A merger or acquisition is a large business undertaking. It’s common for the parties to enter into a preliminary agreement before they negotiate the final terms. A preliminary agreement allows the parties to determine the parameters for their negotiations. They make sure that negotiations are fruitful for both parties.
Binding provisions of a preliminary agreement often include terms about confidentiality and exclusivity. Confidentiality and exclusivity terms help preserve the business interests of one or both parties during the negotiations process. Here’s what you should know about confidentiality and exclusivity in a mergers and acquisitions transaction from our mergers and acquisitions attorneys:
In a merger and acquisitions transaction, each party needs some information about the other party in order to make an informed decision about whether to go forward. Often, the information that they need is private. A confidentiality agreement lets you exchange the information you need without any negative consequences that might come along with public disclosure.
A confidentiality agreement states what information must be kept secret during the negotiations process. Both sides to the transaction may promise to keep information secret that they receive from the other side, or only one party may disclose information that needs to be kept secret. Keeping information confidential can protect trade secrets and secretive business information. It’s important to think about what information you want to be released to the world. It’s almost always in your best interests to keep at least some information confidential during and after the negotiations process. Confidentiality and exclusivity can protect your business especially if the negotiations process isn’t successful.
A standard or boiler plate confidentiality agreement isn’t specific to your situation. There are a lot of different options for a confidentiality agreement like mutuality, rules for the destruction of sensitive information after negotiations, the scope of confidentiality, exclusions, choice of law and penalties in the event of a breach. Because a merger or acquisition is a major undertaking that involves a large sum of money, it’s always in your best interests to tailor your confidentiality agreement to meet the best interests of your business.
In your confidentiality agreement, there are a number of terms to include. You want to address all of the following key provisions of a confidentiality agreement:
The parties in a confidentiality agreement are the buyer and the seller. You may call the parties the disclosing party and the recipient. Sometimes, both the buyer and the seller disclose information.
You may also want to address whether the confidentiality agreement applies to other related parties and organizations. For example, most companies need to involve attorneys and accountants in their business negotiations. You may also include your financing sources or affiliate companies in your confidentiality agreement.
Your confidentiality agreement should carefully define what’s confidential and what’s not. Oral statements may not be confidential, or there may be follow-up procedures that clarify if oral statements must be kept confidential. There may be handling procedures required by both parties in order to prevent unauthorized access to information. There may be exclusions for publicly known information and information that a party acquires without using confidential disclosures.
If the merger or acquisition ultimately doesn’t materialize, the parties must decide what to do with the confidential information that has been disclosed. Naturally, the seller wants to keep the information confidential, but the buyer may need to keep some information to comply with laws and regulations. The seller might want confidential information returned but in the digital age, it may be hard to return electronically stored information. Printed information might have the opinions and mental impressions of the buying company jotted down in the margins. It’s important to agree on how to handle all of these issues as you draft your confidentiality agreement.
While you hope you don’t have to litigate your confidentiality agreement, you want to think about what happens in the event of a breach. The buyer and seller may operate in different states. You should determine what body of law you want to decide the dispute if you have to litigate your confidentiality agreement.
It’s important to think about what you want to happen if either party breaches a confidentiality agreement. Possible remedies might be injunctive relief or a financial penalty. Defined penalties in the event of a breach can take the uncertainty out of the process. It can also give the parties an incentive to follow the terms of the confidentiality agreement.
An exclusivity agreement prevents a seller from negotiating a sale with other buyers during an agreed upon period of time. The exclusivity agreement puts a buyer in a better position because they don’t have competition during the exclusivity period. In addition, the buyer can have faith that the seller is serious about negotiating the sale. If the buyer backs out of the sale, an exclusivity agreement has cost the seller time to negotiate other offers. An exclusivity agreement is also called a “no-shop” agreement.
To prepare an effective exclusivity agreement, you must think about how much you want to agree to early on as you enter into negotiations. A seller wants to keep the exclusivity agreement as short as possible. The seller might look for an exclusivity agreement of not more than 14 days.
A buyer wants a longer exclusivity agreement like 30 or 60 days. The length of the exclusivity agreement depends on the amount of time you need to conduct due diligence and negotiate the final details. You may also negotiate automatic renewals of exclusivity as negotiations continue or even termination of exclusivity if certain events occur.
There’s no one-size-fits-all remedy for a mergers and acquisitions transaction. It’s important to think about the specific needs and interests of your business as you negotiate confidentiality and exclusivity. Both provisions are critical to protecting your business interests as well as the interests of employees, customers and other related parties.
Agreeing on the terms for negotiating an acquisition or merger can be a significant undertaking by itself. Taking the time to tailor your confidentiality and exclusivity agreements can help ensure that your business interests are protected whether or not the merger or negotiation is ultimately successful. Experienced legal counsel can help you draft an effective agreement as you enter into negotiations for your merger or acquisition contract.
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