Mergers and Acquisitions
Confidentiality, Non-Disclosure Agreements
Posted by Securities Attorney Laura Anthony | May 18, 2011 Tags: , , , , , ,

A confidentiality agreement or non-disclosure agreement (“NDA”) is an agreement among the parties to a proposed transaction to keep information secret and in confidence. In the context of a merger and acquisition transaction, NDA’s are important for both the target and acquiring entities. It is critical that an NDA be signed prior to the exchange of any due diligence or embarking upon substantive transaction negotiations.

Protecting Trade Secrets

Generally in a merger and acquisition transaction, the target entity is a closely held private corporation. Accordingly it is critical for the target company to maintain the confidential nature of both its business information, and the fact that it is considering a going public transaction. During the due diligence process, the public acquiring company will be given access to non-public trade secrets, technology, business processes, customer lists, and material information regarding shareholders, debt and equity financing and financial statements.

Loose Lips Sink Ships

If this information were made public or used for any purpose other than to evaluate a potential business transaction, it could materially and adversely affect the value of the target company. Moreover, if a transaction doesn’t go through, a potential acquirer could misuse the information to compete with, or solicit customers or employees from the target company, without the protection of a NDA. Just the knowledge that a transaction is being considered could affect the target’s relationship with its current customers, suppliers and/or employees.

Generally, the public acquiring entity is subject to the disclosure requirements of the Securities Exchange Act of 1934 and its information is already publicly available. However an NDA is still important to protect the public company. That is, if it became publicly known that acquirer was focusing on a particular target, other potential buyers may come to the table to compete.

Shielding Corporate Reputation, Controlling Rumors

Moreover, the acquirer’s business strategy regarding that particular acquisition would become publicly known prior to being legally required. If the acquirer changes its mind and the information was already public, investors may wonder as to why the transaction evaporated and subsequently lose confidence in both entities. An NDA can help protect against unnecessary market rumors and conjecture and potential exposure to insider trading liability. Obviously, an NDA should contain a strong obligation on the part of both parties to keep review information confidential.

Typically an NDA will permit the parties to disclose the information to its affiliates, advisors and key management on a “need to know” basis provided that each information recipient agree to the terms of the NDA.

Limitations of Non-Disclosure Agreements

An NDA only covers confidential information. That is, excluded is information that (i) is already in the possession of the recipient; or (ii) is or becomes available to the public (other than by a breach of the NDA). A properly drafted NDA will provide for procedures in the event a party is compelled, via subpoena or otherwise, to disclose information. Generally, the NDA will provide for an opportunity to learn of and fight the compelling document prior to disclosure.

Lastly, most NDA’s contain some sort of standstill or no shop provision. That is prior to expending time, money, attorney’s fees, other professional fees, etc., the parties will want assurance that the deal is not being shopped around for at least some period of time.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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