Confidentiality Agreement
A confidentiality agreement (or non-disclosure agreement) is often the first document prepared in the acquisition process which imposes obligations on the parties during the negotiation period. Essentially, a confidentiality agreement is an agreement which allows a party to provide confidential information to another party while protecting itself from the unauthorized use of that information by the other party. By defining the duties that parties have with respect to confidential information, confidentiality agreements are helpful in facilitating the diligence and negotiation process and avoiding future litigation.
In an acquisition transaction, the seller will be the party primarily concerned with the confidentiality agreement. Potential buyers often require access to a target’s confidential information in order to perform an appropriate due diligence review of the target. Therefore, from the seller’s perspective, one of the primary purposes of a confidentiality agreement is to restrict a potential buyer’s use and dissemination of the confidential information. However, in many cases, a seller will also desire to maintain the confidentiality of the transaction itself (in addition to its own confidential information). For example, a seller may be concerned that it will lose key employees if the existence of a potential acquisition is publicly disclosed in an unauthorized manner. This unauthorized disclosure could have a detrimental impact on the value of the company to a potential buyer and on the ability of seller to continue conducting its business if a transaction is not consummated.
Some confidentiality agreements are prepared as an independent agreement, while others are included as part of a Letter of Intent (discussed later). Confidentiality agreements are designed to be binding on the parties either in perpetuity or for some more limited period of time. In contrast, most of the provisions included in a Letter of Intent are intended by the parties to be unenforceable. Therefore, in the event that confidentiality provisions are included in a Letter of Intent, the parties (particularly a seller in the case of an acquisition transaction) should make certain the confidentiality restrictions are binding on the parties and survive termination of the Letter of Intent.
Sellers generally prefer a separate confidentiality agreement, but potential buyers may prefer to include the confidentiality provisions in a Letter of Intent in an effort to save both time and expense. From the seller’s perspective, one advantage to preparing a separate agreement is that it will often be more detailed than a Letter of Intent’s confidentiality provisions and is more likely to include all of the “bells and whistles” that lawyers like to see included in a document that purports to protect their client’s confidential information. Typically, the terms and provisions of a separate confidentiality agreement are then incorporated by reference in both the Letter of intent and, if applicable, the definitive purchase agreement.
- Thomas N. Hutchinson
Krieg DeVault LLP
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