The word 'merger' in the charity sector should be seen in a positive light. A proactive strategy – a step taken to improve services for their beneficiaries, to make better use of resources and to benefit from shared knowledge, skills and experience. That said, it is often seen as negative – a step taken to save an organisation in financial difficulty, bringing with it uncertainty and tension. Whether positive or negative, as we see more mergers taking place across the sector, to help provide some insight as to what is ahead – before, during and after the negotiation and signing of any transfer agreement – we have written a series of five blogs outlining the process of merging two charities.
Throughout the series we will call the charity which is transferring its assets and liabilities to the other charity the "transferor" and the charity which is receiving the assets and liabilities the "transferee".
It is worth highlighting at this stage that a merger in the charity sector typically involves the transferor transferring its assets and liabilities to the transferee with the transferee continuing the operations of the transferor and the transferor subsequently winding up. This series will be based on this merger structure – there are others!
In this Part 1 of the series, we focus on the importance of having confidentiality agreements (sometimes referred to as non-disclosure agreements) ("NDAs") in place as an initial step in the transaction to help ensure that any business and/or confidential information about the transferor charity is properly protected before providing it to a prospective transferee.
When to sign a confidentiality agreement/NDA?
Firstly, you will almost certainly wish to ensure that the fact you are considering merging with another charity and have entered into negotiations with interested parties is kept confidential. This is often achieved by including confidentiality obligations in the heads of terms (or Letter of Intent) relating to the proposed merger. It is worth noting that confidentiality provisions (along with exclusivity provisions) are typically among the only provisions in the heads of terms that are legally binding on the parties.
Once the heads of terms are agreed, the prospective transferee ordinarily commences a due diligence exercise to investigate the transferor charity by reviewing legal, financial and business information. In the course of the due diligence exercise, the prospective transferee or its advisers will typically request from the transferee a variety of documents and information about the charity, for example, copies of annual and management accounts, key business contracts, contracts of employment for the employees, whether the charity owns any intellectual property or is involved in any litigation. The prospective transferee reviews this information to understand the state of the charity and, crucially, decide if they want to proceed to merger with the transferee.
By its nature, much of this information may be commercially sensitive and important to the charity's operations. To better protect this information, the transferor may wish to put in place an appropriate standalone confidentiality agreement/NDA (in addition to any confidentiality provisions in the Heads of Terms) before disclosing any of it to the prospective transferee. This will help to safeguard against external parties who may only be interested in acquiring information about your charity and using it to their advantage rather than having any genuine interest in merging with the charity or to cater for a situation where negotiations in relation to a potential merger do not proceed for whatever reason. If you begin the due diligence process without having a confidentiality agreement/NDA in place, you can still seek to protect the confidentiality and value of this information retrospectively by entering into a confidentiality agreement/NDA as soon as possible during the due diligence process.
What should be included in a confidentiality agreement/NDA?
There is no prescribed form of what should be included in a confidentiality agreement/NDA. The transferor (or, more commonly the transferor's lawyers) is most likely to draft the confidentiality agreement/NDA. The key matters to be covered generally include:
- a clear definition of what the 'confidential information' is and how the protected information can be used by the prospective transferee – normally specifying that the information can only be used in relation to the merger and ongoing negotiations between the parties;
- who can access the confidential information – the prospective transferee will likely wish to share confidential information it has received about the charity with its lawyers, accountants and/or senior employees who are assisting with the due diligence process. It is quite typical for a confidentiality agreement/NDA to permit the prospective transferee to disclose confidential information to these persons and sometimes specified others (on a need-to-know basis) while at the same time obliging the prospective transferee to ensure these individuals keep the confidential information confidential; and
- undertakings from the prospective transferee not to disclose the confidential information to anyone they are not permitted to or use the confidential information for any purpose unconnected with the proposed merger.
Other confidentiality considerations for transferors
Confidentiality agreements/NDAs can and often do include other more specific or bespoke terms, such as provisions preventing the prospective transferee from poaching the employees of the transferor.
It is important to consider the extent of the information covered in each case. If information covers the wider transferor group than just the transferee charity then that should also be protected. Sometimes information is passed both ways (so, from a prospective transferee to transferor as well as vice versa) depending on the nature of the transaction and if that is the case then reciprocal confidentiality undertakings may be required.
In addition, transferors should be mindful of the terms of the charity's existing business contracts with third parties before disclosing them to the prospective transferee as they may contain similar confidentiality clauses restricting your ability to share the contracts with others.
If the merger does not proceed for whatever reason, the confidentiality agreement/NDA would ordinarily give the transferor the right to require the prospective transferee to destroy all confidential information it received as part of its due diligence for the proposed merger. Parties should do this out of courtesy regardless, but a written confidentiality agreement/NDA helps provide the basis for seeking relief from a court where confidentiality undertakings are breached.
Careful consideration should also be given to the confidentiality agreement's/NDA's expiry date. It is not uncommon for confidentiality agreements/NDAs not to expire. Confidential information, however, usually becomes less valuable over time and what is an appropriate time restriction will depend on the nature of your transaction. The prospective transferee will wish to ensure it is clear that the confidentiality provisions (in relation to the transferor's information) do not continue following completion of the merger.
Key takeaways
Entering into a confidentiality agreement/NDA at an early stage in negotiations with a prospective transferee helps protect confidential information and makes it clear to prospective transferees that the transferor takes the confidentiality of the charity's business information seriously. It also provides a contractual basis for a potential claim if there is misuse of confidential information.
Our charity law team has experience advising on all steps of a charity merger, including confidentiality agreements/NDAs. If you would like any advice on the issues raised in this blog, please get in touch with one of our charity law experts.
