People often engage in reflexive behaviour without thinking about the function underlying such behaviour. Likewise, in recurrent M&A transactions, clients sometimes lose sight of why they engage in certain formalities.

One such formality concerns pre-acquisition agreements; more specifically, confidentiality agreements (CAs) – including their (i) purpose and (ii) scope.

Purpose of CAs

In preliminary M&A negotiations, the exchange of confidential information is essential to the terms of the transaction. As parties progress beyond preliminary stages to due diligence, increased disclosure is met with intensified risk of the compromise of proprietary information. Executing CAs allows the parties to securely progress beyond preliminary negotiations in order to effect the deal.

Scope of CAs

The scope of confidential information is a trade-off – while the seller prefers a broad or open definition of confidential information to protect itself from excessive disclosure, the buyer prefers a narrow definition in order to avoid breach. In defining the scope of confidentiality, consideration should be given to several factors, including:

  • Timing of disclosure. The CA should distinguish the confidential quality of disclosures made prior to or after the CA's execution.
  • Means of disclosure. The CA should cover disclosures made orally, in writing and by electronic means (g., email or cell phone).
  • Length of disclosure. The survival of the CA is important because a lengthy term for confidentiality might not be enforceable. Typically, it is at the discretion of the parties to choose a period of between 12 and 24 months.
  • Derivative information. The CA should cover information arising from confidential information, such as information related to a party's subsidiaries.
  • Restrictions on use. The CA should have a clearly stated purpose, such as undertaking M&A due diligence. This limits parties from using proprietary information for purposes contrary to the other party's desires.
  • Security protocol. Storage of information, both physically and electronically (g., data rooms), is vital to its security.
  • Jurisdiction. In cross-jurisdictional M&A, the agreement should select governing law and forum for disputes arising from the relationship between the parties.

Breach of confidentiality should also be robustly defined, with consideration given to breaches arising intentionally, unintentionally and/or negligently. Appropriate remedies, damages and indemnities should be afforded to the breached party. The standard for breach should be agreed upon between the parties and should be an objective standard, such as "commercially reasonable efforts" (for the legal interpretation of this phase, see our recent post on interpreting "efforts" in commercial contracts).

The author would like to thank Sam Zadeh, articling student, for his assistance in preparing this legal update.

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