Energy and Resources M&A Transaction Guide
Confidentiality – what happens when parties do not comply
ABOUT THE GUIDE
- This is the second volume of McCullough Robertson's Energy and Resources M&A Transaction Guide developed for the resources sector.
ABOUT EDITION 5
- In Edition 5, we look more closely at what happens when parties break their promises of confidentiality to each other in M&A transactions.
MASTERCLASS
- We'll wrap up this second volume of the Guide with a Masterclass in Brisbane on Wednesday 23 May 2018 and Sydney on Friday 18 May 2018, where you can ask our expert panel any questions related to undertaking an M&A transaction. Register now for Brisbane here and Sydney here.
A successful M&A transaction is often kick started with the circulation of a confidentiality agreement. Although often passed off as merely a formality, confidentiality agreements can be vital to the progress and completion of an M&A transaction. The terms of a confidentiality agreement can have wide reaching implications, including once the M&A transaction has completed.
In Edition 6 of Volume 1 of the Guide, we considered how a well-drafted confidentiality clause in joint venture agreements and other principal documents can assist a transaction. In this article, we will consider confidentiality agreements (or non-disclosure agreements) more closely, including what happens when parties do not comply.
A quick refresher
It goes without saying that a confidentiality agreement is essential if you are the disclosing party. Ordinarily entered into at the start of the due diligence process or competitive bid process, a confidentiality agreement will make it so that a bidder is not permitted to disclose that information to any unauthorised third party or to profit from the use of that information in an unauthorised way.
In terms of what should be included in the document, it is particularly important to consider the definition of 'approved purpose' (i.e. the purpose for which the recipient can use the confidential information). If this definition is too wide it may allow the bidder to use the confidential information beyond what was intended by the discloser. Equally, if you are the bidder, the wording of this definition is important as it must allow enough scope for your intended use of the information, including the ability to provide that information to your employees and advisors as required.
It is good practice for the confidentiality agreement to fall away once the sale agreement has been signed so both parties should seek to limit the term of the confidentiality agreement to the period prior to the transaction documents being executed.
Enticing bidders
In our experience, an onerous confidentiality agreement is a sure fire way to put off bidders. Confidentiality agreements with standard terms are often signed without requiring amendment (and are less likely to need sign off by management) and can set the tone for reasonable negotiations between the parties (which may expedite your transaction).
In some situations both parties may be disclosing confidential information. These types of confidentiality agreements (also known as 'two-way' or mutual confidentiality agreements) are unusual in a M&A transaction except where there will be a continuing relationship between the discloser and the bidder (for example, where the sale is for part of an asset which will continue to be owned by the discloser or where the discloser provides vendor finance). Whatever the purpose, mutual disclosure obligations may provide the bidder with comfort that the provisions of the confidentiality agreement are not one sided.
For sales of joint venture interests, a discloser should confirm what type of confidentiality agreement is actually required under the joint venture agreement. Some joint venture agreements only require a bidder to sign a confidentiality deed poll in favour of the other participants. Limiting confidential documents to a deed poll will accelerate finalisation of that document (and therefore the transaction) and would also be beneficial for bidders who may be sensitive about disclosing their identity to other participants.
What happens when a bidder does not comply?
Where a confidentiality agreement has been properly executed, an unauthorised disclosure of confidential information by the recipient would constitute a breach of contract. In many cases the document itself will set out a dispute resolution mechanism. In the absence of this type of clause, the usual breach of contract remedies are available to the discloser, which may include seeking an injunction to prevent any threatened disclosure.
As well as a claim in contract, it might also be possible for the discloser to claim against a bidder in equity for a breach of a duty of confidence. Successfully arguing this position would mean that the discloser would have access to a range of additional equitable remedies which would not be available for the common law breach of contract claim. Notably this would include an account of any profits that had been generated from the breach.
It is clear from recent case law that this claim is not available in situations where there is a written confidentiality agreement, especially where that document includes an 'entire agreement' clause. It is important to keep this in mind when negotiating a confidentiality agreement – for the discloser to negotiate out of the document and the bidder to negotiate its inclusion.
What happens when a bidder's representative does not comply?
It is standard for a confidentiality agreement to extend to a bidder and its directors, officers, employees, agents and advisors (Representatives) who need to access various types of information in the process of negotiating a potential M&A transaction. A discloser should ensure that the bidder is responsible under the terms of the confidentiality agreement for any breach by those Representatives. In that way, the same remedies will be available to a discloser who suffers damage as a result of a Representative not complying with the confidentiality agreement.
A bidder should seek to protect itself by:
- limiting the wording so that it provides 'reasonable endeavours' to ensure that its Representatives do not breach the confidentiality agreement, and
- limiting the application of some of the clauses of the confidentiality agreement from applying to its Representatives (such as standstill provisions or non-solicit provisions) or wholly in circumstances where the Representative is also a party to the transaction.
While remedies are available to a discloser where a bidder or its Representative has breached the terms of the confidentiality agreement, a discloser would need to weigh the financial pros and cons before taking action given the high burden of proof to demonstrate that the relevant damage was caused by the breach.
Final thoughts
Negotiations of confidentiality agreements can really set the tone of the forthcoming M&A transaction. It is important for parties to take a few extra moments to consider confidentiality agreements for the reasons set out in this article, including to get bidders through the door.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
