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[M&A Lounge] (3) NDA?

2020. 11. 17. TUE. Los Angeles, CA.

I've introduced the overview of M&A, I am going to do deep dive to M&A process from now on. One of the M&A process that comes up first is the Non Disclosure Agreement (NDA). Sometimes it's called the Confidentiality Agreement (CA).


I could do one or two hours of lectures to talk about NDA specifically, but here I am going to summarize my thoughts and experiences on some important topics.

1. NDA Needs and Type

This happened a few years ago when I was involving in the M&A case one big company was taking over a famous entertainment company. To ensure maximum confidentiality, Seller (the famous entertainment company) provided all due diligence materials only with hard copies in a small private place where only a small number of people could enter, and strictly prohibited filming and copying. Furthermore, he asked for a separate NDA from the legal and financial advisors individually, saying that I would not be able to see the data unless I signed it.


Basically, to do M&A, Buyer has to review the due diligence data provided by Seller, but it is not mandatory for Buyer to complete (close) the M&A. In other words, Buyer could see the confidential information of Target provided by Seller and then just leave away. And even if the M&A case is closed, Target and Buyer need to protect each entity's confidential information as separate entities.


On the other hand, startups may have to provide investors with important technologies or company information (strictly confidential to the public). However, as mentioned above, the fact that an investor receives that confidential information does not mean that the investment has to be done. Particularly, investors are generally more likely to invest in multiple startups, so there is a comparatively high risk that information would be leaked to third people.


Nevertheless, I was quite surprised to hear that most startups do not sign an NDA with investors when they provide confidential information to the investors. Especially in Korea, it is sometimes understood that signing an NDA is an expression not to trust each other, so I thought it would not be easy for startups to ask investors to sign an NDA.


However, in several cases that I was involved in, after investors signed an NDA, confidential information was provided for the purpose of investment and the investment was done. It is difficult to elaborate on the specific circumstances of the cases here, but I think the process of fully understanding and explaining the need of NDA is very important for both parties.


In this regard, I think that the type and parties of the NDA matter. First, sometimes the buyer's side in M&A or the investor in the investment are required unilaterally agrees to have a responsibility for confidentiality and its violation in the name of confidentiality confirmation letter. It seems this unilateral type of the NDA could be a significant burden on the buyer/investor side.


On the other hand, Seller or startup need to encourage the other party (buyer and investor) to agree to sign the NDA so that the M&A or investment can be done. Actually, unnecessary tension from the early stage should be avoided, and it should be avoided that the whole deal process does not proceed because of this NDA procedure.


Considering the above, the NDA should be entered into in the form of a "contract" or “agreement” rather than in the form of a "confirmation letter". And I think lawyers should play a sufficient role to ensure that both parties can sign an NDA and move forward with satisfaction to both parties.


At the famous entertainment company M&A mentioned earlier, I signed an NDA and review the due diligence data. Usually, the parties of M&A cases sign the NDA including the coverage of lawyers’ responsibility, but in some cases (like the above case) the lawyer signs the NDA for themselves.

2. Gun-jumping. Clean Team. And Clean Team NDA

Gun-jumping has several meanings, in relation to M&A, such as (a) where the same effect occurs as the M&A was closed prior to closing of M&A (a violation of the HSR. Act) or (b) where the anticompetitive conduct happens prior to closing of M&A (a violation of the Sherman Act).


During the due diligence process, which takes place before the M&A is closed, Seller may provide Buyer with sensitive information under antitrust law, such as price information, which may lead to Gun-jumping issue such as above (b). So, the Clean Team concept has been considered from a perspective that minimizes the risk of this Gun-jumping issue, and the process of entering into a Clean Team NDA (other than the NDA entered into between the parties in the transaction) is conducted.


Clean Team literally consists of employees who are “clean” from sensitive information such as price information, and the sensitive information is provided only to Clean Team (i.e., Clean Team only). For me, in the beginning these Clean Team and Clean Team NDA were not familiar, and I remember it wasn't easy when I first implemented these. For example, when I did the due diligence report on Clean Team only information at the management meeting, I asked to send out all non-Clean Team members (including C-level managers) for a while. But, recently, Clean Team and Clean Team NDA seems to be normal, especially in M&As between competing companies in the same market.


The recently proposed amendment to Korean Monopoly Regulation and Fair Trade Act includes (a) the provision that the sensitive information exchange activities themselves is the illegal cartel conduct and (b) the presumption provision that there is an agreement to do illegal cartel conduct when exchanging the information. This proposed amendment has been raised steadily since a few years ago, but most companies have been insisting strongly against it. But, given the current status of the National Assembly in Korea, it is highly likely that the amendment would take effect. If so, the exchange of information during the M&A process would increase the risk of Gun-jumping issue. Therefore, I believe that the Clean Team / Clean Team NDA would become more popular and become one of the general procedures in M&A process.


See you again at next Lounge.

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