Buyers and sellers might disagree about many things, but one concern shared by both parties is the risk of sharing too much proprietary data. This is particularly true early in the deal process, when neither party wants to give inside information to a competitor that could later use it to its advantage should the deal fall apart.
Several solutions are available for keeping private information from falling into the wrong hands during the M&A process, including the confidentiality agreement and a “clean team.”
A confidentiality or nondisclosure agreement (NDA) typically is the first thing prospective buyers and sellers sign when they enter M&A deal talks. These legal documents may seem like a formality, but they provide the foundation for a transaction’s success execution and shouldn’t be ignored.
Nondisclosure agreements are designed to keep information that parties exchange during the due diligence and negotiation stages private. Typically, review processes involve documentation about research and development, product rollouts, finances, intellectual property, customer data, organizational processes, hiring and expansion plans, and long-term strategies. If such information were to be released prematurely — or at all — it could be disastrous for a company.
NDAs are legally binding agreements M&A participants use to enable candid and detailed discussions during deal negotiations. They’re particularly important for sellers, who need to feel comfortable enough to disclose competitive information to serious buyers — particularly when those buyers are also competitors.
An NDA can be drafted in a variety of ways with terms specific to your deal. Most agreements, however, contain information that’s to be considered confidential as well as information that’s excluded from the agreement. The NDA should specify how long information must be kept confidential and outline scenarios in which a party could disclose confidential information — for example, when subpoenaed by a court or ordered by a federal regulator.
Sellers almost always produce more information for review during due diligence than buyers, and therefore are generally more concerned about securing sensitive sales, earnings and intellectual property information. But if you’re selling, be careful not to come across as inflexible. If you demand overly strict barriers on information access or force the buyer to negotiate with you on the release of every document, it will slow down the deal. The buyer may even become so frustrated that it loses interest in completing the transaction.
Another solution to the problem of confidentiality is the “clean team.” These teams are neutral third parties who can facilitate the sharing of sensitive information during predeal talks and help mitigate disagreements during the negotiation stage. Early in the process, a clean team is given access to sensitive documents and other information from both parties. The team maintains the confidentiality of the raw data, using it to develop evaluations and recommendations that can be shared with everyone.
Clean teams are more than mere secret-keepers. They can help buyers and sellers avoid wasting time pursuing a transaction that’s a no-go — or, conversely, dismissing a deal before they have all the pertinent information. During negotiations, the clean team might act as an objective facilitator, keeping both parties focused on key issues rather than tangents. It also can address questions about anything that has already been decided — which can save time and help the parties reach an agreement faster.
Even without a clean team, selling companies can protect private data by setting up a deal review room where some information is made available for hands-on inspection. The documents aren’t allowed to leave the room, thus minimizing the potential for leaks.
NDAs are standard in the M&A process and your deal is likely to involve one. Clean teams, however, are less common. Discuss confidentiality needs with your M&A and legal advisors to determine which mechanisms should be put in place to keep your deal safe.