Put:  Antonio Carlos Mazzucco and André Jerusalemy

In mergers and acquisitions (“M&A”) transactions, a number of confidential and sensitive information must be disclosed at a certain stage of the negotiations. This must be done in a secure and organized manner, with the certainty that the party receiving such information is obliged to respect its confidential nature by taking all precautions to prevent its disclosure, which could result in enormous losses.

To protect such information and determine the limits of such protection, the parties involved in the transaction usually sign Non-Disclosure Agreements (NDA). In this article, we will indicate the main aspects of these agreements and their fundamental relevance for the smooth running of M&As.

At first glance, it may seem that such agreements follow an almost universal standardization, since both sellers and buyers usually have a standard draft. However, these documents contain critical terms that should not be accepted as standardized, as there are numerous clauses that require special attention and that should not simply be accepted without careful evaluation.

Unlike a non-binding takeover offer (NBO), an NDA is binding and mandatory in nature and, as such, great care must be taken with clauses that are mistakenly considered standard and without major implications.

In fact, it is necessary to verify that the NDA truly fits the transaction that is intended to be carried out and the situation of the parties. Standard drafts usually do not address issues that may be critical to the transaction and often contain conditions that do not fit the reality of the parties. An example of this are clauses with penalties that often exceed the revenue of the parties involved, and which tend to be reviewed when faced with potential litigation.

Reciprocity (or not):

NDA drafts may or may not provide for reciprocity, that is, they may protect the information disclosed by one of the parties or by both parties. A reciprocal NDA does not make sense in an M&A context in which only one of the parties will be subject to due diligence. The presentation of a reciprocal NDA for these situations already indicates that the document was not drawn up considering the particularities of the deal.

Sellers should avoid reciprocity because they do not expect to receive confidential information about a prospective buyer’s business. As such, there is no need for an NDA to provide for reciprocity, except for information regarding financial standing that may be required by the seller from the buyer to ensure that the transaction will be paid for. However, this may be detailed in the offering document rather than providing for general reciprocity.

An NDA that protects the information that will be disclosed by the seller is therefore essential and much more appropriate for an M&A.

What are the important elements?

An NDA should not be long or complex. Well-written documents tend to be concise and to the point. The important elements of an NDA are the following:

● Delimitation of information considered confidential;

● The purpose for which the information is used by the receiving party;

● Information excluded from the obligation of confidentiality;

● The way in which information should be stored and protected;

● The term of the confidentiality obligation; and

● The consequences in case of violation of confidentiality obligations.

What information can be considered confidential?

Defining the information that should be considered confidential is essential. This is because in most cases this information is not catalogued or identified as such.

On the other hand, the party that will disclose the information wants the scope of the concept of confidentiality to be as broad as possible. And the party that will receive the information wants to limit this same scope or even have a clear identification of what is or is not confidential.

Verbal information, on the other hand, is more difficult to process. In this case, there is a need to create evidence of its disclosure.

Purpose of use of the information by the receiving party:

The purpose of the information used by the receiving party is very clear: it must be used solely to evaluate the acquisition opportunity.

The NDA must clearly prohibit the use of the information for any other purpose.

Information excluded from the obligation of confidentiality

Confidentiality exclusions typically deal with situations in which the party would be exempt from the confidentiality obligation assumed. The most common situations are:

● Information that is already known to the receiving party;

● Public domain information;

● Information developed by the receiving party without any use of the confidential information; or

● Information disclosed to the receiving party by third parties without violating the rights of the party protected by the NDA.

The above exclusions are often standardized in NDAs. The big question is how to know whether the party receiving the information can legitimately benefit from any of these exclusions.

In any case, exclusions must be carefully evaluated by the party disclosing the information to ensure that none of these exclusions could create embarrassment to the confidentiality obligation sought to be obtained from the other party. Depending on the importance, additional precautions may be taken, such as clearly identifying the confidential nature of the information.

Exclusions should also be assessed from the perspective of the obligations that the receiving party may have with regulatory agencies, such as the CVM (Brazilian Securities and Exchange Commission) and B3. It is necessary to consider whether any of these obligations may compromise confidentiality obligations.

How information should be stored and protected

It is common for the NDA to stipulate the obligation to return and destroy information after the transaction is completed. In general, both the obligation to return and destroy information are difficult to implement and monitor. For this reason, it is ideal for the conditions for storing and maintaining the confidentiality of information to be clear. In this sense, it is very common for information to be exchanged exclusively through digital platforms that have controls for the transmission, storage and viewing of documents (Data Room).

The obligation to protect information must be very well established in the NDA, including whether there will be a provision for hiring a Data Room, as well as how it will cover such services.

It is of fundamental importance that the receiving party takes all measures to avoid disclosing confidential information to third parties, preferably detailing how the information will be handled. In this sense, it is not uncommon for there to be a requirement for the purchaser's employees who may have access to the information, as well as for the service providers involved in the transaction, to sign a confidentiality agreement. This standard of conduct must be very clearly outlined in the NDA.

The term of the confidentiality obligation:

Although the party whose information is protected by the NDA may wish for the confidentiality obligation to last forever, this is not a business practice. As for the term itself, it must be verified on a case-by-case basis and there is nothing to prevent the same document from having different terms depending on the nature of the information provided. However, most contracts stipulate terms that vary between two and five years.

Penalties – Consequences of breach of obligations:

Another issue that often deserves attention is the issue of fines or pre-settlement of damages in the event of a breach of the NDA obligations. In this regard, it is worth remembering that a process for settling damages can take a long time and the evidence can often be difficult to produce. As such, the prior stipulation of compensation or fines tends to be a better solution.

As mentioned above, it is important to take into account that the fine must take into account the size of the business under discussion, as well as the financial capacity of the parties. Thus, while the fine must serve to prevent the breach of confidentiality, it must also be compatible with the reality of the parties involved.

Other adjustments and stipulations

The exchange of information in an M&A process usually occurs over time. The selling party, together with its advisors, must define the information that will be provided initially and other information that will only be provided once the deal has matured.

An example of sensitive information is information about suppliers and customers. One of the criteria to be used concerns the need for and importance of the information for the buyer to evaluate the business. Considering that the evaluation is based on cash generation criteria, confidential information regarding technical issues will also not be necessary for this purpose. Therefore, ideally, without prejudice to negotiating the details of the NDA, the seller should establish very objective criteria regarding the need to disclose certain information and the appropriate time to do so.

Other important provisions also concern the non-solicitation of employees and collaborators, as in most cases they carry with them important information about the business.

It should be remembered that the NDA does not create any obligation for either party to complete the transaction. This should create even greater concern for the seller and as such the NDA must be drawn up with care and attention.