When dealmakers make the decision to enter into a deal, parties will typically want to proceed full steam ahead. It is important to remember, however, that hasty decisions can lead to headaches down the line. Here are seven points to consider when preparing to enter into a buy-sell, merger, joint venture or other type of M&A transaction:
1. Be wary of term sheets that claim to be non-binding but create an agreement to negotiate in good faith.
Most deals start with a term sheet (also known as a letter of intent or memorandum of understanding) that sets out certain terms of a transaction that have been agreed to between the parties. Recent precedent from Delaware has increased the likelihood that a term sheet may not be categorized as simply “an agreement to agree,” but instead may be construed under certain circumstances as an enforceable obligation. Moreover, in Delaware, expectation damages (based on lost profits) could be awarded for breach of a preliminary agreement, such as a letter of intent or term sheet, where some material terms are included but others remain open to negotiation.
2. Enter into a Non-Disclosure Agreement (NDA) that clearly defines confidential information in a useful way.
Before the deal gets underway, both parties should sign an NDA or confidentiality agreement to protect confidential information disclosed during the negotiation process. Confidential information should be defined to include all disclosed information, but provide certain standard carve outs, such as information already in the public domain other than through a breach by the recipient or information that is independently developed by the recipient without using the confidential information.
3. Enter into a mutual NDA, regardless of whether both parties will be conducting due diligence.
Parties sometimes sign unilateral NDAs in order to save time and get a deal underway quickly. Depending on the circumstances, this can be risky even if a situation seemingly calls for a unilateral NDA (e.g., by a buyer in an all-cash deal). Keep in mind that both parties will likely end up providing non-public information to each other as negotiations progress. Further, buyers often prefer that the identity of the buyer, the deal terms, and the purchase price remain confidential until the parties are ready to make a public statement, and this information should be protected from the start by a mutual NDA (or at least confidentiality and non-disclosure language in a term sheet or letter of intent).
4. Find a reasonable compromise on the expiration date for confidentiality obligations.
Disclosers of confidential information typically want the NDA to run indefinitely or for as long as possible. Recipients of confidential information, on the other hand, prefer a set term to limit any potential liability or the possibility of inadvertent disclosure. Negotiate a reasonable term that suits the recipient and is sufficient to protect the discloser. In setting the term, take into consideration the type of information being disclosed (e.g., technology and innovations, which may become obsolete quickly, vs. customer lists, which should be protected well into the future) and the nature of the recipient (a longer term should be used for a recipient that is a competitor).
5. Make sure your right to independently develop information, products and technology is not impeded.
In a deal with another business (often your competitor), the last thing you want is for the other party to argue that, after learning about their innovation in the course of due diligence, you used the knowledge to compete and develop similar products or technology. Independently developed information, products, and technology should be carved out from the confidentiality and non-use provisions of the NDA, and the NDA should allow the recipient’s employees to use any confidential information retained (at least unintentionally) in their memories. These provisions should help in protecting against later disputes.
6. In a deal with an international component, include a provision in the NDA that addresses export-compliance obligations.
Parties should be aware in undertaking a deal with an international component that there may be issues under U.S. export control law. Some types of information, such as certain technologies, may require a license to be disclosed to someone in another country. Even if the information does not leave the U.S., but is disclosed to someone in the U.S. who is not a U.S. citizen or permanent resident, export control law and related laws or regulations may apply. To deal with these concerns, screen the parties and have the NDA require that neither party export any information under the NDA, or take any other action, that would violate applicable export control laws or regulations.
7. Ensure that the NDA and term sheet or letter of intent include clear choice of law and venue provisions.
Providing for choice of law and venue may be very important in protecting your interests when enforcing such an agreement or defending against claims related to such an agreement. There are several reasons for this. By setting a familiar jurisdiction’s substantive law application to the agreement, you will be familiar with the law and how language of the agreement is likely to be interpreted. Because of this, you are less likely to be caught off guard by something obscure or unexpected in an unfamiliar jurisdiction. It is also more convenient to litigate locally rather than having to travel to another jurisdiction (whether a different state or a different country). Typically, but not always, the home state’s governing law and jurisdiction is the preferred option.
In any deal, the best way to proceed will depend on the specific facts and circumstances of the transaction. While this list mentions some (but not all) of the basic issues to keep in mind, speaking with an M&A lawyer before entering into any M&A transaction (or even such preliminary documents as a term sheet, letter of intent or NDA) is critical.
Serge Pavluk is a partner in Snell & Wilmer’s Orange County and Los Angeles offices focusing on corporate and securities transactions. Elizabeth Gadbaw is an associate in Snell & Wilmer’s Los Angeles office focusing on M&A, franchising, entity formation and general corporate matters.