Confidentiality in the M&A Process

It’s a strange thing but it’s the ultimate dealmaker’s paradox: that special something that makes a business valuable and attractive to would be purchasers is also a matter of utmost secrecy.

The question is, as a seller or buyer looking to take a business to the next level, how do you share and scrutinise the inner workings while keeping things under wraps? Of course business integrity and trust go a long way, but sometimes are not enough to keep a prospective deal confidential.

Confidentiality – that is the nub.

A common feature of many Mergers and Acquisition’s (M&A) is the considerable volume of confidential information that needs to be exchanged between the buyer and seller. Of course, this is perfectly reasonable and necessary for a successful M&A. However, such movement of confidential information leads to the potential for misuse – either by accident or design.

Therefore anyone who is given access to confidential information needs to be bound by the terms of a robust confidentiality agreement before any information is exchanged

So what should such a confidentiality agreement cover?

Whilst standard confidentiality agreements abound and all basically cover the same well known clauses and covenants, there are some less obvious points that need to be considered.

Below we take a look at some important points what should be covered when drafting a confidentiality agreement.

  • It is not sufficient for an agreement simply not to disclose confidential information. It should be stated that the confidential information is to be used only for the purpose of evaluating the proposed transaction/investment.
  • List what could be considered to be confidential information in a non-inclusive list and have the recipient acknowledge that this confidential information has competitive value
  • Look to protect confidential information by only releasing the increasingly sensitive information in phases.While it is critical for a smooth and timely sale process to collect and organize due diligence information in advance, you should only distribute increasingly sensitive information as you progress in the sale process.

Other points to note when considering the confidentiality question in the M&A process include:-

  • Use the Right PeopleAs discussed earlier there will be the sharing and transfer of a vast amount of information during the M&A process, so it is important that you trust the people who will have access to that information, much of it confidential and sensitive. Therefore, anyone who is allowed to view such sensitive data must be vetted.
  • Make Best Use of TechnologyIt is important that companies retain control over their data, and in any M&A, where there will be many sensitive documents, it is necessary to use a highly secure solution that utilises appropriate technologies such as multi-factor authentication, encryption and certified data servers.
  • Implement SafeguardsTrust and technology will not be enough to keep important data confidential. It will be necessary for organisations to institute specific policies and procedures with respect to data management and security. Good intentions can never replace a coherent strategy, and it is critical that all personnel are effectively trained with regard to the company’s data security goals and expectations. In addition, the tone from the top must be clear and all levels of the company must be clear as to the planned strategy and act accordingly.

In the end the most effective way to maintain confidentiality is to control the flow of information. However, M&A deals are fast-moving and often founded on trust, but as we have discussed that does not mean that certain measures should not be taken to ensure that closely guarded information stays secret. In fact, confidentiality need not stymie the process or breed suspicion. Indeed, a thoughtful and transparent approach will not only protect disclosures but ultimately facilitate a deal, bringing more focus and calculation to the proceedings.

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