Canada: M&A BuildingBlocks - Confidentiality Agreements

Before a potential buyer is willing to make an offer, even a non-binding offer, to acquire a company, the buyer will often want to have an opportunity to complete at least preliminary due diligence regarding the target to enable it to evaluate the opportunity and set a price. To provide the parties with some basis as to the use of, and access to, non-public information, the parties will generally enter into a confidentiality (or non-disclosure agreement) ("CA"). In addition, in order to retain control of the process, most targets will insist that the CA include a standstill provision that would generally prohibit the buyer from making a hostile or unsolicited bid for the target for an agreed upon period of time.

While each CA will be specific to the parties involved and the particular transaction, the following are the more common terms typically included in a CA1.

1 Receiving Party

The receiving party includes the buyer, its affiliates and its representatives, and the buyer is responsible for a breach by any of such parties.

2 Confidential Information

"Confidential Information" includes the following, whether furnished orally, electronically or in writing:

  • information relating to the target's business and technical matters
  • reports, summaries, compilations and other material derived from such information or at site visits
  • information relating to the transaction, including communications, discussions and negotiations between the parties.

However, Confidential Information usually excludes information which:

  • is or becomes generally available to the public
  • was or becomes available from a source other than target
  • is independently developed by, or was already in the hands of, the buyer
  • is required by law to be disclosed.

3 Protective Measures and Degree of Care

There are a variety of standards for the degree of care a buyer must take to protect information, including holding the information "in trust", holding it "strictly confidential", using "reasonable precautions", using the same degree of care as if it were its own information, or industry standard. Buyers should not agree to such a high standard that it cannot actually be met practically, or at all.

4 Restricted/Permitted Use Clauses

CAs restrict the use of confidential information other than for the specific purpose set out in the CA. Targets want the purpose to be narrow and the restrictions broad, whereas buyers do not want to the restrictions on use to be so broad as to prevent acquisitions even after the standstill period expires.

5 Return of Information

At the end of the term, the receiving party must return or destroy information received. This can lead to issues relating to the destruction of evaluation materials, materials stored in electronic files and documents retained under solicitor-client privilege.

6 Standstill Clauses

As a condition to providing information, public company targets often require that buyers agree to a standstill clause to protect against such information being used to make an unsolicited take-over bid. The following are provisions that often get negotiated:

  • Limitations on Buyer: During the standstill period, the buyer cannot:
    • purchase securities or assets of target
    • enter into or negotiate a merger
    • solicit proxies or seek to influence or control management, board or policies
    • make public statements as to intent to undertake any of the foregoing.
  • Requirement to Provide Information: While not common, buyers should consider including a clause that the standstill will only be operative if the target actually provides confidential information.
  • Length of Standstill: 6-18 months is typical.
  • Exceptions to Standstill: De minimus acquisitions of securities and/or confidential proposals to the board of directors are sometimes permitted.
  • Springing Standstill: Almost all definitive agreements governing the acquisition of a target include a fiduciary out that enables a target to terminate the agreement in favour of a "superior proposal" provided that certain conditions are met. However, many agreements prohibit the target from releasing parties from standstills, which could have the effect of limiting the pool of potential parties that could make a superior proposal. In anticipation of such provisions, targets will often include a clause in a standstill provision that "springs" the other party to the CA from the standstill if the target publicly announces that it has entered into a definitive agreement for the acquisition of the target or supports a bid for it. Some buyers will negotiate a standstill that also springs if any offer is publicly made for target, regardless of whether such offer is supported by the board of directors of target. Targets may want to resist this it could result in target losing control of the bidding process.

7 Non-Solicitation Clauses

A target may require a buyer to agree not to solicit its employees, customers or suppliers for a period that is usually between 12-24 months.

8 Area of Interest

A resource issuer may include a provision that prevents the buyer from acquiring mineral or petroleum tenure within an agreed vicinity of the target's property.

Letters of Intent

If, after completing some or all of its due diligence, the buyer continues to be interested in pursuing a potential acquisition of the target, the buyer will often present the target with a letter of intent ("LOI"). An LOI may be helpful as it can, among other things, signal a commitment of the parties that will help build momentum by focusing parties on the "big picture" and key issues.

1 Binding v. Non-Binding Provisions

LOI's are often divided into two parts, non-binding provisions that set out proposed deal terms that will form the basis of the definitive agreement, such as price, deal protections and deal structure, and binding provisions that deal with the process to get to a definitive agreement or matters that survive if no agreement is reached, such as exclusivity, confidentiality and costs. The parties will want to carefully consider which portions of the LOI are binding in order to ensure that premature disclosure of the transaction is not required. Set out below are the provisions that are typically binding and non-binding in an LOI:

  • binding provisions: confidentiality and disclosure
    • access to diligence information
    • exclusivity
    • expenses
    • term, survival
    • miscellaneous provisions such as governing law
  • non-binding: price and payment terms
    • composition of management and the board post-closing
    • transaction structure, including treatment of options, warrants and debt
    • summary of key deal protections, including quantum of break fee
    • termination events
    • requirement for shareholder approval
    • conditions to closing
    • drafting of definitive agreement and timing
    • completion of diligence

2 Exclusivity

Exclusivity provisions, which are sometimes in a separate agreement, prohibit the target from negotiating or communicating with other potential purchasers for an agreed upon amount of time. Upon agreeing to exclusivity, the target is typically required to terminate discussions with other parties and cease their data-room access. Exclusivity periods generally range from 7-30 days depending on the complexity of the target's business and assets and diligence done to date. An exclusivity provision is similar to a non-solicitation clause in a definitive agreement, however, typically there is no fiduciary out to accept or deal with competing offers.

Footnotes

1 Note that contrary to the common belief that the CA is meant to protect only the target, it is important for buyers to enter into CAs as well as there is a legal obligation at common law to protect confidential information, which obligation is potentially unlimited. Therefore buyers should also want the certainty that a written agreement provides.

About BLG

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.