#10218 - Material Contracts Reviewed - Mergers and Acquisitions (Private Acquisitions)

PREP TASK MATERIAL CONTRACTS REVIEWED

Confidentiality Agreement (Task 1 Part 1)

¿Why enter into a written Confidentiality Agreement (“CA”)?

a. Compared to common Law a CA offers: (at CL there is an equity obligation of confidence = there is a relationship quality of confidence + in circumstance when duty of confidence was imposed + and they have used the information to your detriment. This may be an unsatisfactory and vague when the business is at stake)

Seller:

• Clearly define what information is agreed to be confidential (give certainty)

• Clarify (set out) the remedies that are available (sometimes this is clearly outlined within the CA)

• The Seller can monitor the buyer’s procedures for handling the information

• The seller will be able to recover damages if Buyer breaches the Confidentiality Agreement.

Buyer:

B will seek to reduce restrictions imposed, particularly those with a cost implication. B may prefer that the restriction apply only to the most sensitive info and it may not wish to agree extensive procedures for tracking info in its possession.

b. Need to keep information confidential because:

- S will be expected to provide a wide variety of commercially sensitive information. If the buyer is a competitor, the seller will be particularly concerned about revealing information such as customer lists, important contracts, accounting and business information, industrial secrets, business plans which the buyer may be able to use to its own advantage if the acquisition falls thought. The seller is at most risk and will draft the initial agreement.

- The fact that there may be a potential sale means that:

- Leaking/Releasing confidential info can affect your share price & may disrupt the relationship with customers, clients, employees and future management plans which are commercially sensitive.

- There is no statutory framework to protect the Seller’s confidential information.

- Competitors may use the information to take advantage

c. Buyer's undertakings Non-solicitationof staff:clause 5.2

The restriction on poaching employees in clause5.2 is only likely to be appropriate if B will be talking to the S's key staff as part of the DD process. With a view to increasing the reasonableness of the restriction, theseclauses are limited to protecting the S's senior employees. S should consider if it is appropriate to extend the restriction to a wider pool of employees having regard to the target business and the way the DD process will be handled.

Non-solicitationof customers:clause

If the prospective B is a competitor of S or the target business, the S should consider including a restriction aimed at preventing the prospective B from poaching or otherwise interfering with its customers or clients. It may also be appropriate to extend the B's undertakings to prevent the solicitation of the key suppliers to the target business. It should be limited to customer who have recently dealt with the target (e.g. within previous 12 months). Clauses preventing the disclosure of information after termination can only be effective in relation to highly confidential information or trade secrets Faccenda Chicken Ltd v Fowler 1986 and as long as they do not restrain trade.

Terms to Protect the Seller

General:

1. The definition of Confidential Information is an important part of the agreement. The seller will want a wide definition but a too wide Confidentiality clause may:

• restrain trade if the clause is too restrictive,

• lose the “necessary” quality which should be essential in Confidentiality Clauses. People will take more notice of requirements if they are truly confidential

• A clause protecting “financial & commercial info” is preferable to one specifying “all info”.

• “Oral” – too vague and hard to control

• “Before and after the date of this Agreement” – Too wide for the buyer to accept

• “Obtained by observation by the Buyer” – To hard to prove what is/isn’t confidential

The clause is likely to exclude information in the public domain and information already known to the proposed buyer). The definition will include information obtained from the seller and its advisers, and should extend to any document prepared on the basis of this information by the buyer;

2. Issues:

• it is evidentially difficult to enforce an oral confidentiality agreement.

• Some information might have already been provided to the buyer which will fall out of the confidentiality agreement. The seller will want to make sure that this does not happen.

• The seller will want to provide a list of information that is confidential

• The seller will want to mark the information as confidential (watermark)

3. Clause of What happens if transaction falls through

A clause that Seeks to protect the seller’s information in case the transaction falls through to make sure that the confidential information is destroyed:

• An undertaking by the B to return or destroy all info provided (copies too) if the acquisition fails

• Tracking mechanisms (the S wants to make sure that he & B keep records of all the info.)

• Use a Data Room

• Guidelines instructing the personnel on how to destroy the confidential information

4. Clause for Permitted Use Only and to Keep the information secret.

There are a number of promises from B not to use the information other than for the permitted purpose (i.e. for the DD only or as defined in the agreement). (the Buyer may use the information in a case where there was going to be a Share Acquisition to switch to an Asset acquisition as a result of the confidential information disclosed)

Remedies clauses

• Insert a clause where B is to indemnify both the S and Co. which allows Co. to claim the indemnity. (Co. may be able to show loss more easily than the seller). Careful not to make into a Penalty Clause

• Insert a clause for equitable relief (including an injunctive relief (it is an estoppel clause where B promises not to oppose an application for an injunctive relief by the seller)) but this is at the discretion of the court.

• Specific Damages: damages may otherwise be hard to quantify. For example, it will be difficult to show that share price dipped because the potential sale became public, as opposed to being the result of fluctuating market conditions.

Limitations of CA + How to manage confidential information

• It is not always easy to establish that the Buyer breached the confidentiality agreement.

• The remedies are not perfect as once secret info is given to another party it ceases to be secret.

• How can you quantify your loss from breach of the confidentiality agreement?

• Even if the buyer is honest, the confidential information will affect the way a potential buyer (in case the transaction falls through) makes decisions.

• In general, once the information has been leaked there is nothing a Co. can really do to repair the damage. Largely, the remedies serve a deterrence function.

Making Sure confidential information stays confidential

• Keep the most important confidential information and secrets for last.

• Have a nominated people within the buyer and seller that are in charge of dealing, sending and receiving the confidential information

• Have a data room (virtual or real)

• Number all documents to prevent photocopying

• Mark the information as confidential and restrict the access of electronic...