A recent lawsuit has again highlighted the importance of the terms of confidentiality agreements entered into between potential targets and acquirers in advance of an M&A transaction.


It is usual practice in both the public and private M&A context that bidders who are looking at acquiring either the assets or shares of a target company in a consensual deal will first be expected to negotiate and enter into a form of non-disclosure agreement (NDA) or confidentiality agreement (CA). The CA will often provide standard protections for the non-public or confidential information that the target entity may share with the potential acquirer as part of the due diligence process that may be undertaken in advance of a potential M&A transaction.

Depending on the nature of the transaction and appetite of the parties, these NDAs can either be heavily negotiated, or entered into very quickly without in-depth legal review, often using one of the parties’ standard form of agreement.

The NDA addresses permitted uses of the information that may be shared pursuant to the terms of the agreement for a fixed time period. The agreement may go further to not only restrict the use of such information in the future, but to include standstill provisions for a set period of time restricting the launch of a hostile transaction without the consent of the target.

Recent lawsuit

On July 7, 2015, IOU Financial Inc. announced that it had commenced legal proceedings against Qwave Capital LLC and its manager before the Québec Superior Court in the face of Qwave’s unsolicited partial offer for the shares of IOU Financial commenced in June 2015. IOU alleged that Qwave had misused confidential information and acted in a manner not permitted by the confidentiality agreement entered into by the parties in November 2014, and sought an order suspending Qwave’s hostile offer.

On July 17, 2015, the parties announced that they had settled the matter, with Qwave agreeing not to take up and pay for shares tendered to its offer prior to September 2015 and IOU agreeing to waive the application of its rights plan until such date. Given the settled outcome, IOU terminated its proceedings with the Quebec Superior Court against Qwave. IOU also announced that it is continuing to pursue alternative transactions in the best interests of IOU and its shareholders.

Bottom line

The provisions of a CA are meant to safeguard the confidential information of the party providing such information, but their use may also be extended by a target to attempt to thwart future non-friendly overtures by a bidder. The case law regarding the ability of a bidder to initiate a hostile transaction after having entered into a CA with the potential target is mixed and highly fact-specific. In this case, the settlement with Qwave has provided IOU’s board with a longer time frame to complete its strategic review process.

This again reiterates that parties to an NDA or CA should think carefully about their current and future intentions with respect to the relationship when entering into such an agreement. It is prudent for all parties to exercise caution and carefully review the wording of CAs at the time they are being entered into in order to mitigate the risk of litigation based on future actions.

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