The cornerstone of merger and acquisitions – the buying and selling of all or part of a business – is the non-disclosure agreement. And similar to the critical role a cornerstone has in building a foundation, the nondisclosure agreement also serves as the reference point for completing a business transaction.
However, a recent lawsuit filed in federal district court illustrates the importance companies and their employees need to place on complying with nondisclosure obligations throughout the purchase transaction.
Due Diligence and Nondisclosure Agreements in M&A
Nondisclosure agreements are often signed at the beginning of the merger or acquisition under consideration. It generally is intended to facilitate the exchange of often highly confidential information between a buyer and a seller usually as part of the purchasing company’s due diligence process.
Nondisclosure agreements also provide a measure of protection for companies who rightly worry that word of a potential sale will hurt business, jeopardize customer or supplier relationships, and undermine employee morale if the sale does not take place.
Liability for Breaching a Nondisclosure Agreement
In 2011, Catalent Pharma Solutions was in talks to sell its U.S. commercial pharmaceutical packaging business to Sharp Corp., reportedly for $80 million. At the time of these talks, Sharp was a U.S. division of United Drug, PLC.
The parties entered into a nondiscolsure agreement and pursuant to that agreement, Catalent considered these talks to be confidential as well as the information exchanged between Sharp and Catalent.
But United Drug’s CEO took a different view: In two separate public conference calls United CEO discussed the potential sale, valuations of Catalent, and how the sale would affect the U.S. market in favor of United Drug. Discussions between Catalent and Sharp ended without a deal being consummated between them.
Catalent Pharma eventually sued Sharp and United Drug for damages arising from a breach of the non-disclosure agreement based on the allegedly unauthorized and improper disclosure of Catalent’s confidential and sensitive business information by its parent company’s CEO.
A key issue in Catalent’s lawsuit will be whether Sharp’s parent company (United Drug) was bound by the nondisclosure agreement. In this regard, Catalent claims in the lawsuit that United Drug executives were involved in the deal discussions and, therefore, were “representatives” under the nondisclosure agreement.
Take-aways for Employers
When it comes to mergers and acquisitions, the Catalent lawsuit makes clear that a nondisclosure agreement is only a piece of paper, which can be easily violated. And even if a violation is discovered, they can be expensive to litigate. Therefore, it is important to manage the flow of confidential information. To properly manage this flow, here are a few points companies should consider:
- Digital Deal Rooms. I have become a big fan of using digital deal rooms for sharing information, including in conducting due diligence matters. These are secure online virtiual deal rooms where documents are stored and shared. Two great features are establishing permission-based roles and creation of audit trails. In this regard, the Catalent complaint noted the number of times confidential documents were reviewed.
- Sequence the Disclosures. The purpose of a buyer’s due diligence is to obtain enough information for the buyer to make an offer. But this doesn’t mean that a buyer needs every data point all at once. Instead, information could be provided in a phased approach so that “crown jewel” type confidential information would be disclosed at the end of the due diligence period or only after a definitive binding acquisition agreement is ready to be signed.
- Educate Employees. It is important for the company and its employees that is receiving information pursuant to a confidential agreement to not lose sight of the obligations created by the nondisclosure agreement. In this regard, a best practice is to limit access to such information to those employees and consultants with a need-to-know basis. For those employees that do have access, make sure they understand – if not the specifics of the nondisclosure agreement – the ultimate goal to protect the confidentiality of the information and even the existence of the deal under discussion.
These are only a few of many issues to consider if your company is part of a merger or acquisition transaction. But for more information about buying or selling a business, including conducting an efficient and meaningful due diligence of that sale, contact Jason Shinn.