Technically, a confidentiality agreement is a legally binding contract that is used to protect the owner’s proprietary,also intellectual property, or sensitive information from disclosure by others, the public and especially competitors.
In the context of M&A, the implementation of virtual data rooms, secure data access protocols, and confidentiality agreements is crucial to mitigate potential risks such as insider trading or market manipulation. This is especially crucial when there is a risk of sensitive information being disclosed before it is publicly announced.
Pablo Perez Garcia Villoslada, Managing Partner at Bondo Advisors, a prestigious boutique advisory firm specializing in M&A within the dynamic technology sector, has shared his view about the importance of confidentiality in M&A deals, summarizing it in five key points.
The 5 things you should consider about confidentiality in M&A
Confidentiality is a crucial element in the process of buying or selling a company. You may easily recall Gordon Gekko, the villainous investor portrayed by Michael Douglas in the iconic movie Wall Street. Gordon Gekko, driven by greed and lacking scruples, exploited Bud Fox (Charlie Sheen) to obtain confidential information for his own benefit.
To prevent such situations, here are some points that every company should consider:
1. Market Abuse Regulation
For publicly traded companies in Europe, there is the Market Abuse Regulation, a regulation that governs the use of confidential information. This regulation introduces the concept of an “insider.” Companies are obligated to create and maintain a list of individuals with privileged information.
For non-publicly traded companies looking to initiate a sales process, the key tool is the NDA (Non-Disclosure Agreement). It’s an initial agreement, before sharing information, not only between the buyer and seller but also between the company and its advisor.
3. Scope of confidentiality
Within an NDA, the scope of confidentiality is defined. Generally, it covers all shared information, with exceptions for information that is already public (or will be) or that must be disclosed by legal mandate.
4. Information access
The NDA can specify the purpose of information handling and who will have access (similar to the insider list), and may even include a non-solicitation clause.
5. Good advisor
In any case, while an NDA is necessary, it does not provide an absolute guarantee against leaks. Therefore, as important as signing it, is selecting a good advisor. For example, at Bondo Advisors, we would never sign one with Gordon Gekko.