How to Execute an M&A Confidentiality Agreement

If a Buyer is interested in seeing more about the proposed M&A deal after reading the teaser, the Seller should execute a confidentiality agreement with the Buyer.

A confidentiality agreement, or CA (also known as a non-disclosure agreement or NDA), is an arrangement where both parties agree to share information with each other but to refrain from sharing the information with outsiders.

They also promise not to divulge the fact that discussions are ongoing. In other words, if you sign a CA, you agree that you can’t even talk about the talks!

The CA isn’t just a piece of paper or some perfunctory step in the M&A process. It’s a serious legal document, and you need to treat it as such. Signing a CA means you have a legal and ethical obligation to keep your mouth shut.

Perusing the CA’s contents

Here are the key aspects of a confidentiality agreement:

  • Confidentiality: This one seems like a given, but it’s nice to get this agreement down on paper.

    Make sure the agreement excepts information already known, such as public information or general information, from the confidentiality requirement.

  • Use of materials: The CA specifies that any materials exchanged during the M&A process are for evaluation purposes only. In other words, don’t use the evaluation materials to, say, write your own business plan or create a TV sitcom.

  • Disclosure of materials: Despite a pledge of confidentiality, the CA also explicitly states who the parties are allowed to disclose information to, such as outside advisors. Each party agrees to be responsible for any breach that its advisors cause.

  • Who’s covered: A CA specifies the identity of Buyer and usually includes language stating that Buyer can inform employees and advisors (lawyers, accountants, investment bankers, and so on) of the transaction and share information with these advisors.

  • Destruction of materials: The recipient of confidential material agrees, upon request, to either return the materials to the source or destroy them.

  • Chain of command: The CA defines the chain of command all deal-related correspondence should go through.

  • Period of enforcement: A good CA specifies the length of time the agreement is in force, usually one to two years. Don’t sign an agreement that lacks an end date; you don’t want your hands to be tied indefinitely.

Most confidentiality agreements are boilerplate legalese and don’t differ that much from document to document. But you should read any CA before signing it to be on the lookout for language that differs from the norm. As with everything in the M&A process, you don’t have to accept a CA as is.

Figure out which party sends the CA

Who sends the confidentiality agreement depends upon who initiated the contact. If a Seller is contacting a Buyer, she usually attaches the CA to the teaser, often with instructions for the Buyer to sign the CA if he wants to see the full book.

A Buyer contacting a Seller should have a CA at the ready. However, Buyer may want to offer Seller the option of using either her own CA (if she has one) or Buyer’s CA, whichever makes Seller the most comfortable.

Who gets more value out of the CA

The confidentiality agreement is most helpful to Seller because she’s giving up the most confidential information and is more at risk from others finding out that M&A discussions are ongoing. The CA is so valuable to the Seller that any Seller contacted by a Buyer should execute a CA with the Buyer before any meaningful conversations occur.

On the other hand, the fact that Buyer is interested in making acquisitions has no negative impact on him. Seeking acquisitions essentially says that a company is so successful and profitable that it can afford to buy other companies. That’s hardly a disclosure that can provide a competitor with an advantage.

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