When a company decides to conduct M&A transactions with its business, it must accept that some of its internal information must be disclosed to potential investors and their consultants during the transaction. In order to determine the business value and negotiate the contractual terms of the M&A transaction, the investor will need to collaborate with the consultants to conduct business due diligence, such as legal due diligence, financial due diligence, and tax assessment. At this stage confidentiality is critical and is a requirement for a successful M&A transaction.
The significance of confidentiality in M&A transactions
If the enterprise, the investor, and the third parties (such as the personnel of the consultants performing the business due diligence) do not initially have a confidentiality agreement, these entities may not be obligated to keep the information of enterprises confidential, except for cases where they are required by law to keep information confidential such as the obligation to keep client information confidential under the provisions of law on lawyers. They may disclose information of the enterprise to other parties, particularly when the internal information (such as financial statements, pricing information of important contracts) of the enterprise is made aware of to its competitors, business partners. In addition, if the confidentiality agreement is not detailed enough to cover possible circumstances for internal information disclosed by the enterprise to investors and consultants, these entities may fail to fully fulfill the confidentiality obligations expected by the enterprise, seriously affecting the enterprise’s legitimate rights and interests.
Furthermore, if information of the company doing M&A is disclosed, it may have an impact on the company’s business activities, employees feeling insecure about their jobs, partners concerned that the company’s business will be disrupted due to M&A transactions, and the value of the company during the negotiation phase may decrease.
Risks of disclosing internal information of enterprises in M&A transactions
When investors and their consultants conduct business due diligence, the enterprise must establish a ‘data room’ to provide and store enterprise documents and information (legal, tax, investment, finance, etc.) as required by investors and their consultants. If the data room grants the right to download and/or print documents, investors and their consultants can download documents, print, copy, store them in their own data room to help with their due diligence. Even if the confidentiality agreement has been signed, there is still a risk of information disclosure when the company’s internal information is stored in multiple locations, such as forgetting documents in the printing area, administrative staff learning about M&A transactions when arranging meetings between enterprises, investors and consultants and preparing documents for the meeting. Especially in the case that the consultant has many employees who have access to the data room, it is difficult for the enterprise to control which personnel has the right to hold the internal information of the enterprise.
In our experience, some enterprises may only allow investors and consultants the right to ‘view’ documents directly in the data room without granting the right to ‘download’, ‘print’, or specifically allowing only a group of people to have ‘view’ permission, another group to have ‘download’ permission, another group to have ‘print’ permission, and so on. Some enterprises only allow investors and consultants to access paper documents directly at the enterprise and do not allow them to copy or bring paper documents out of the enterprise’s office without the enterprise’s permission. In addition, to best ensure the legal rights of the enterprise, each employee of the investor and the consultant must sign a separate confidentiality agreement with the enterprise if such personnel are required or designated to access enterprise’s documents and internal information to serve the due diligence of investors.
In addition, not only do investors need consultants to conduct business due diligence, but the enterprises also need their own consulting team. Investors and their consultants will generally require enterprises to provide as much and detailed information and documents as possible in order to prepare a due diligence report. As a result, businesses must have a team of professional consultants to help them provide relevant information and documents for the business due diligence process of investors and consultants, or to provide information and documentation at the appropriate time during the due diligence and negotiation process.
In order to best protect the legitimate rights and interests of the enterprise, a confidentiality agreement must include many contents and elements. For example: What information should be kept confidential and what information should not be kept confidential (for example, information that has been made public through legitimate communication channels)? Who receives the information (specifically, which personnel are assigned to participate in the transaction by the investors and their consultants)? What should be done when information must be disclosed to public authorities as required by law (with reasonable advance notice to the enterprise and prior consultation with the enterprise)? What are the consequences of breaching information confidentiality obligations (damages, fines for violations)? Information confidentiality period (usually, the confidentiality period can last between three and five years, depending on the parties’ agreement)? What actions should the parties take if they decide not to proceed with the M&A transaction after the due diligence process (for example, they can ask investors and consultants to confirm that all information and data provided by the enterprise have been deleted)?