Keeping It Under Wraps: Confidentiality Agreements In The M&A Context
Confidentiality agreements are one of the first agreements addressed in the mergers and acquisitions context, their primary purpose being to govern the disclosure and protection of proprietary information. They help avoid misunderstandings, particularly in the initial stages of a deal when lots of information is passed across the buyer/seller fence.
Preliminary matters a seller and potential buyer should consider at the outset include: When should the parties enter the agreement? Should the agreement cover only the seller’s information, or should it cover the potential buyer’s information too? Should the confidentiality agreement be a separate document, or should it be incorporated into the term sheet?
A seller and potential buyer should waste no time in preparing and executing a confidentiality agreement. This is of particular concern to a seller, whose information is exposed from the moment it is placed into the potential buyer’s hands. As to applicability, most M&A transactions incorporate unilateral terms, as it is often only the seller who is disclosing the information. However, mutual terms are not uncommon. This is especially true if each party is disclosing information or if there are matters that both parties prefer to keep confidential, including the actual deal terms. Binding confidentiality provisions are often included in a letter of intent, but they are just as often featured in a comprehensive separate confidentiality agreement, which covers disclosure of due diligence long before a term sheet can even be negotiated.
In terms of content, a confidentiality agreement should contain the following basic elements:
- Definition of “Confidential Information”: Information typically categorized as confidential includes financial details, pricing data, sales and marketing reports, trade secrets and other intellectual property. The agreement may define confidential Information as only that which is so designated, or it may define confidential information as all information from the disclosing party, whether disclosed orally or in written or electronic form.
- Exceptions to Confidentiality: Confidential information typically does not include information that: (i) is or becomes public without a breach of the agreement by the receiving party; (ii) was already in the receiving party’s possession at the time of disclosure; (iii) is disclosed to the receiving party through a third party not bound by confidentiality obligations; or (iv) is independently developed by the receiving party without using confidential information. A receiving party’s general obligation to protect confidential information may be rescinded if disclosure is mandated by court order.
- Permitted Use: The confidentiality agreement should make clear for what purpose confidential information may be used and who may use it. In an M&A scenario, the purpose can be clearly tailored to the evaluation of the potential transaction. Permitted recipients should be limited to the potential buyer and certain of its representatives and advisors, in all cases, with a need to know the information.
- Standard of Care: Every confidentiality agreement will include the receiving party’s duty to keep the information confidential in accordance with a certain standard, typically a reasonable standard of care.
- Term: The term of the confidentiality agreement should be clearly set forth, as should any continuing obligations. It is not unusual in the M&A context to allow for termination of the confidentiality agreement alongside execution of a definitive purchase agreement, which will itself incorporate confidentiality provisions to last beyond the closing date.
- Return of Confidential Information: All disclosing parties should make sure that they have full rights to a return of their confidential information upon their request, or at the expiration or termination of the confidentiality agreement. Often, the receiving party will incorporate its own right to destroy the information instead of returning it to the disclosing party. This is particularly helpful when the potential buyer incorporates its own confidential information with that of the seller and is uncomfortable returning this combined (and as to the buyer, unprotected) information to the seller.
- Remedies: Injunctive relief (in addition to monetary damages) is always provided as a remedy to unauthorized disclosures. Injunctive relief is of particular importance in this context, because the disclosing party wants to stop the unauthorized disclosure, not just sue for damages.
A strong confidentiality agreement, clear about the information it is protecting, who may use the information and how that information may be used (and for how long) can help to avoid confusion at the outset of a deal and set the seller and potential buyer off to a great start where the exchange of information is comfortable and secure.
For assistance with these matters, please contact a member of our Business practice.
This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.
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