M&A: What can and what cannot be disclosed to interested buyers in a Due Diligence?What is it about?
It is customary and common to conduct or perform a due diligence review and investigation with respect to the target company and its business activities before a share or asset purchase is completed. In this context, the review and investigation are not only undertaken with respect to legal aspects (e.g., clarification and verification of ownership), but with respect to all business-related aspects of the target company (incl. with respect to products, markets, financials, HR, taxes, environmental matters and insurances).
Through the due diligence, the purchaser may obtain detailed knowledge about the target company, which help the purchaser to confirm the strategic fit of the transaction and the appropriateness of the offered purchase price. By way of conducting a due diligence review, the purchaser may limit its own liability exposure and challenge allegations that a transaction would not be beneficial. Furthermore, the conduct of a due diligence may balance and bridge knowledge gaps between the seller and the purchaser which may limit the liability exposure of the seller and enhance the chances that a transaction is followed through. Potentially, the seller may also realize a higher price if the buyer may conduct a due diligence review of the target.
Taking the above into consideration, it has to be pointed out that the information and documentation made available in the course of a due diligence review mainly belong to the target company and not the seller. Therefore, the board of directors of the target company must decide whether granting the right to conduct a due diligence review is in the best interest of the company and whether such granting is duly covered by its corporate authority and business judgement – namely, whether such granting is in line with the board of directors’ duties of care and loyalty owed to the target company.
Limitations with respect to the disclosure of information
The board of directors of a target company has an obligation to maintain confidentiality and a duty to observe secrecy. The board of directors has to refrain from doing anything that may damage the company in whatever way. After having duly considered and balanced all relevant and, as the case may be, conflicting interests, the board of directors may only allow a due diligence to be conducted if the board of directors attaches more importance or value to the transaction than to keeping the relevant information and documents confidential and as a secret. In this context, the board of directors must observe the following:
- Arrangements with employees, customers, suppliers, banks, service providers and generally any kind of other business partners contain, more often than not, contractual obligations to maintain confidentiality. These obligations must be observed. Therefore, any such arrangements may, in general, not be disclosed in a due diligence review and investigation (except if the relevant business partners have consented to any such disclosure, or if the information is made available in a duly anonymized way only).
- Personal data and information, which refers and is allocatable to an actual natural or legal person may only be disclosed in compliance with data protection laws as well as rules and regulations governing the protection of the legal personality. Therefore, any such personal data and information may only be disclosed upon prior consent of the relevant person or if the data and information is duly anonymized. The disclosure and submission of personal data and information to a foreign country (e.g., making such data and information available in a virtual data room or through the Internet) is particularly sensitive. In general, personal data and information may only be made available on the site and locally to buyers who have an actual and substantial interest in the transaction.
- Under the Swiss Federal Law against Unfair Competition, work results (such as construction plans, computer software, price calculations and offers) of a third party may not be disclosed by a target company without the prior consent of such a party. It may also be dishonest and unlawful if the target company or the seller discloses false or misleading information about the business activities of the target company (window dressing). The disclosure of information to market participants of the same or preceding/subsequent market stages and levels, may also lead to unlawful agreements affecting or, as the case may be, eliminating competition.
- The disclosure of industrial and/or business secrets may trigger criminal liability (industrial espionage or breach of manufacturing or trade secrecy) if the disclosure is not consented to by the target company, the relevant business partner or governmental agency). Allowing a due diligence to take place without due consideration of the valid interest of the target company, may also be untrustworthy business management or represent a violation of a professional or banking secrecy, or may – in case of public companies – violate insider dealing rules and regulations.
What do I have to do?
In the context of a due diligence, the confidentiality obligations and needs of the target company must be considered in light of the interests of the buyer and the seller to disclose and receive, respectively, company-related information. The board of directors of the target company must resolve upon which information and documents, and what kind of data, shall be disclosed at which point in time to third parties in the context of a M&A transaction. The board of directors must also consider whether there are any contractual or statutory provisions, which limit or, as the case may be, prohibit the disclosure to third parties of company-related information. If the board of directors neglects these obligations and duties, then its members may become personally liable or render themselves liable to prosecution, and severe monetary fines may be imminent.