Jonathan Masucci, Partner in the Corporate & Commercial team at Girlings, explores whether a confidentiality agreement is required in Merger and Acquisition (M&A) transactions, together with some of the key advantages and limitations a seller should consider when putting such an agreement in place with a prospective buyer.
Is a Confidentiality Agreement Required?
Confidentiality agreements are a routine preliminary document in both UK and global acquisitions. Although a duty of confidence may arise even in the absence of a written confidentiality agreement, having such an agreement in place will support a claim under general law by avoiding debate around whether the recipient of the information knew that it was confidential in the first place.
Such an agreement also gives the parties the opportunity to set the scope and parameters for which such confidential information is to be used. This is typically for the purpose of considering, evaluating, negotiating or advancing the sale of business assets, or the sale of shares in a company. A confidentiality agreement may even be required by virtue of a pre-existing agreement between the seller and a third-party permitting disclosure of confidential information, providing the recipient agrees to be bound by similar confidentiality obligations.
Advantages of Putting in Place a Confidentiality Agreement
A confidentiality agreement gives the seller a level of comfort in sharing confidential information to the buyer. It also allows a seller to focus and manage the disclosure and return of confidential information and sets out parameters and procedures to minimise the risk of information being disclosed to unauthorised persons.
Where the seller and buyer operate in similar industries or are competitors, the inclusion of restrictions within a confidentiality agreement around approaching staff, customers or suppliers will ensure that if the transaction doesn’t proceed to completion, the seller has some form of protection in place, even if the buyer can still base its commercial decision making around the information it received.
Where an unauthorised disclosure has been made, a confidentiality agreement will also assist in setting out the basis for any claim for damages and other remedies, as well as supporting an application for an injunction against the buyer.
Where a buyer is required to disclose confidential information for regulatory purposes, a confidentiality agreement will often be of use in balancing the needs of the buyer to make such a disclosure, alongside the seller's need to minimise the extent to which the information enters the public domain.
Limitations of Confidentiality Agreements
Although the disclosure of confidential information can be managed more effectively, even with a confidentiality agreement in place, the risk of an unauthorised disclosure or use of such confidential information can never be fully eliminated.
Sellers should always be mindful that a confidentiality agreement does not guarantee that the information disclosed under it will be protected, particularly where the buyer has little intention of complying with it in the first place.
Although seeking an injunction to stop the unauthorised disclosure or use of confidential information is a remedy for breach of a confidentiality agreement, the limitation of this remedy is that it is somewhat reactive in that it relies on the seller knowing that a breach is about to take place. If the confidential information has been disclosed, the damage may have already been done and in which case, an injunction will be of little or no use, particularly if the information has fallen into the public domain.
Where an injunction is not available, claiming damages for breach of contract or an account of profits where the buyer has made use of the information, may be the only legal remedy available. Even where this remedy is available to the seller, it may not be adequate if the confidential information has potential future value rather than a value at present.
Practically speaking, it can also be difficult to prove that there has been a breach of a confidentiality agreement in the first instance.
As mentioned earlier, regardless of whether a buyer in receipt of the seller’s confidential information is honest and acting in good faith, it will inevitably take the disclosed confidential information into account in its own commercial plans, regardless of the terms set out in any confidentiality agreement.
The Advantages Outweigh the Disadvantages
Despite the limitations, the commercial benefits of disclosing information under a confidentiality agreement to encourage a buyer to proceed with the acquisition will normally outweigh the risks of disclosing the information in the first place, not least because it will focus each party's mind on what, how and when disclosure of confidential information is permitted.