Merger and Acquisition Non-Disclosure Agreements: How to Use Them
February 08, 2019 by Josh Hrala
During a merger or acquisition, information is often being shared between two parties. This means that financial records, protected data, business plans, and other various documents are more exposed than they normally are. To help protect these sensitive subjects, you need to use a well-crafted merger and acquisition non-disclosure agreement that protects everyone involved.
While we are not lawyers and cannot tell you how to craft a surefire non-disclosure agreement – that should fall onto your legal counsel – we can help you understand what you need to protect and what key areas you should pay close attention to.
First, let’s start with the basics.
What Is a Merger and Acquisition Non-Disclosure Agreement?
What is the purpose of one of these agreements? What does it protect in general?
These are great starting questions. In short, a non-disclosure agreement is a legal document that protects your sensitive information. This sensitive information is different in every deal, however, most of time it bars both parties from talking about the deal itself before a specific time, what the term sheet includes, and every other detail that needs to stay under wraps during the negotiation phase of the proceedings.
Using a non-disclosure agreement – NDA – is important because when negotiations are taking place, there is a lot of private business data getting passed back and forth. Some of this data is sensitive enough that it shouldn’t go public yet.
“The agreement is designed to protect the confidentiality of information exchanged in connection with the consideration and negotiation of the transaction and information exchanged in the course of a party’s due diligence review of the other,” writes Eric H. Wang, in an article for DLA Piper.
“In a situation where a party is presented with the other side’s form NDA, a careful review is warranted.”
What Goes Into a Merger and Acquisition Non-Disclosure Agreement?
There are a lot of legally binding things that can go into any NDA. These should be thoroughly examined by your legal team before you sign.
Some major parts include what is and what isn’t deemed confidential, what ‘parties’ are involved, and things of that nature.
According to Richard Harroch, from AllBusiness, a decent merger and acquisition non-disclosure agreement should cover the following:
- Identification of the parties
- Definition of what is deemed to be confidential
- The scope of the confidentiality obligation by the receiving party
- The exclusions from confidential treatment
- The obligation to return or destroy confidential information when requested by the disclosing party
- The term of the agreement
To fully understand all of these items, please review the NDA with your legal counsel so that they can make sure everything is above board and compliant with all local, state, and federal laws. During this initial process, you have to check and double check that all of your legal bases are covered.
Who Issues a Merger or Acquisition Non-Disclosure Agreement?
This seems like a simple question. Who is responsible for issuing an NDA? To put it simply, NDAs are usually issued by whatever party has more at stake if information were to leak out.
For example, in a merger, both parties will likely want to keep negotiations private until things are nailed down. In this situation, both parties are agreeing to join forces, making both of them more or less equal.
However, during an acquisition, one party always has more at stake and it is often times the seller. Consider the power dynamics at play here. One company wants to buy another. That means, in short, that the buyer is the bigger company – so much so that it wants to consume the other. The seller is automatically viewed as lesser than the buyer.
“The confidentiality agreement [CA] is most helpful to Seller because she’s giving up the most confidential information and is more at risk from others finding out that M&A discussions are ongoing,” reports Bill Snow.
“The CA is so valuable to the Seller that any Seller contacted by a Buyer should execute a CA with the Buyer before any meaningful conversations occur.”
“On the other hand, the fact that Buyer is interested in making acquisitions has no negative impact on him. Seeking acquisitions essentially says that a company is so successful and profitable that it can afford to buy other companies. That’s hardly a disclosure that can provide a competitor with an advantage.”
In other words, the public opinion of the buyer is always more than the that of the seller. So, when it comes to NDAs, the seller has more reputation at stake during the deal and should be the ones more concerned. However, for deals to typically work, both parties should be privy to using NDAs until things are finalized.
What Happens If Someone Breaches the Merger or Acquisition Non-Disclosure Agreement?
While it’s important to note that, most of the time, NDAs do their job because both parties want the deal to succeed (or, at least, both parties want to negotiate). There are definitely times when the terms of the non-disclosure agreement are broken, but what does that mean?
Well, considering in the fact that merger and acquisition non-disclosure agreements are legally binding, it opens up the option of legal action against whoever breached the contract.
“If the breach of the confidentiality agreement has had a significantly detrimental effect on your business, it’s time to discuss your options with a lawyer. In the majority of cases you will be in a position to take legal action for breach of contract, however you will need to work out whether it’s worth your time and effort to do so,” reports LegalVision.
“Other potential legal recourses may include copyright infringement, patent infringement or breach of fiduciary duty.”
Basically, you have options at this point. Do you want to take the other company to court? Do you want simply cancel the deal? These questions cannot be answered by us. In fact, it largely depends on how much damage the breach of contract has caused your organization.
The important takeaway here is that you are largely within your right to legal action if the breach has occurred and has damaged your company. However, what action you take should be decided by your legal team who can explain what the best course of action is based on what happened.
Using a Merger and Acquisition Non-Disclosure Agreement: The Important Takeaways
The key of any merger and acquisition non-disclosure agreement is to protect sensitive information, including the fact that a possible deal is even on the table. This is because one party is usually in a more precarious situation than the other.
Negotiations should be kept private to ensure that both parties can speak freely and fairly.
The exact details of the NDA, including what language is used inside the document, differs slightly for every instance they are used. Lean on the expertise of your legal counsel to craft an NDA that is suitable for your needs.
If a merger and acquisition non-disclosure agreement is breached, you also have to work closely with your legal counsel to weigh all of the options in front of you so that you can make an educated decision on what to do next.
In the end, using a merger and acquisition non-disclosure agreement is a great way to to get the whole M&A process started on the right foot.
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