In a corporate M&A scenario, a legal due diligence review of the target company is standard procedure today. During the course of the review, confidential information about the target company itself and its business relations is disclosed to the purchaser. In order to cater for the interests of both seller and purchaser, the parties generally enter into a non-disclosure agreement (NDA).

During the course of a legal due diligence review, various individuals have access to highly sensitive corporate data. During the disclosure of such confidential information, confidentiality obligations under which both the management of the target company as well as the selling shareholders operate could be violated. These obligations could derive from the law or be stipulated by contract, for example in contracts entered into between the target company and suppliers or clients.

The disclosure of confidential information during a due diligence review can be managed in different ways depending on the intended transaction structure, so as to do justice to both the potential purchaser’s interest in information as well as the confidentiality obligations of the potential seller.

The conclusion of a non-disclosure agreement (NDA)

At the very beginning of a contemplated transaction, parties enter into a NDA. In many cases, the conclusion of a NDA is necessary in order to enable the management of the target company to disclose any confidential information without violating their confidentiality obligations in the first place.

In the NDA, the disclosing party and the recipients of the information of the potential purchaser should be named. In addition, the agreement should contain a ban from using the findings for own or third party purposes, as well as a non-solicitation clause as regards staff, clients and suppliers. Furthermore, the obligations under the NDA should be secured by way of contract penalty. Finally, it should be ensured that the transferor of the confidential information has control over the detailed procedure concerning the inspection of relevant documents. This can be done by determining different “access rights” in relation to specific individual documents in the data room (e.g. determining whether or not the potential purchaser is free to save or print certain documents or if the documents can only be seen on the screen).

Creating anonymised contract summaries

Even if there is no breach of the confidentiality obligations which the seller is subject to as a shareholder under corporate law or which the target company’s management must comply with, there could still be contractual confidentiality obligations that might be breached by the transmission of confidential information. Should the transaction be structured as a controlled or open bidding process, the phased publication of confidential information by way of censored summaries of the most important contracts is particularly useful. These summaries are normally drafted by the transferor’s legal advisor and contain anonymised summaries of the contract terms most important to each particular stage of the transaction. The more advanced the bidding procedure or the negotiations with a potential purchaser are, the more information can be disclosed in these contract summaries. 

Setting up a black box data room

The most extensive protection of confidential information combined with the lowest risk of violating confidentiality obligations is provided by setting up a so-called black box data room in which the confidential information on the target company is placed. Only advisors of potential purchasers who are bound by professional confidentiality obligations have access to this data room. They can view the information and are only allowed to disclose certain results to the potential purchaser. The setting up of a black box data room is especially appropriate for controlled or open bidding processes during which various potential purchasers are supposed to get access to confidential information about the target company.

The timely involvement of legal advisors

In order to recognize and manage the elaborate array of problems that result from the publication of confidential information within the context of an M&A transaction, it is advisable to involve a legal advisor as early as possible. This will allow parties sufficient time to implement appropriate measures for the protection of the target company’s management, for example by approving board resolutions or shareholders’ resolutions on the disclosure of sensitive information to the potential purchaser.

Felix Wolf