Mergers and Acquisitions For Dummies (41 page)

Destruction of materials:
The recipient of confidential material agrees, upon request, to either return the materials to the source or destroy them.

Chain of command:
The CA defines the chain of command all deal-related correspondence should go through.

Period of enforcement:
A good CA specifies the length of time the agreement is in force, usually one to two years. Don't sign an agreement that lacks an end date; you don't want your hands to be tied indefinitely.

Most confidentiality agreements are boilerplate legalese and don't differ that much from document to document. But you should read any CA before signing it to be on the lookout for language that differs from the norm. If something is out of sorts with the CA being offered, discuss it with the other side. As with everything in the M&A process, you don't have to accept a CA as is.

Figuring out which party sends the CA

Who sends the confidentiality agreement depends upon who initiated the contact. If a Seller is contacting a Buyer, she usually attaches the CA to the teaser, often with instructions (or polite reminders) for the Buyer to sign the CA if he wants to see the full book (or offering document, which I discuss in Chapter 8).

A Buyer contacting a Seller should have a CA at the ready. However, Buyer may want to offer Seller the option of using either her own CA (if she has one) or Buyer's CA, whichever makes Seller the most comfortable.

Determining who gets more value out of the CA

The confidentiality agreement is most helpful to Seller because she's giving up the most confidential information and is more at risk from others finding out that M&A discussions are ongoing. (Flip to the earlier section “Tempting Buyers with an Anonymous Teaser” for more on why these revelations are risky for Sellers.) The CA is so valuable to the Seller that any Seller contacted by a Buyer should execute a CA with the Buyer before any meaningful conversations occur.

On the other hand, the fact that Buyer is interested in making acquisitions has no negative impact on him. Seeking acquisitions essentially says that a company is so successful and profitable that it can afford to buy other companies. That's hardly a disclosure that can provide a competitor with an advantage.

Handling a Breach of Confidentiality

Breaching
the confidentiality agreement means one party has not followed the conditions of the agreement, therefore violating the agreement. Breaches are serious occurrences and should be dealt with head on and immediately.

Here are some common types of breaches:

Speaking out of school:
Somebody privy to confidential information starts flapping his gums to his golf buddies or at Friday night cocktails or a lunch meeting.

Buyer making improper contact with Seller's employees:
Buyer contacts one of Seller's employees, specifically someone who isn't involved in the potential deal, without Seller's permission, alerting that employee that the company is for sale.

Involving a loose-cannon advisor:
An advisor who knows of the impending deal (usually someone who'll be brought in only if the deal moves forward) can't resist making comments to friends and strangers alike.

One of the signers of the confidentiality agreement may cause a breach, but in my experience that situation is very rare. The person signing the document is usually acutely aware he just signed a document! More than likely, the weak link occurs elsewhere in the chain.

The two most common weak points — the people most apt to cause a breach of confidentiality — are advisors and executives or other employees, both of whom can be further broken down into “active” and “I hope I get hired” categories. In fact, those employees or advisors who hope to get hired or retained if the deal closes often cause the most problems.

Confirming a breach

Although some breaches are easy to confirm (people who shouldn't know about the deal talk to you about it), others are more difficult to nail down if you don't receive direct knowledge of it. If you suspect a breach, immediately pick up the phone and have a conversation with the other side. (If you're a Seller represented by an intermediary, call him immediately and have him deal with the situation.)

A phone conversation is important because you can gauge the other side's tone and reaction to the news. Writing a lengthy, accusatory e-mail (or leaving a length, accusatory voice mail) may end up muddying the waters more than clearing them. You need to hear the other side's story.

Only send an e-mail to recap your conversation about the breach of confidentiality. If you're unable to get the other side on the phone, leave a brief message and send a short e-mail. Simply say that you urgently need to speak with the other party as soon as possible; you have some concerns about confidentiality. Don't go into detail in the message or e-mail.

I've dealt with the occasional breach during my deal-making years. In each and every example, I contacted the other side and had a conversation. In some cases, the other side apologized and immediately took steps to fix the problem. In other cases, where the breach wasn't as clear, the phone call served to raise the other party's awareness to a potential problem, and the breaches magically stopped.

Thinking long and hard about legal action

Although your first instinct may be to sue the pants off the offending cause of the breach, remember that lawsuits can be expensive, lengthy, and time consuming and may end up hurting you more than helping.

In every breach I've encountered, we were able to eventually complete a transaction without getting the courts involved. Starting a lawsuit would have greatly compromised our ability to close a deal.

Talk to your lawyer and your intermediary about a breach or suspected breach. Although you want to avoid legal recourse if possible, doing more than talking to the other side may be the best course of action. It's a bullet you may have to bite.

In case of a dispute, the confidentiality agreement usually designates the state where the dispute is heard in court. The jurisdiction is often a sticking point, especially if Buyer and Seller are in different states. Each party may prefer to use its home state as the jurisdiction. In that case, a third state (most often Delaware, due to its standing as a business-friendly state) is usually the best option.