Takeover blog #1: the non-disclosure agreement

As a member of the Legal Persons & Contracts team, I am heavily involved in assisting in share transactions, both on the side of buyer(s) and seller(s). A standard acquisition process looks broadly as follows:

• Orientation and introduction phase
• Signing confidentiality agreement ('Non Disclosure Agreement','NDA' or 'Confidentiality Agreement').
• Information Exchange
• Valuation and agreement on key points transaction
• Signing letter of intent ('Letter of Intent','LOI' or 'Term Sheet').
• Book examination ("Due Diligence Examination" or "DD").
• Signing purchase agreement ('Share Purchase Agreement' or 'SPA').
• Passage of deed of delivery ('Closing').

In a series of blogs over the next few weeks, I will focus on a lawyer's role in this process, highlighting the most important transaction documents. I pay attention to the place of relevant transaction documents in the acquisition process, pointing out the main concerns and pitfalls.

Starting with the stand-alone non-disclosure agreement (to be distinguished from the non-disclosure that is part of a letter of intent; the scope of that is usually broader). After buyer(s) and seller(s) have sniffed each other out and concluded that there is mutual interest in a takeover, the buyer will want to know more about the seller's company. Inevitably, information will be exchanged in that context. This entails the necessary exposure for the seller, for example because the information provided is competition sensitive. Even the mere fact that a company is for sale can be sensitive. Therefore, the seller will require confidentiality and safeguards thereon from the information it shares with the buyer.

Although a non-disclosure agreement is not very complex in a general sense, there are a number of snags.

1. Delineation of "Confidential Information.

First, the question of what information to be provided qualifies as "Confidential Information. For the buyer in particular, it must be clear what information is considered confidential, for the simple reason that it must be known to him when a breach occurs. Against that background, the potential buyer will want to limit the term "Confidential Information" to only information marked as such, as the potential seller will want all information he provides to be considered confidential.

And how to deal with information provided orally? A practical solution is to include that this information falls within the scope of the concept of "Confidential Information" only if the information is confirmed in writing within a certain period of time.

To limit the potential buyer's exposure, it is important to include exceptions, for example, by establishing that publicly accessible information is not covered by the term "Confidential Information" (even if the information provided does not become publicly accessible until after the confidentiality agreement is signed).

2. Circle of data subjects with access to the confidential information.

A second point of attention is the circle of people who have access to the confidential information. One way is to have every person involved sign a confidentiality declaration, but certainly in the somewhat larger takeovers this is not very workable. A more pragmatic solution, often used in practice, is for the potential acquirer to ensure that the persons involved within his organization and those he engages behave in accordance with the confidentiality agreement. If one of them blurts out, the potential buyer is liable.

It is also important to consider third parties, who may have access to the confidential information but are not part of the potential buyer's organization. Think of consultants. Viewed from the seller's interest, it is advisable to stipulate that any breach by these third parties will be attributed to the buyer.

3. Consequences of violation

Viewed from a seller's interest, it is advisable to include a penalty clause in the non-disclosure agreement. If this is missing, a non-disclosure agreement can quickly prove to be 'toothless'. A potential seller will then have to prove that there has been a breach of confidentiality and he will have to prove his damages numerically. The point is that when non-disclosure agreements are breached, the effects are almost never fully quantifiable. A penalty clause provides the potential seller with the necessary comfort in that it has a certain preventive effect. Incidentally, the exact wording of a penalty clause requires the necessary attention because under circumstances it can block the possibility of compensation.