A Non-disclosure Agreement in M&A Transactions

A Prohibition or a Defense?

One important step in M&A transactions is the signing of a non-disclosure agreement on the company that is being prepared for sale. Disclosure of business information may cause a loss of competitive advantage or result in losses. Especially, if the buyer of the company is a strategic competitor. When drafting an NDA, it is important to define what is confidential and avoid being too vague or too narrow. If the NDA is written in such a way that only information about the company's assets and financial condition is deemed confidential, it may exclude a lot of relevant details. On the other hand, the seller will often try to treat as confidential any information transferred as part of an NDA between the parties. However, in many ways, such broad language is not subject to judicial protection and the nuances of legal systems in different countries must be taken into account. Therefore, when starting an engagement with a potential acquirer, the best solution is to use the combination of a properly drafted non-disclosure agreement in combination with a so-called process letter. Where the NDA will focus on the specifics of the confidentiality and the materials, conversations and presentations that will be covered by it, the process letter focuses on the overall process and how the potential acquirer has to abide by the steps as specified in the process letter. Together with the NDA, it ensures that confidentiality and process are properly covered, and the potential acquirer clearly understands its boundaries when it decides to engage. For the process letter to be “recognized” it is important to have the receiving party acknowledge the receipt of the letter and its intention to abide by it.  

In general, the best approach for the NDA is to make all information, spoken, written, e-mailed and documented, covered by the NDA with the usual exceptions for information already known to the receiver. It is good practice to have the receiver identify any substantial and relevant information already in its possession. It is also important to ensure that for all conversations, detailed notes are made and shared as a registry of the information shared. 

A schedule for disclosure of key and confidential information about pending key contracts, intellectual property, transactions, employees, etc. – is part of the disclosure strategy and typically also covered by the process letter (sometimes two process letters are issued, related to the stage of the engagement). In general, after reception of the Non-Binding Offer (sometimes also referred to as the Letter of Intent), the potential acquirer will receive access to the company’s dataroom. That access can be staggered and controlled by gating agreements on the progress of the assessment. However, this often leads to unwanted delays and the additional “security” is often of limited value. More effective, when engaging with potential competitors as acquirer, is the use of a “door fee” to ensure that the specific acquirer is serious about its intentions. This too however has its limitations as it is hard to define a specific value for the information gained by getting access to a competitor’s detailed product roadmap as well as customer contracts.