When carrying out an initial review in respect of a proposed corporate divestment, the principal issues and tasks relating to the proposed  divestment are usually clear for all to see, but some issues are less obvious.

A category of agreements which falls firmly in the “less obvious” basket is confidentiality  undertakings and non-disclosure agreements (CAs) which have been entered into by the corporate entity which is to be  sold (target company). Most established oil and gas companies are likely to have entered into many  CAs, particularly if they may have been actively considering acquiring assets. The number of CAs  could be substantial.

The buyer of a corporate entity will of course acquire it with all its obligations and liabilities,  including historic CAs, (whereas in the case of an asset sale, these would have remained with the  party selling the assets).

The question therefore arises as to whether such CAs should be identified in the sale data room or  otherwise indicated in the disclosure process in order to allow bidders to carry out their due  diligence.

First of all, the CAs should be identified and copies obtained. This might not be as simple as it  sounds. The CAs should be reviewed, to ascertain whether they are still binding and, if so, their  scope. For example, it is not unusual for the confidentiality obligations to expire after a  specified time (the O&G UK pro forma CA has a five-year life), and many CAs will simply fall away  or be replaced by other arrangements (for example a GOA) upon completion of the relevant transaction. 

The O&G UK pro forma CA requires the party receiving information to keep confidential the following:

  1. that the CA exists
  2. that discussions are taking place between the parties
  3. that the proposed transaction is contemplated
  4. the information made available to the recipient
  5. any data (reports, even board minutes) of the recipient derived or generated by the recipient from the information made available to it (secondary records)

More bespoke CAs might include non-competition restrictions or “standstill” obligations  (undertakings not to acquire shares in a company whose shares are listed on a stock exchange for a  specified period). The wording of each CA should be considered carefully, to ascertain the extent  of the restrictions, and also to identify whether the target company undertook to ensure that its  affiliates from time to time adhered to such restrictions. Whilst such an undertaking would not  bind a buyer, the actions of the buyer and its affiliates could place the target company in breach.

The seller should create a table itemising each CA, summarising the relevant information and the period and extent of any restrictions. Has the relevant time period expired? Has an announcement  been made that a transaction has been entered into in relation to the assets subject to the CA? If  so, the categories mentioned in 1 to 3 above are unlikely to cause concern.

Does the target company still hold any of the information made available to it (or was it all returned)? What appears in the target  company’s secondary records?

When this process has been completed, it should be possible to understand better the issues and  risks.

If a number of CAs prohibit the disclosure of the CA and/or discussions and/or the proposed  transaction then clearly this might create problems. A bidder will want to understand the  obligations placed on the target company, but these obligations cannot be disclosed to the bidder,  as this will place the target company in breach of its obligations under the CA.

From a practical prespective, the information subject to each CA might be removed from the target  company’s systems and returned to the party providing it. In reality, this is likely to be what the  party relying on the CA is most concerned about. A more problematic area is the secondary records created by the target company, particularly if  they are contained in board minutes or papers accompanying them. However, it is possible to  identify any secondary records and if nothing else ensure that board minutes which contain  secondary records are redacted before being placed into the data room.

There might be some CAs in relation to live processes where the seller is actively considering the  acquisition of assets. In such cases it might be appropriate for the obligations to be removed from  the target company and assumed by the seller (and a novation entered into).

This process will, hopefully, produce a shorter list of binding CAs and a summary of the  restrictions and issues. This will flag any prohibitions on the disclosure of CAs to prospective  bidders. If, for example, a CA related to a proposed transaction which has subsequently been completed and announced, all information which was disclosed to the target company has been  returned to the disclosing party and the target company does not hold any secondary data, that CA  can be disclosed in the data room.

Otherwise, if the disclosure of a CA in a data room would give rise to a breach of its terms, we  advise that it is not included in data room, nor should any secondary records, at the initial stage  when the data room is made available to bidders (not least because one of the bidders might be a  counterparty to a CA, and would not be impressed to see a copy of it in the data room).

Instead, bidders should be made aware of the existence of generic CAs in general terms and also the  nature of any other unusual restrictions (in summary form or with sensitive information redacted).  This should not give rise to pricing issues as in reality these CAs will not affect price.

As and when a preferred bidder is chosen and given exclusivity, the seller can reconsider the issues. Whilst the prospective seller  might naturally be loath to cause a breach of CAs by disclosing them, an analysis of the actual  issues - any press reports, the extent of the information held and the fact that the preferred  bidder has itself entered into a confidentiality undertaking under which it is required to keep the  CAs confidential - could satisfy it that the risks arising from the disclosure of the CAs to the  preferred bidder are low.

If, however, any problematic CAs are identified, the prospective seller can consider these  individually and devise a strategy to deal with them. This may include entering into discussions  with the party relying on the CA. Alternatively, the prospective seller may decide simply to tell  the preferred bidder that it will not receive a copy of certain CAs, but set out in generic terms  what the CA states and confirm that the target company has complied with the CA (these might both  be included as warranties in the SPA). Unless the CA contains a change of control provision (which  is unlikely) the sale of the target company should not cause any problems, and the target company  will remain bound by the CA.

Whilst CAs might be considered to be low risk, our experience is that it is essential to manage  these in the same way as other contractual arrangements relating to the target companies. The focus  when commencing a divestment process is naturally upon the assets to be marketed and those to be  hived out. It is important that CAs are included in the review process and that they are managed  concurrently with the more obvious aspects of the proposed transaction. In particular: 

  • companies should collate and index CAs, what they cover and confidential information covered by them – both in relation to the  proposed sale but also on an ongoing basis
  • the initial review can be carried out by relatively junior personnel or paralegals, provided  they are properly managed and supervised
  • this process should be initiated as soon as possible, to enable the necessary issues to be  considered and in particular to ensure that documents or information are not inadvertently  disclosed in a data room
  • in addition, the approach which has been adopted can be included in the Information Memorandum  and Bid Instructions; if this can be made clear to bidders they are likely to be relaxed about this  aspect.

As a seller, it is very much a case of being forewarned is forearmed.

As ever, this is general guidance based on the practical experience which we have gained whilst  advising on O&G M&A transactions, and preparing the target companies for sale, and there is no  substitute for specific legal advice and assistance.