5 things to know when negotiating M&A confidentiality agreements

Confidentiality Agreements, also known as Non-Disclosure Agreements(NDAs), are essential instruments in the field of structural changes and corporate restructurings (M&A).

The main purpose of these agreements is to protect confidential and sensitive information exchanged between the parties during the course of negotiations or for the entire duration of the process. In addition to protecting the information, NDAs ensure that it is used exclusively for its intended purpose, preventing unauthorised disclosure or improper exploitation.

In the framework of an M&A transaction, the confidentiality agreement establishes the basis for the handling of confidential information, avoiding risks that may compromise the viability of the transaction or violate the confidence of the parties involved.

5 things to consider when negotiating an NDA

The following are five fundamental aspects that should be considered when negotiating an NDA in the context of mergers and acquisitions, in order to ensure adequate protection of information and legal certainty for the parties involved.

1. Clearly define the concept of ‘Confidential Information’.

One of the key issues when negotiating a Non-Disclosure Agreement (NDA) is to clearly define what is meant by ‘confidential information’. The parties involved in the transaction must establish precisely what type of information is to be protected and the extent of such protection.

Confidential information’ generally includes, but is not limited to, any information of a technical, financial, commercial or any other nature, which is capable of being disclosed in writing, orally or by any other means. Such information may include, but is not limited to, the following examples:

• Financial statements and related documents.
• Business strategies and business plans.
• Trade secrets and know-how.
• Intellectual property, such as software, algorithms, source codes, databases, etc.
• Information relating to suppliers, products, services, sales, prices, etc.

Both parties should have a mutual and clear understanding of what information is protected, in order to avoid possible disputes in the future. A vague or ambiguous definition may lead to contradictory interpretations regarding the scope of information covered by the agreement.

In addition, it is crucial to consider the breadth of this definition, as any type of information that is shared between the parties – whether tangible or intangible – and that is not intended for the public domain, could be considered confidential under the terms of the NDA.

2. Establishing exceptions and exclusions

While the primary objective of an NDA is to safeguard confidential information, it is equally important to specify exceptions to such confidentiality. Not all information exchanged between the parties should be considered confidential, as there are circumstances in which the disclosure of certain information does not jeopardise the security of the transaction or the interests of the parties involved.

Among the most common exclusions typically included in such agreements are the following:

• Public information: data that is already in the public domain or that, without violating the NDA, becomes so through no fault of the receiving party.
• Prior knowledge: information that the receiving party already possessed prior to the signing of the agreement, provided that it was acquired in a legitimate and non-confidential manner.
• Legal or judicial obligation: information that is required by law or court order to be disclosed by order of a competent authority.

The inclusion of these exceptions not only ensures that the agreement is balanced and fair to both parties, but also prevents the NDA from becoming an unnecessary or disproportionate restriction, thus ensuring an adequate and operational legal framework for the negotiation.

3. Duration of the agreement

The duration of the obligation to maintain the confidentiality of information received should be clearly delineated in the agreement. It is essential to establish a specific time period during which the parties are obliged to preserve the confidentiality of the data exchanged.

In accordance with Article 1.563 of the Spanish Civil Code and its jurisprudential development, which establishes the principle of interdiction of perpetual or excessively prolonged obligations, the duration of the confidentiality obligation must be reasonable and appropriate to the circumstances of the transaction.

The duration of the NDA may depend on the nature of the protected information. Some common modalities include:

• Confidentiality may expire at the conclusion of the transaction or negotiation process.
• In other cases, certain confidentiality clauses may extend for several years after the signing of the agreement, in order to ensure the protection of sensitive information in the long term.

Agreeing on a reasonable timeframe that ensures adequate protection of confidential information is key. Establishing a clear and well-defined period will avoid potential disputes in the future and ensure legal certainty for the parties involved in the merger or acquisition process.

4. Obligations and definition of the parties

It is important, first of all, to clearly define who will be considered the disclosing party and who will be considered the receiving party of the information or whether both parties will share confidential information on a bilateral basis. This distinction is essential in order to establish precisely the obligations and responsibilities of each party in relation to the shared confidential information.

Furthermore, the obligations of the parties should be clearly spelled out in the NDA, and these include, in general:

• The obligation not to disclose confidential information to third parties without the explicit consent of the other party. This clause prevents unauthorised disclosure of confidential information and ensures that the flow of confidential information is kept within established limits.
• The limited use of the information is restricted exclusively to the purpose of the transaction. That is, the information may only be used for the analysis or evaluation of the current transaction, without being used for other commercial or business purposes.
• Security measures to be taken by the parties to protect confidential information. The technical and organisational measures necessary to ensure the integrity and confidentiality of confidential information, such as the use of secure storage systems, restricted access to authorised persons and the obligation to destroy confidential information when it is no longer needed, should be clearly defined.

Adequately defining these responsibilities will not only help to maintain the integrity of the agreement, but will also serve as a solid basis for preventing potential breaches and ensuring that the parties comply with their confidentiality commitments throughout the merger or acquisition process.

5. Consequences of non-compliance with the NDA

It is crucial that the NDA provides for the consequences of non-compliance with the obligations set out in the NDA. In this way, the parties involved will have clarity on the remedies available if a breach of confidentiality occurs. Some of the measures that may be included are:

• Defining ‘damages ’ as compensation for loss of business value or lost profits due to the leak of confidential information. This type of compensation helps to mitigate the negative effects of a possible breach of the agreement.
• Penalty clauses providing for a specific penalty regime in case of breach. Such clauses can act as a deterrent to prevent information leaks and ensure compliance with obligations.
• Remedial actions that allow the parties to take appropriate steps to remedy the damage caused, such as returning or destroying confidential information improperly disclosed, or taking measures to minimise the impact of the leak.
• Including these provisions not only provides a clear framework for action in the event of a breach, but also ensures that both parties understand the legal consequences of not complying with the terms of the confidentiality agreement, thus protecting the interests of all parties involved.

Conclusions

In summary, Non-Disclosure Agreements (NDAs) are a fundamental tool in M&A processes, as they guarantee the protection of information that is defined as confidential and ensure that it is used in accordance with the terms agreed by the parties. In order for these agreements to be truly effective, it must be ensured that:

1. The definition of ‘Confidential Information ’is clear and specific, avoiding ambiguities that could lead to disputes in the future.
2. Well-defined exceptions are established, so that not all information exchanged is subject to confidentiality, allowing for a balanced and realistic framework.
3. The duration of the confidentiality commitment should be within a reasonable period of time, respecting the legal principle of not perpetuating obligations indefinitely.
4. The obligations of the parties are clearly spelled out, specifying who is responsible for what and what security measures are necessary to protect confidential information.
5. A regime of consequences for non-compliance is provided for, including penalty clauses and remedial mechanisms to ensure compliance with the terms set out in the NDA.

Only in this way will the NDA not only be an effective protection mechanism, but also a key tool to build trust, mitigate risks and facilitate the successful development of business negotiation and collaboration processes.

Article written by:

Roc Lamas

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Metricson is a pioneer in legal services for innovative and technology companies. Since its inception in 2009, it has advised more than 1,400 companies from 14 different countries, including startups, investors, large corporations, universities, institutions and governments.

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