You have worked hard to make your company successful and have now reached the stage when you wish to sell it and reap the rewards. It is likely that the sale process will have to be juggled alongside your day-to-day work of continuing to manage your company. To help provide some insight as to what is ahead – before, during and after the negotiation and signing of the share sale and purchase agreement – we have written a series of seven blogs outlining the process of the sale of a company.
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 your company is properly protected before providing it to an interested buyer.
Follow the link to read Part 2: Data Rooms and Due Diligence.
When to sign a confidentiality agreement?
In the first instance, you will almost certainly wish to ensure that the fact you are considering selling your company 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 sale. 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 potential buyer ordinarily commences a due diligence exercise to investigate the company by reviewing legal, financial and business information. In the course of the due diligence exercise, the potential buyer or its advisers will typically request from you, as seller, a variety of documents and information about the company, for example, copies of annual and management accounts, key business contracts, contracts of employment for the employees, whether the company owns any intellectual property or is involved in any litigation. The potential buyer reviews this information to understand the state of the company and, crucially, decide if they want to proceed to buy the company and, if so, at what price.
By its nature, much of this information may be commercially sensitive and important to the company's operations. To better protect this information, you may wish to put in place an appropriate standalone NDA (in addition to any confidentiality provisions in the Heads of Terms) before disclosing any of it to the buyer. This will help to safeguard against competitors who may only be interested in acquiring information about your company and using it to their advantage rather than having any genuine interest in acquiring the company or to cater for a situation where negotiations in relation to a potential sale and purchase do not proceed for whatever reason. If you begin the due diligence process without having an NDA in place, you can still seek to protect the confidentiality and value of this business information retrospectively by entering into a NDA as soon as possible during the due diligence process.
What terms should be included in a confidentiality agreement?
There is no prescribed form for how an NDA should look. As the seller, you (or, more commonly your lawyers) are most likely to draft the confidentiality agreement. The key terms to be covered generally include:
- a clear definition of what the 'confidential information' is and how the protected information can be used by the potential buyer – normally specifying that the information can only be used in relation to the acquisition and ongoing negotiations between the parties;
- who can access the confidential information – it is likely the buyer will wish to share confidential information it has received about the company with its lawyers, accountants and/or senior employees who are assisting with the due diligence process. It is quite typical for a NDA to permit the buyer to disclose confidential information to these persons and sometimes specified others (on a need-to-know basis) while at the same time obliging the buyer to ensure these individuals keep the confidential information secret;
- undertakings from the buyer not to disclose the confidential information to anyone they are not permitted to or use the information for any purpose unconnected with the proposed acquisition of the company.
Other confidentiality considerations for sellers
NDAs can and often do include other more specific or bespoke terms, such as provisions preventing the potential buyer from poaching the employees of the target company.
It is important to consider the extent of the information covered in each case. If information covers the wider seller group than just a target company then that should also be protected. Sometimes information is passed both ways (so, from a buyer to seller 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, as a seller, you should be mindful of the terms of the company's existing business contracts with third parties before disclosing them to the buyer as they may contain similar confidentiality clauses restricting your ability to share the contracts with others.
If the sale does not proceed for whatever reason, the NDA would ordinarily give you the right to require the prospective buyer to destroy all confidential information it received as part of its due diligence for the proposed acquisition. Parties should do this out of courtesy regardless, but a written NDA helps provide the basis for seeking relief from a court where confidentiality undertakings are breached.
Careful consideration should also be given to the NDA's expiry date. It is not uncommon for 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 buyer will wish to ensure it is clear that the confidentiality provisions (in relation to the target company information) do not continue following completion of the purchase.
Key takeaways
Entering into a NDA at an early stage in negotiations with a potential buyer helps protect confidential information and makes it clear to potential buyers that the seller takes the confidentiality of the company's business information seriously. It also provides a contractual basis for a potential claim if there is misuse of confidential information.
How Brodies can help
If you would like any advice on the issues raised in this blog, please get in touch with one of the Brodies Corporate Team below, or, your usual Brodies contact who will be happy to assist.
View our downloadable guide, "Taking the blinkers off when selling your business", by Neil Ritchie, Director of Personal Tax, on what to watch out for from a personal perspective when selling your business.
