M&A deals and the Non Disclosure Agreement (NDA)

M&A deals and the Non Disclosure Agreement (NDA)

Author: Joris Kersten MSc

Kersten Corporate Finance: M&A Advisory @ The Netherlands. www.kerstencf.nl

Valuation training: Business Valuation & Deal Structuring – 5 day training – 4th until 8th November 2024 at Amsterdam South. www.joriskersten.nl

Source used: Make the deal – Negotiating Mergers & Acquisitions. Christopher S. Harrison. 2016. Bloomberg Press/ Wiley.

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Introduction

In almost any M&A deal a buyer will require access to non public information of a target.

This is so called “due diligence” and this to figure out unexpected information regarding the target.

And its structure, liabilities and its prospects, and to conduct financial analysis.

To accommodate both the buyer and seller, the target normally provides diligence information.

And this on the condition that the buyer agrees not to disclose it to third parties.

And not to use it for any purpose other than to evaluate the M&A deal at hand.

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Restriction on disclosure

Confidentiality agreements restrict the buyer from disclosing confidential information to third parties.

This is the core element of the contract.

Normally an exception allows confidential information to be disclosed to “representatives” of the buyer.

And these can include for example the bidder’s internal personnel.

And external agents, such as: Corporate Finance (M&A) advisors, lawyers and accountants.

This leaves everybody else a third party.

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Restrictions to use

The use of confidential information by the buyer is also restricted by confidentiality agreements.

Consider what a potential buyer can do with the target’s information if there were no restriction on its use.

For example, the potential buyer could use it to compete with the target in the future.

However, enforcing a restriction to use can be challenging in practise.

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Definition of confidential information

The use restrictions, and disclose restrictions, broadly apply to all the “confidential information”.

These "confidential information terms" generally start with a broad definition.

Covering all information related to the target business provided by the seller to the buyer, whether or not it is confidential.

The definition generally covers oral as well as written disclosures.

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“Generally known by the public”

Information that becomes generally known by the public is normally excluded from the definition of confidential information.

For example, the financial press or trade journals can report facts about the target’s business.

Then there is no longer the justification for the seller to restrict the buyer from using that public information.

This since other competitors or third parties could use it as well.

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Already in the buyer’s possession or received from an appropriate third party

Information already in the buyer’s possession, or which later received from an (appropriate) third party, is often excluded from the “definition of confidential information”.

So if the bidder learns information about the target through legitimate means, outside of the diligence process, then that information often stays outside reach of the NDA (non disclosure agreement).

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Independently developed by the buyer

Information that the buyer separately develops may also be excluded from the NDA.

For example, a buyer can learn about the business technique from a seller.

But the buyer’s internal R&D team is busy independently developing a similar technique.

Then the fact that the buyer’s team also learned from the seller will not stop the buyer from using its own internally developed version of that technique.

Of course, this is a potential risk for seller.

So what we see in practise is that the most sensitive information of the deal is often withhold to a (very) late stage of the deal.

And sometimes it is only disclosed after the closing.

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Disclosures required by law

NDAs permit the buyer to make legally required disclosures.

Procedural rights protect the target from inappropriate decisions by the buyer about what is required to disclose.

So the seller should be noticed first on the potential required disclosures.

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Return or destroy

After a deal has died, the potential buyer no longer needs the confidential information.

The target can require the potential buyer to return the information to the target.

Or to destroy all physical and electronic forms of the confidential information.

When "archived material" is excepted in the NDA, the target may wish to clarify that the retained records may be accessed only by IT personnel.

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Expiration of the confidentially agreement

Most NDAs expire after 2 to 5 years.

And this means that the key restrictions on use, and disclosure, no longer apply after that time.

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See you next week again !

My next blog will be about:

-Key provisions and agreements of an M&A deal.

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Best regards, Joris????

Source used: Make the deal – Negotiating Mergers & Acquisitions. Christopher S. Harrison. 2016. Bloomberg Press/ Wiley.