Written by Associate Marlene Istad.
Key takeaways:
As a persistent yet cautious optimism is starting to show amongst dealmakers in line with growing pipelines and the slight uptick of new projects, more business owners are starting to consider selling their business, with stronger competitors often being qualified potential buyers. Recent local examples include Vår Energi's acquisition of Neptune Energy Norge, DNB's acquisition of Sbanken, and Norwegian's acquisition of Widerøe. A common concern for owners that are contemplating selling their business to a competitor is whether players that express interest in their business are genuinely interested or if they are solely taking advantage of a sales process to extract information about a company for their own business' potential benefit. This concern is often more evident for a seller that contemplates selling to a competing industrial player but might as well also be a reasonable worry when selling to a financial buyer which may have made similar investments in the relevant industry. Consequently, a seller may become reluctant to accept an offer or to share information, which may harm the sales process. However, there are several different strategies that a seller may use to remedy this situation and limit the risk.
Considerate preparations and screening
Firstly, a seller should ensure that careful preparations are carried out prior to engaging with potential buyers and releasing information. This includes, inter alia, qualifying the buyer before any information is shared. Amongst other things, the seller should investigate the potential buyer's financial situation and historic transactions, as well as their possible rationale and motivation for acquiring the target business. Another strategic approach is to engage a neutral third party, e.g., an external advisor.
Non-disclosure agreement (NDA)
Secondly, the non-disclosure agreement (NDA) is a commonly used tool to prevent confidentiality breaches. Although the applicable law may provide a certain amount of protection, such as for instance the Norwegian Trade Secrets Act which implements the EU Directive 2016/943 on the Protection of Trade Secrets, an NDA can offer additional security which may become of great value to the seller.
The NDA is usually drafted by the seller or seller's advisors and may vary greatly in terms of length and detailing. However, as a starting point, the agreement should include (i) a definition of "confidential information", (ii) a description of the obligations to keep the information confidential and to only use it for the "permitted purpose", (iii) a description of the specific circumstances under which a potential buyer may disclose the information, and (iv) a description of the procedure to be followed if the transaction does not proceed with the respective interested party, inter alia, regulating the return or destruction of information.
When contemplating a sale to a competitor, the seller may also consider additional protection in the NDA, for example through including non-solicitation or no-hire clauses. However, the parties should be aware that in certain jurisdictions there is a risk that specific provisions in the agreement may be deemed invalid or illegal, and one should therefore consider obtaining local legal advice in each case to avoid any unpleasant surprises. Also, the seller in particular should note that ambiguities in the wording typically work against them or the party holding the pen in a potential subsequent dispute regarding the interpretation of the agreement. Therefore, it is imperative to ensure clarity and precision in the language in order to mitigate risk.
Timing and ways of releasing information
Thirdly, a seller should pay attention to the timing and procedures for the actual release of the confidential information. A neutral third party engaged by the seller may also advice on what information is regularly shared with buyers at which stages and under what circumstances in similar transactions. Normally, the seller shares ordinary information such as financial statements and balances, material supplier agreements, policies, licenses, asset and inventory list and marketing material, but may be more reluctant to share more sensitive information such as specific pricing, customer agreements, and employment agreements, and typically even more protective of sharing highly sensitive information such as for instance software codes and trade secrets.
Furthermore, the seller should consider the different ways of releasing information. Specifically for a seller that is contemplating a sale to a competitor, one should attempt to limit the circle of people accessing the information. Moreover, the seller may assess the need for establishing a separate "clean room" for the due diligence in which the more sensitive commercial information and data can be shared with the potential buyer's advisors under specific terms, for instance that access to this data room is only granted to a limited number of advisors for a certain time period and subject to receipt of a specific, more detailed non-disclosure undertaking. Also, it is generally recommended as a good practice for the seller to always stamp or watermark the documents as "confidential" prior to releasing it to the bidders, and ideally also to ensure that all other necessary security measures are taken to prevent any breaches, although this must be balanced against practical considerations and reasonable costs for the specific transaction at hand.
The next steps
With the market players and consolidators now reevaluating and adapting their acquisition strategies to a new normal as market dynamics shift, your company may be contacted by potential buyers, both financial and industrial. The abovementioned strategies are a few examples of some procedures and items to take into consideration in order to protect your business when contemplating selling to a competitor and to decrease the concern for buyers exploiting the sales process. If you are considering a potential future sale of your business, our team of dedicated lawyers at Aabø-Evensen can assist with any inquiries, including drafting of non-disclosure agreements and investigating how to best protect your business' trade secrets and know-how in a sales process, throughout the sale from A-Z.
Contacts
Marlene Istad
Associate
mi@aaboevensen.com
+47 477 98 305
Martin Gunnerius Unneberg
Partner
mgu@aaboevensen.com
+47 477 98 301
André Høgdahl
Partner
ah@aaboevensen.com
+47 477 98 304