Pre-Acquisition Confidentiality Agreements

In a business acquisition, the seller normally requires a confidentiality agreement to prevent the buyer's disclosure of the seller's confidential information that buyer will reveal during the due diligence period. The confidentiality agreement must define what information is confidential and typically includes the details of the transaction in the definition. Often, such agreements exclude from the definition of confidential information any information already in buyer's possession. Typically, the buyer can reveal to its advisers, such as accountants, attorneys, bankers, and other professional advisers, that amount of otherwise confidential information that the advisers need to provide the required advice.

The agreement should describe the use that buyer can make of the confidential information and often sets out uses that are prohibited. This ensures the buyer cannot use confidential information for any reason other than evaluating the seller's business. Similarly, most confidentiality agreements restrict disseminating confidential information to anyone who does not have a “need to know” it for the buyer to perform its due diligence process effectively. Confidentiality agreements usually require the buyer to treat the confidential information in the same manner as buyer treats buyer's confidential information, so long as that standard equals or exceeds the norm for the industry in which the seller is engaged.

The parties can negotiate a limit on how long the agreement lasts. Some confidential information has a limited shelf life, while other confidential information may not. The parties should explore and agree on this. Often, the solution may be to have multiple categories or types of information with varying nondisclosure periods.

            If the negotiations and due diligence do not result in a sale, then the agreement should require buyer to return or destroy the confidential information received by it and make no further use of it. Sellers often require that the confidentiality agreement state it makes no representations or warranties regarding the accuracy or completeness of the confidential information provided during the due diligence period. Instead, such representations and warranties will be in the purchase and sale agreement negotiated by the parties.

            This informational memorandum is provided as a courtesy to provide readers with items of interest in the business acquisition area. It is not intended to be an exhaustive treatment of its subject matter but an overview of some elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have questions, please call.