In our previous blog, we introduced mergers and acquisitions [M+As] and took you through the steps of structuring an acquisition deal. The next, and one of the most important aspects of M+A is ensuring all parties to a potential M+A transaction enter a non-disclosure agreement.
A non-disclosure agreement [or commonly referred to as a confidentiality agreement] is an agreement parties enter to ensure confidential information is protected during negotiations of a transaction.
Below is a summary of non-disclosure agreements, why and when they are entered into and what they should include.
Why a non-disclosure agreement?
Is it crucial for parties to enter a non-disclosure agreement during negotiations of M+A.
This is because the seller will exchange and provide confidential information to the buyer so the buyer can determine whether they wish to acquire the seller’s business or assets.
Things could turn south if confidential information is provided, and the prospective buyer decides to no longer proceed with the M+A, which is why it is imperative parties enter into a non-disclosure agreement at the outset.
When is the correct time to enter a non-disclosure agreement?
We highly recommend parties to a potential M+A enter a non-disclosure agreement before the execution of any term sheet or transaction document [whether this is binding or non-binding], or before due diligence processes has begun.
What to include in the non-disclosure agreement?
It is important to ensure your non-disclosure agreement is specifically tailored to the potential M+A transaction. Some key terms to incorporate include:
- Parties details: This will be the purchaser and the seller. However, if the seller is a holding company, it may be important to include a guarantor to the agreement.
- Disclosure of information: This is usually captured by defining the purpose of the agreement. For example, for the buyer and specific permitted persons to evaluate and assess the transaction.
- Confidential information: It is important to correctly define what is confidential information in the first place. This can include things like employees, suppliers, profit and loss statements and the company’s internal systems.
- Permitted disclosure: Parties can only disclose confidential information if the agreement expressly allows, or to a permitted person. It is therefore important to define permitted person correctly. This usually includes a party’s directors, specific employees and professional advisors. If the information is highly sensitive, these permitted persons may also be made a party to the agreement.
- Public knowledge: Both parties will also be prohibited from notifying the public about the negotiations of the potential M+A until the transaction is complete as this could impose negative ramifications for customers, employees or suppliers.
- Restraints: It may be important to include a restraint against some confidential information. For example, parties may not approach or deal with the other party’s major customers, or solicit employees that they have been made aware of due to the information exchanged.
- Destruction of information: parties must destroy confidential information [and copies of such] after the transaction is complete, or immediately if the transaction does not go through.
- Term of agreement: It is important to ensure that the period for the agreement applies for 1-2 years from the date of the agreement. Alternatively, this may terminate once the transaction is complete.
- Remedy: If a party breaches the agreement, then the disclosing party has a right to apply for an injunction, damages or specific performance.
It is vital for parties to enter into a non-disclosure agreement before exchanging information in a M+A transaction. The terms of the agreement should be carefully considered to ensure they are in your best interests [now and in the future]. If you would like help with a non-disclosure agreement, please reach out to us on 1300 BDEPOT or email@example.com.
Stay tuned for part three of this M+A series on the importance of due diligence.