In a merger, acquisition or sale process, there are likely to be considerable volumes of confidential information that need to be exchanged between the buyer and seller. This is reasonable, normal and essential to a successful M&A process. Make sure, however, that anyone who is given access to any confidential information is bound by the terms of a comprehensive confidentiality agreement before they receive any information. In a professional sale process of a privately-held company, this should be before you even share the name of the company that is for sale.
Important note. Recipients of confidential information do not typically have any obligation to the confidential information they receive, unless they have signed a confidentiality agreement, and if this is the case, they would be free to use it, without recourse, in any way they wish, even if it is harmful to the seller. This is why this confidentiality agreements are so important.
A standard confidentiality agreement for an M&A process will likely span 1,000 words or more of legalese and while we’re not going to talk through most of the points, we thought it may be useful to highlight some of the less obvious, yet important covenants. This is not a comprehensive list and we would recommend seeking professional advice before sending out a confidentiality agreement.
Select provisions to include:
- State that the confidential information is to be used only for the purpose of evaluating the proposed transaction/investment. An agreement simply not to disclose confidential information does not go far enough to protect a seller from misuse of the confidential information.
- Include a covenant not to engage, hire or solicit employees, agents or reps of the seller’s company for a fixed term, even after expiry of the confidentiality agreement. There may be resistance by some buyers to sign this clause, particularly if they compete in the industry, so it can be modified in some cases to allow for general, non-directed solicitations made through online or print media.
- List what could be considered to be confidential information in a non-inclusive list and have the recipient acknowledge that this confidential information has competitive value.
- Include a covenant that the seller does not warrant the accuracy or completeness of the confidential information and that any offer or investment/acquisition by the recipient will be made only after buyer’s independent analysis of the business and at their own expense.
Another good way to protect confidential information is to only release the increasingly sensitive information in phases.While it is critical for a smooth and timely sale process to collect and organize due diligence information in advance, you should only distribute increasingly sensitive information as you progress in the sale process and with fewer prospects (hence fewer opportunities for leaking sensitive confidential information.)
It is standard practice for the leading M&A advisors, law firms and investment banks to host your sensitive information online in a secure dataroom. While it may seem counterintuitive to security to host information online, it actually increases the protection of your confidential information and accountability of each recipient. Through a secure dataroom, you can track every single click and action, each individually recorded with the time and duration the user was active on each page of every document.
What you want to avoid, however, is a case we heard about last week where an advisor in a proposed sale had posted confidential information for his client’s company on his own website and listed the name of the company on the same web page, which allows anyone on the internet to search and see that his client’s company is for sale. To avoid unexpected confidentiality leaks such as this, it is good practice to ask your advisor in advance what procedures they have in place for safeguarding your sensitive, confidential information. And as with everything in life, there is a right way and a wrong way.
If you have any questions about protecting your confidentiality, please just drop me a line.