Dr McDeal title In the strictest confidence

What is a confidentiality letter?

A confidentiality letter (sometimes known as a non-disclosure agreement or NDA) is a legally binding agreement, typically entered into between a buyer and seller, under which the buyer commits not to disclose any information provided to it by the seller. This normally also extends to keeping secret the fact that discussions have occurred or may be ongoing between the parties and places a requirement on the buyer to “police” any staff and advisers that receive confidential information during the process.

When should I get buyers to sign one?

As early as possible. If you know the buyer already, you should put an NDA in place to protect your interests before meeting. If you are marketing your business to several buyers, obtain NDAs before your identity is disclosed and before sending out any information on your business.

You may also want to put a second, more detailed and robust confidentiality letter in place when a preferred buyer has been selected and is about to start its due diligence in earnest to provide you with even greater protection.

Won’t they find out who I am before they sign?

Many confidentiality letters give the game away by naming the sellers. One of the advantages of having an adviser is that they should be able to secure a signed NDA from buyers on your behalf without first disclosing your identity. While this is common sense to us, not everyone seems to adopt this approach!

What if the buyer refuses to sign one?

Very simple - don’t deal with them. Signing a NDA is a feature of every corporate finance transaction and there are no valid reasons for not signing one. It is an important act of good faith on the part of a buyer, without which a seller should not take any risks.

If I’m buying, what small print should I look out for?

Two important issues tend to arise when negotiating NDAs. The first is the length of time for which the confidentiality letter will be enforceable. Sellers often ask for three or more years of protection.

Depending on how stringent the terms of the NDA are, a reasonable period will be between one and two years. The second issue concerns a buyer recruiting staff from the seller should a deal not be concluded. On one hand, a
seller does not want a buyer to poach all its key team members having worked out who’s good and who isn’t during due diligence. On the other, a buyer does not want to find itself breaching an NDA simply because it recruits an employee from the target company who quite innocently replies to a general recruitment advert placed by the buyer in a trade magazine. On both issues, you should take legal advice.

What ‘carve outs’ by a buyer are acceptable?

Certain information will be treated as not “confidential” and therefore not subject to the terms of the NDA.

Specifically, this includes information that is publicly known or available, that a buyer actually possesses before the letter takes effect, that is given to the buyer by a third party that was not subject to an NDA itself or where the information has been disclosed as a result of a need to comply with a legal or regulatory requirement. An example of the latter might include where the buyer is a listed group and a sudden rise in its share price means that it is forced by the London Stock Exchange to disclose that it is in discussions with a potential acquisition target.

What if there is a breach of confidentiality?

The reality is that a seller has relatively few meaningful remedies against a buyer that has intentionally - or unintentionally - breached the terms of the NDA. At a practical level, if there has been a leak or inappropriate gossip by the buyer, the horse has already bolted! While a seller might technically be entitled to receive damages for a breach of contract, it would need to go to court to prove such a breach had occurred and that some financial loss had been suffered - an expensive, timeconsuming and uncertain process.

Many NDAs give a vendor an additional right to obtain injunctive or other equitable remedies against a buyer for a threatened or persistent breach. Despite these obstacles, a purchaser must be made accountable for their actions and a suitably threatening letter to the buyer’s chairman is the very minimum retaliation. Buyers that consistently breach their NDAs quickly earn a reputation for doing so among advisers and within their industries and the deal flow soon dries up!

So, frankly, what’s the point?

Best practice and good housekeeping. We see surprisingly few breaches of confidentiality, although it is undeniably a risk for every seller. The best way of maintaining confidentiality is by approaching a brief shortlist of serious buyers, of restricting any discussions to very senior decision-makers and by drip-feeding sensitive information on a need-toknow basis as the transaction progresses. An NDA should give peace of mind. But you should recognise that - other than a stern bollocking - a seller has relatively few remedies against an unprofessional or mischevious buyer.