In the beginning stages of a contemplated M&A transaction, the parties may enter into preliminary agreements. Confidentiality agreements and letters of intents are the most common preliminary agreements entered into prior to the execution of a definitive merger agreement.

It is important to keep in mind that the entry into such preliminary agreements can have significant consequences down the road. Even though confidentiality agreements and letters of intent are entered into before a definitive merger agreement is executed, the provisions may inadvertently impose future restrictions or obligations on the company.

Confidentiality Agreements

Confidentiality agreements are sometimes referred to as non-disclosure agreements, or NDAs. This is often the first legally binding document in the M&A deal-making process. A non-disclosure agreement enables a company to share its non-public information with potential transaction parties while protecting its sensitive or confidential information.

Confidentiality agreements often include standstill provisions that restrict the ability of the party receiving information from taking actions toward acquiring ownership or commencing a takeover bid of the target company. This standstill agreement will be in effect for a defined period of time. To further enhance the protections for the target company, the standstill provision may include a “Don’t Ask, Don’t Waive” clause. This clause essentially states that the receiving party cannot request a waiver of the standstill restrictions.

Other restrictions in NDAs that could have future implications include provisions relating to the solicitation and hiring of employees, the destruction of confidential information, limitations on financing sources, and legally required disclosures.

Letters of Intent

Letters of intent can serve several purposes during the early stages of the M&A negotiation process. Sometimes referred to as a “memorandum of understanding” or “MOU”, letters of intent can signal the seriousness of both parties to eventually executing a definitive merger agreement. They may also serve as a form of preliminary documentation for making a Hart-Scott-Rodino antitrust filing or for providing to lenders in connection with obtaining financing.

Letters of intent are more common in private company transactions than in public M&A deals. Some provisions may be expressly binding, such as an expense reimbursement or exclusivity period for negotiations. The parties should be clear about terms that are expressly intended to be non-binding. Even in circumstances where the letter of intent contains language expressly indicating that the letter of intent is non-binding, courts may interpret it as binding. For example, in the case SIGA Technologies, Inc. v. PharmAthene, the Delaware court concluded that the letter of intent contained an enforceable commitment to negotiate a licensing agreement in good faith. While SIGA Technologies noted that the letter was unsigned and contained a footnote stating “Non-Binding Terms”, the court held that attaching the letter to the merger agreement signaled its enforceable nature.

It is essential to keep in mind that the M&A process begins before the signing of a definitive merger agreement. In order to prevent issues from arising at a later time, special attention must be paid to the drafting of provisions in preliminary agreements. Confidentiality agreements and letters of intent can be highly useful tools if careful attention is focused on how provisions are drafted.