow parties first to consult each other, the standard agreement is to inform the other party after making the public announcement immediately.
5. Exceptions to Confidentiality
Confidentiality agreements usually exclude certain information from remaining confidential. It means that any disclosure, under those circumstances, will not amount to a breach of the confidentiality agreement. Typical exceptions include:
- information that is in the public domain;
- information that has been in lawful possession before the date of the confidentiality agreement;
- information that the disclosing party disclosed to the other party through a third party, where that third party was not obliged to keep the information confidential; and
- information that the other party disclosed with the prior approval of the disclosing party.
6. Restraint Provisions
Some confidentiality agreements will also include non-solicit provisions, particularly if the counter-party is a competitor or potential competitor of the discloser of the confidential information. The restraint will usually provide that the party receiving information (and its related entities) must not:
- approach or deal with a major customer or supplier of the disclosing party, other than in the ordinary course of business; or
- solicit the key officers and employees of the disclosing party.
7. Destruction of Information
The disclosing party may require that the party receiving information destroy all the confidential information if the parties terminate negotiations. Destruction will typically include both physical and electronic copies of documents that contain the confidential information. However, the receiving party may negotiate with the disclosing party that such destruction provisions do not apply to their internal record keeping, any electronic backup storage or professional record keeping.
8. Termination of Confidentiality
The disclosing party will usually aim to seek from the party receiving the information the maximum possible confidentiality period. The typical period for a confidentiality agreement is between 1–2 years from the date of the confidentiality agreement. In some transactions, the parties may agree that the confidentiality agreement will terminate upon the completion of the merger or acquisition contemplated under the agreement.
9. Implications of Breach of Confidentiality
It is common for a confidential agreement to provide that damages may not be an adequate remedy for breach of the confidentiality agreement. The disclosing party will have the right to apply for an injunction, specific performance and other relief for a threatened or actual breach of the confidentiality agreement.
It’s prudent for parties to enter into an M&A confidentiality agreement before exchanging any information during negotiations. If the other party has prepared the confidentiality agreement, you should ensure that you closely review the terms. A confidentiality agreement for an M&A transaction should be specifically tailored for the particular transaction, and it is important that you carefully review any terms before you enter into such agreements.
If you are entering into an M&A transaction and have any questions, or need a commercial lawyer to draft or review your agreements, get in touch on 1300 544 755.