Time is money. Information is also money, and access to information can save a lot of time and costs. This is evident in every M&A transaction.
Non-disclosure agreement or NDA in practice
One of the first actions taken in virtually every transaction is to conclude a confidentiality agreement between the parties.
Usually, the scope of confidential information includes all data relating to the proposed transaction and the parties involved, including information on the status of ongoing negotiations.
The confidentiality obligation may take the form of a separate agreement – a non-disclosure agreement (NDA). It can also be incorporated into another document, such as a term sheet or preliminary agreement.
Normally, an NDA sets out how confidential information is to be protected. It also includes an obligation to return documents containing such information should the transaction not be effected.
Alternatively, an NDA may oblige the party receiving confidential data to delete it (as not every document can be easily returned, such as for example email communications).
Financial penalties in NDAs
The confidentiality obligation may also be secured by a contractual penalty, i.e. an obligation to pay a certain amount in the event of a breach by the recipient of the information.
The contractual penalty clause facilitates the enforcement of the penalty, as the party in whose favour the penalty is stipulated does not have to prove the value of the damage suffered as a result of the breach of the NDA.
Permitted use of information, or what not to forget in an NDA
An often overlooked, yet equally important element of an NDA, is the clause defining the permitted use of information by the recipient.
The idea is to secure that confidential information will only be used to assess the viability, negotiate the terms and conditions of and then execute the transaction.
In that case, confidential information may not be used for any other purpose, in particular for competing activities. Indeed, we can imagine a case where a buyer, who is a strategic industry investor, obtains information from a seller operating in the same market segment and thus being the buyer’s direct competitor. The buyer has obtained confidential information, but the transaction does not take place.
Another example. A transaction is carried out via an auction in which several competing buyers make their bid to acquire another company operating in the same industry. Naturally, the seller may choose only one of them. Those whose bids have been rejected still had access to confidential information, as each of them was invited to the auction process in which they made a due diligence investigation of the company being sold.
High risk for technology and innovation-based companies
In a situation where the buyer does not proceed to close the deal, either because he withdraws himself or his offer is rejected, the risk of confidential information being used for a purpose other than originally intended seems particularly significant.
This is particularly true for those business sectors and activities that rely on new technologies and other innovative solutions.
Indeed, in the rapidly changing market of products and services based on innovative concepts that require special protection against disclosure, access to non-public technological information can be crucial to the success or failure of an entire business project.
How we help protect important information
We help our Clients to protect themselves against disclosing their important information, but also to secure the data they share against unauthorised use.
We also know how to effectively counter attempts to build unfair competitive advantage based on the information that Clients choose to share in M&A transactions. Because we know that information is money, so there are many people eager to get it.
Questions? Contact us
Paweł Mardas
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