Confidentiality is of key importance in deal making and although often considered as a “side-bar” issue, is a foundation to a successful M&A process. When managing a competitive sale process, managing confidentiality allows sellers to maintain negotiating leverage while maximising deal value and terms while ensuring no future damage by unsuccessful buyers. M&A deals are underpinned by a confidentiality agreement.
Most business sale programs have structured milestone phases with appropriate confidential information released at each phase. Optimal’s sale process has four phases with varying stages of confidentiality. At each stage more detailed confidential information is released to approved parties/persons in a structured “controlled disclosure” process.
Confidentiality in market M&A transactions is a serious concern in four areas.
- First, with employees of the selling company
- Second, with customers and suppliers of the selling company
- Third, with competitors of the selling company and the public
- Fourth, in cases where a public company is involved on one side or the other of a deal, consideration as possible insider information.
NDA – Non Disclosure Agreement/Confidentiality Agreement
The non-disclosure agreement (NDA) often referred to as a confidentiality agreement (CA), is the first line of defence when it comes to confidentiality in a deal. This is the first document to be signed by an interested party (see NDA Minimum Requirements for Mid-Size Business Sales). Ultimately confidentiality is determined by the integrity of the parties with legal recourse available if abuses occur.
The NDA is provided once a party has shown a preliminary interest in a deal after receiving information via a “Teaser”. The Teaser includes basic company information typically without disclosing its name. The NDA places structure and legal parameters around the confidentiality of information shared. Good physical processes still however need to be in place to ensure confidentiality across all participants involved in the deal with an ability to provide information selectively. Optimal’s controlled disclosure uses data room technology to manage the release of confidential information with different stages of confidentiality (see Confidentiality Stages in M&A Sale Program).
With Whom is Confidential Information Shared?
Confidentiality has to be considered in relation to staff of the selling and buying company and information of the deal should be limited only to those directly involved. Each can be detailed by name or position in the confidentiality agreement generally including email addresses.
Who should sign the confidentiality agreement? For some listed company acquisitions, all staff involved in the transaction plus family members/partners not in the business but with whom sensitive information may be discussed, can be requested to sign the NDA to protect market sensitive information. Typically a suitably authorised senior staff member signs the NDA on behalf of the company and conveys to each person involved what is in the NDA and their responsibilities.
A major roadblock in an M&A process can be internal disruption and dissatisfaction of employees which may prevent the business from continuing to grow or efficiently deliver its services. It’s crucial that an executive team does not become distracted by the M&A process and neglect day-to-day management. To that end, it’s critical that only business owners and a limited number of trustworthy team members be aware of and involved in deal discussions. Maintaining confidentiality throughout a company limits disruption to daily operations and allows most employees to remain focused on the business.
Not all employees will react favourably to the news of a potential sale and it’s not uncommon for employees to disengage from their work amidst the uncertainty associated with an acquisition. This can directly impact the performance of the company which in turn can impact the chances a transaction will close or negatively influence the price. Furthermore, even without performance concerns, there are plenty of reasons a deal might not go ahead and no reason to worry employees unnecessarily in advance of a binding agreement.
Rumors of a potential sale can be equally harmful to customer relationships. No one likes having an elephant in the room. That’s exactly what happens when a customer learns about the possibility, via leaked information, of a supplier being acquired. Questions immediately arise about the quality of services going forward, potential conflicts with the acquirer, the possibility of having to renegotiate contracts and more. Keeping the transaction process confidential allows the acquirer and seller to craft appropriate messaging to address these concerns proactively if and when the deal does close.
Competitors are typically viewed as natural acquirers considering the overlap of capabilities and end markets. It’s imperative that the M&A advisor has processes in place beyond the traditional protections outlined in the NDA to ensure confidentiality. Otherwise, providing a competitor with access to sensitive information including contractual agreements with customers, margins, differentiators, competitive advantages, and intellectual property could provide a competitor with multiple levers with which to gain an advantage with prospective and/or existing customers in the market.
Ensure adequate time and attention is focussed on preparing a confidentiality agreement and ensure all interested parties sign it before confidential information is provided!