M&A Deals - Confidentiality
A confidentiality agreement or Non-Disclosure Agreement (“NDA”) is a legally binding contract between the company interested in selling and the potential buyer. The NDA governs the sharing of confidential company information and prohibits certain other activities. Typically the confidentiality agreement is drafted by the selling company’s M&A advisor or the company’s attorney. It is distributed to potential interested buyers along with a teaser of the target company, which provides some details on the acquisition opportunity, but not enough so that the company for sale can be identified. Upon execution of the confidentiality agreement or NDA, a detailed confidential information memorandum (“CIM”) of the selling company is released to the potential acquirer. It also paves the way for the buyer and seller to have frank conversations about the selling company’s business.
Typically, the NDA will include the following governing provisions: how the information may be used, the term, permitted disclosures, non-solicitation of employees, no contact provisions for customers, suppliers, etc., and return of confidential information when negotiations cease. In some cases, the buyer is allowed to destroy the confidential information and may be required to supply a certificate indicating that the information was, in fact, destroyed.
The use of information provision states that any disclosed information is confidential and can be used only to make a decision with regard to a proposed transaction. There is usually a term of one or two years for which the information must remain confidential. The permitted disclosures outline what confidential information a potential buyer can disclose and prohibits the disclosure of negotiations for a possible transaction between the buyer and seller. The non-solicitation provision prohibits the hire of the selling company’s employees by the potential buyer for a particular period of time. Many times, the buyer will “carve out” certain hiring, like general solicitations that do not target the selling company or the permitted hiring of people that have been terminated or have left the selling company.
A good M&A advisor should be able to advise you as to what provisions are important and how to negotiate this very important document. The M&A advisor does not replace your attorney or good common sense; however, they do know what is reasonable and what buyers are willing to accept as they work with hundreds or thousands of buyers each year. The key is to obtain as much protection as possible, but also not to make it so impossible that buyers won’t give your potential transaction the attention it deserves.
