By: John Glover (MBA)

Mergers and Acquisitions (M&A) transactions are high-class business decisions involving the transfer of ownership or control of a business. During this process, sensitive business information such as trade secrets, financial data, marketing strategy, client lists, asset logs and future prospects are exchanged. Critical information such as these must be protected from competitors and the public.

Business lawyers, apart from giving professional guidance on how to create an LLC or other business entity types that may be needed to house the business entity after the M&A is concluded, play a vital role in ensuring the confidentiality of the information that is exchanged during the M&A process. They draft Non-Disclosure Agreements (NDAs), also called Confidentiality Agreements (CAs) in which both parties must agree to the terms before any discussion can even begin.

The article discusses the essential content and importance of NDAs in M&A transactions, explaining how business attorneys ensure they are effective and, for the most part, watertight.

How Important are Confidentiality Agreements in M&A

Businesses do not freely disclose sensitive data to all parties interested in a potential merger or acquisition. This would put the business at risk and could lead to loss of market leadership or winning edge. CAs or NDAs offer a legal framework for keeping sensitive information in a closed circuit throughout the M&A process.

The importance of CAs or NDAs include:

• Protection for Both Parties:
  A confidentiality agreement prevents a buyer from disclosing sensitive data and trade secrets of a seller to parties unconnected with the M&A transaction. This safeguards the seller’s sensitive data and secrets. This legal coverage also extends to buyers.

• Facilitates Transparency:
  A well-drafted CA creates an atmosphere of trust and encourages open and sincere deliberation, especially during the stage of due diligence. A transparent engagement will allow for a more accurate valuation and a smoother negotiation process.

• Reduces Risk of Litigation:
  CAs clearly outline expectations from parties involved in handling confidential information. Knowledge of these expectations help to prevent misunderstandings and potential lawsuits. In some cases, the action to be taken if there is a breach is clearly stated in the agreement instead of resulting in litigation.

Key Elements of a Strong M&A Confidentiality Agreement

A strong M&A CA typically addresses the following key elements:

• Parties to the Agreement: The parties to the agreement are the disclosing party (seller) and the receiving party (buyer).
• Definition of Confidential Information: A specific and comprehensive definition of confidential information is stated.
• Permitted Uses: The condition for authorized use of confidential information is clearly itemized.
• Non-Disclosure Obligations: This prevents unauthorized disclosure to third parties. 
• Duration: Specific timeframe for which confidentiality obligations will remain in effect is agreed on. 
• Return/Destruction of Information: The manner in which data will be handled after the M&A deal, or after it fails, should be clearly and properly documented.

How Business Lawyers Ensure Effective CAs in M&A

Business lawyers play a vital role in crafting and negotiating effective CAs for M&A transactions. Here’s how they ensure these agreements provide the necessary safeguards:

• Tailoring the Agreement:
  Business attorneys, with expertise in CA drafting, tailor agreements to the specific needs of the deal based on factors such as the nature of information being shared, the parties involved and the timeframe of the M&A process. This role is crucial, as there is no one-size-fits-all approach to CA drafting.

• Defining Confidential Information:
  A fundamental aspect in CA drafting is clarity in the definition of data that will be classified as confidential information. Usually, financial data, business plans, market strategies and trade secrets form part of confidential information. The business lawyer uses his expertise and experience to define these details.

• Negotiating Terms
  Business lawyers perform the essential role of negotiating fair and balanced terms of confidentiality. They ensure the interest of their client is protected while also accommodating the reasonable needs of the other party.

• Ensuring Compliance
  Once the confidentiality agreement is in place, business lawyers help their clients to develop means of ensuring compliance. This may be by giving advice on the best method to handle and store confidential information, conduct training sessions for employees, and putting in place mechanisms for detecting possible breaches.

•  Enforcing Agreements
  In the event of a breach, business lawyers take necessary actions to enforce the confidentiality agreement. This may involve sending cease-and-desist letters, filing lawsuits, and seeking injunctive relief. This is done to minimize the damages caused by the breaches.

Conclusion

Confidentiality agreements are critical tools in M&A transactions. This agreement provides a legal platform to protect sensitive information. Business lawyers play a crucial role in drafting, negotiating and enforcing these agreements with the intention of protecting  their clients’ interests throughout the process. By following standard practices and proffering solutions to the challenges associated with confidentiality, M&A transactions can be carried out with greater confidence and security.

Disclaimer: “The content in this article is provided for general knowledge. It does not constitute legal advice, and readers should seek advice from qualified legal professionals regarding particular cases or situations.”

Published by: Nelly Chavez