Mergers and acquisitions (M&A) typically begin with some form of confidentiality agreement, or non-disclosure agreement (NDA). The NDA offers protection for sensitive information that may come up during due diligence. The goal is to protect confidential information from a third party’s eyes.
Often, the NDA protects any discussion of the M&A negotiation itself. This means neither party may discuss the deal with anyone in the outside world. The seller traditionally drafts and presents the NDA to the buyer before sharing access to any other sensitive information.
Used when both parties intend on sharing confidential information. These sometimes create legal obligations and rights for each party (rights are not usually transferred in a non-mutual agreement). This is the less common type and is more suited for joint ventures or investments.
You may nonetheless end up with a mutual NDA in an M&A transaction. This may be necessary if there is a chance the buying party will have to share sensitive information along the way. In these cases, a mutual NDA relieves some risk for the buyer and may be viewed as a necessary gesture of good faith.
The most common type. Disclosing parties have more flexibility under a one-sided NDA, but be careful. Some recipients may walk away from a transaction if the terms are too demanding.
Your confidentiality agreement or NDA should be suited to fit your business and your transaction needs. Certain clauses broadly apply to virtually every agreement, but some do not. While it is tempting to think you can use any template NDA you can find, you should not.
Essential terms and concepts include:
Sellers must reveal some information about their company in order to attract potential buyers. The confidentiality agreement, therefore, needs to fall in between first contact and opening up your books. This why you need to know the difference between a teaser sheet, an NDA, and the Confidential Information Memorandum (CIM) — even if you do not use documents with those exact titles.
Or information sheet, starts the M&A courting process between a buyer and seller. Formal teaser sheets are often produced through a specialized transaction adviser or investment banker, but less formal marketing material can serve the same function. These must be carefully crafted so the seller’s identity is hidden and are sent to a targeted group of buyers.
Or CIM, is a detailed breakdown of the business, its assets and liabilities, and other material information that a potential buyer may need to value the acquisition. In other words, a seller is showing the books to the buyer.
If the process is executed through an intermediary, such as a transaction adviser, there is no direct contact between buyer and seller. This means no customer lists or trade secrets until the due diligence phase. A more detailed breakdown about protecting sale confidentiality throughout the entire M&A process can be found here.
You do not need a third-party professional for every single business transaction activity, but it is highly advisable to use an experienced attorney before drafting or signing a confidentiality agreement or NDA. These can be complex legal documents and even well-prepared business owners may end up in court over a confidentiality breach.
Just as you should not blithely exchange confidential information with counterparties, you should
not take the risk of creating an ineffective NDA or signing a document you do not fully understand.
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