A confidentiality agreement (or non-disclosure agreement or NDA) is generally used to impose contractual controls over the use and disclosure of confidential information. In a sale and purchase of the business and assets, or the shares of a company, a confidentiality agreement is usually one of the first documents to be negotiated and put in place, together with Heads of Terms, before the transaction can proceed any further.
Whether confidentiality obligations are found in a stand-alone document, in a separate exclusivity agreement, or as part of the Heads of Terms (if used), a well advised seller will usually refuse to embark into a due diligence exercise without first having obtained their protection.
A confidentiality agreement will dictate what information can be shared, by whom, how long the information can be stored and how and what will happen to it if the transaction aborts. It will usually also contain provisions to prohibit the further disclosure to third parties (except of course to professional advisers and key staff such as directors of the target company).
But why is it so important to have a confidentiality agreement? What can go wrong if one is not put in place and yet the buyer is allowed access to the target company’s confidential information?
From the perspective of the seller the results can be catastrophic. Say that negotiations are taking place and the buyer requires access to the company’s commercial, financial and legal information, which are happily shared by the seller without first having put in place a binding confidentiality agreement. In this scenario there will be nothing to stop the buyer from seeking to gather information directly from the seller’s employees or its customers and suppliers. This could potentially create uncertainty among the employees, the customers and suppliers which could result in the loss of sales and key staff during the sale process, or even a permanent loss of customers to a competitor.
Needless to say that if this happens the value of the target company may decrease forcing the seller to accept a lower price. Even worse, the buyer may change its mind and walk away from the deal, having first obtained the company’s trade secrets and access to its main customers and suppliers, leaving the seller with a company that will have probably lost a significant amount of trade during the process.
Whether you are selling or purchasing the business and assets or shares of a company, it is important to take legal and tax advice from the outset to make sure you are entering into the process armed with adequate protections and safeguards.
Our corporate solicitors can help.
