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Wednesday, January 30, 2013

Loose Lips Sink Deals

JoAnn Lombardi
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Loose Lips Sink Business DealsConfidentiality Agreements are Essential When It Comes to M&As
During World War II, posters showed Uncle Sam with a finger to his lips superimposed over a freight ship. The caption read "Loose Lips Sink Ships." It was a clever way to remind troops never to discuss confidential information, lest they unintentionally disclose secrets to the enemy that could cause disaster. Though ramifications of breaching a business deal are not as dire, maintaining strict silence is still critical. 
Pre-Plus Potential Holes
Before receiving detailed information regarding a potential acquiree or merger prospect, the buyer is normally required to execute a confidentiality agreement (CA) or a non-disclosure agreement (NDA). In essence, the two agreements are synonymous and used interchangeably. Occasionally, less-than-upstanding competitors pose as potential buyers to access privileged financial and operational information regarding competitive businesses. 
The CA or NDA is a seller's first line of defense, so requesting one is not just reasonable, but prudent. Maintaining confidentiality throughout the entire deal process also is in a legitimate prospective buyer's or merger partner's best interest. This doesn't mean, however, that the potential partner's professional advisors, banks and other financing sources must be kept in the dark about the impending transaction.
Potential Impediments
A buyer often must reveal details about the target company to his or her advisors or bankers. In certain circumstances, these parties also should be asked to sign a CA or NDA incorporating that fact. For example, if there's a likelihood that another part of the buyer's lending institution is one of the seller's customers or prospects, the buyer may ask his or her banker to execute one of these agreements.
Confidentiality doesn't end with the CA or NDA. At some point, usually after both parties have signed a letter of intent, the buyer will interview the target company's key personnel to judge whether to retain them after the deal closes. Under normal conditions, the buyer retains at least some, if not all, of the target company's key managers. To help ensure an orderly transition, the content of these conversations should also be kept confidential. 
Shore Up the Details
What information should a CA or NDA contain? Here are some of the more common confidentiality provisions you may encounter in these agreements:
Disclosure Terms. Usually, the CA or NDA specifies that information released pursuant to the document be used only to explore the transaction. Both agreements enjoin the signers from using the data for another purpose.
Most CAs and NDAs contain provisions for disclosure of information to the buyer's advisors and potential financing sources. The buyer is responsible for informing these people of the agreement's existence.
Whoever becomes privy to the confidential information must abide by the agreement's requirements. In fact, it's an excellent idea for a buyer to require his or her advisors and financing sources to complete a CA or NDA, ensuring their cooperation in keeping the confidential information private.
Exemptions. Some agreements exempt facts that are in the public domain or that a court document such as a subpoena demands. In these cases, the affected party is entitled to notice before information is released. CAs and NDAs commonly state that there is no liability to the buyer for disclosing information under those circumstances.
These agreements may also require that the buyer obtain the seller's approval before revealing anything pertaining to discussions about the potential merger or acquisition.
Expiration Date. The potential buyer can expect that the agreement's requirements will expire within a specified period. In fact, virtually every agreement of this nature contains an expiration date. Two years is typically considered reasonable, though one year is more common.  
Breach of Confidentiality. The CA or NDA usually contains a provision that details the harm a prospective buyer will suffer if it breaches the agreement. Applicable state laws regarding mergers and acquisitions also are included.  
Canceled Deal. Most of these agreements require that the potential buyer either return or destroy all documents and other materials involved in the transaction if either of the parties should decide to break off negotiations for any reason. 
Nondisclosure is Golden
The less said about impending deals the better. Even when speaking with members of your team, consider any public place a bad place to have a conversation about confidential information. It's in the best interests of both parties to be reticent when they are involved in a deal.
A going business is akin to a living thing, so significant changes can take place in the company, the marketplace or both within a relatively short period. Make sure to discuss confidentiality agreement contingencies with your M&A professional.

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