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:
- that the CA exists
- that discussions are taking place between the parties
- that the proposed transaction is contemplated
- the information made available to the recipient
- 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.
