Merger & Acquisition Series: Structuring an M&A deal in Australia - Step 2: Your confidential information is what sets your business apart from the rest. Maintain your confidential information from the start.
Over the coming weeks, the Business and Enterprise Team will take you through the process for structuring an M&A transaction in the Australian marketplace.
Typically, the very first agreement that is entered into in an M&A deal is a confidentiality agreement. These can also be called, “Non-Disclosure Agreements” or NDAs. This agreement is designed to maintain the confidentiality of the information that you exchange to potential bidders of your business, when they undertake ‘due diligence’ (‘due diligence’ is elaborated in a more detail in a later blog).
An NDA may work as a two-way agreement – i.e. you may receive confidential information from the prospective purchaser/investor. An example of this is when the prospective purchaser/investor is issuing its equity as part of the deal.
It is important to be aware of the common pitfalls for an NDA. Helpfully, we provide the following checklist for the NDA:
- The definition of Confidential Information: The definition of “Confidential Information” forms the basis for the protections provided within the NDA should there be a breach by a “Recipient” of Confidential Information. The definition should cover the information and materials to be provided (and to the extent applicable, any previous information provided) both written and verbal. The broader the definition, the better for the “Discloser”.
Equally important is what is carved out of the definition of Confidential Information. Typically, Confidential Information does not include information that is in the public domain; is already known to the Recipient of the information; is lawfully possessed by the recipient prior to the disclosure of the confidential information; or is required to be disclosed by law.
The Discloser should also consider:
- removing legending and/or watermarks that contain or are marked as “Confidential” to avoid accidental failures to legend leading to unprotected Confidential Information; and
- withholding certain Confidential Information (which is deemed to be extremely confidential, such as pricing information, patent information, or source code) until the end of the due diligence period. This may include having a separate NDA, which implements separate controls and procedures to limit the disclosure of this Confidential Information – especially where the Recipient is a competitor.
2. Use and disclosure of Confidential Information: The Confidential Information should only be used for the express purpose for formulating the decision to invest in your business or not.
In addition, only certain “Specified Persons” should be disclosed Confidential Information.These may include directors, senior managers, financiers or other such advisers to the prospective purchaser/investor.It is worthwhile implementing controls and procedures to limit the distribution and access of the information if there is extremely confidential information being supplied or if the Recipient is a close competitor.
Note that, typically a Recipient may need a carve out provision to provide Confidential Information to its Financiers.
The Discloser should also consider:
- whether there is language within the NDA that prohibits a license from being granted by the Discloser to the Recipient (or its Specified Persons) to use the Confidential Information except for the specific purpose of evaluating the transaction. This is extremely important, as a license may also be indirectly provided in respect of any Intellectual Property that the Discloser has; and
- whether there is language within the NDA that confirms that any discussions between the parties remains confidential.
3. Non-compete / Non-solicitation clauses: Besides non-use clauses, a non-compete or non-solicitation clause prevents the Recipient from competing with you for a specific period of time and in a certain location.
Note that this non-compete clause has to be reasonable (as compared to an unfair restraint on competition).
Similarly, the essence of a non-solicitation clause is there to prevent the Recipient from stealing or coercing employees and customers of the Discloser.
4. Term length: It is worthwhile considering whether the NDA (which protects the Confidential Information, including trade secrets or otherwise) shouldn’t expire as such trade secrets may wish to remain confidential for a long time.
If the other side wishes to cap the length of time until the NDA expires, market practice is typically between one to five years.
Why some investors DO NOT sign NDAs
If you are capital raising and pitching to certain professional investors, these investors may not be prepared to sign an NDA. This is because a professional investor may see numerous deals each week, and signing an NDA for each deal would essentially block them out from all sorts of industries and sectors.
Be careful dealing with investors without an NDA. Your investment memorandum, pitch decks, business plans and financial statements can be shared incredibly easily.
Competitive Bidding Process – Managing NDAs
In a competitive bidding process, each Recipient is typically required to sign an NDA. It is important to comprehensively manage this process so that you have signed agreements with all of the parties that you provide with Confidential Information.
Typically, our clients advise us to negotiate, prepare and manage all aspects of the NDAs during a competitive bidding processes.
Get advice on what kind of NDA is suitable for your type of transaction. If you are thinking of capital raising or selling down your business, come have an initial consultation with James Burrell or Nick Hornstein and we can assist you with your immediate next steps.
Who we are
R.B. Flinders’ Business and Enterprise Team predominantly represents founders of businesses who are looking to capital raise or alternatively sell-down from their business.
We know that no deal is the same and that no client is the same. For that reason, we get to know our clients at a personal level and take a pragmatic approach in our dealings with them.
We offer a wide-variety of services that assist our founder going forward, including assisting in their estate planning affairs as well as restructuring their property portfolio for a more advantageous tax position.