To ensure this confidentiality, it is customary to have the prospective buyer sign a non-disclosure agreement before disclosing the identity of the target company and its financial information. According to Wikipedia, "a non-disclosure agreement is a contract between two entities that commits one of these entities to keep confidential certain information that the other will be sharing with it. The agreement may also be 'mutual', meaning that both entities agree not to disclose certain information exchanged."
Several terms exist to designate this same reality: non-disclosure, secrecy, or confidentiality agreement or contract. In industry jargon, the most common terminology is Anglo-Saxon: "Non-Disclosure Agreement" or NDA. The confidentiality agreement can therefore be mutual, but in the context of an acquisition, it is generally unilateral since information is only disclosed about the target company.
What are the main elements of a non-disclosure agreement?
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Identification of the parties: Regarding the prospective buyer, the contracting party may be the seller or the firm managing the sale;
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Definition of confidential information: This naturally includes received physical and electronic documents such as accounting records, technical specifications, and commercial documentation. However, it must also account for verbally disclosed information, know-how, strategy, etc., even though these elements are difficult to prove in the event of a dispute;
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Exclusions: Typically, the following elements will not be considered "confidential information," or at least their disclosure will not be deemed actionable: information available in the public domain or obtained through another source; information received prior to signing the NDA; disclosure made pursuant to an order from an authority (such as a court order);
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Timeframes: A distinction must be made between the disclosure period—the timeframe during which confidential information is shared with the signatory (for example, 1 year from the signing of the NDA)—and the confidentiality period itself (for example, 5 years);
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Signatory's obligations: Use the information solely for the purposes defined in the agreement—in this case, evaluating the opportunity to acquire the target company; limit the dissemination of confidential information strictly to necessary individuals, such as financial advisors, CPAs, etc.; ensure that these individuals, upon receiving the confidential information, abide by the same non-disclosure commitments; take all necessary precautions to prevent confidential information from falling into the wrong hands (which implies exercising the same degree of care used for one's own confidential information);
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In the event of terminating acquisition talks, provision will be made for confidential information to be destroyed or returned. The signatory commits to retaining no copies under such circumstances. It may also be requested that the signatory confirm this destruction in writing;
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Penalties: To give the NDA more "teeth," it is possible to include a liquidated damages penalty in the event of a breach of commitments. This penalty generally applies in addition to any actual damages incurred.
The non-disclosure agreement is one of the cornerstones of the M&A process. It represents the first step in bringing parties together, establishing safeguards in case discussions do not progress further. These agreements are sometimes taken lightly, as proving a breach can be challenging in practice. Nevertheless, maintaining data confidentiality throughout the acquisition process remains paramount, as it serves to build the foundation of trust essential to the deal's success.
Illustration: Clou
