1. PLI Doing Deals March 28, 2007 Nicole E. Clark
Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context
PLI Doing Deals
March 28, 2007
Nicole E. Clark

2. Speaker Profile
Nicole E. Clark is a Partner in the Corporate section of Vinson & Elkins and focuses on public and private mergers, acquisitions and divestitures; securities offerings; and corporate governance matters. She can be contacted at or via at

3. Preliminary Agreements
Confidentiality Agreements (CAs)
Standstill Agreements
Exclusivity Agreements
Letters of Intent (LOIs)

4. Preliminary Agreements
Practice Tip:
Business people may view preliminary agreements as “standard” or “boilerplate.”
To help avoid unintended consequences, lawyers should get involved early in the transaction.

5. Confidentiality Agreements Basic Elements
Definition of “confidential information”
Obligation to protect the information
Return of information
Disclaimer of obligation to negotiate/consummate
Disclaimer of warranty
Unilateral vs. bilateral
Definition of “representatives”
Term/integration
Access to employees

6. Confidentiality Agreements Basic Elements
Other possible provisions:
Prohibition on soliciting or hiring personnel
Most-favored nations clause
No clubbing
Standstill (if a public company target)
Exclusivity

7. Definition of Confidential Information
Typically, broadly defined to include all information concerning the business and affairs of seller that will be disclosed to the recipient, including materials prepared by the recipient
Specific identification of confidential information
Exclusions to the definition
Already in possession of recipient
Becomes publicly available (other than through any breach by the recipient of the CA)
Independently developed by recipient
Exception when required by law or court order

8. Definition of Confidential Information
Sensitive information may include:
Trade secrets
Term on confidentiality obligation can thwart required efforts to maintain secrecy
Disclosure to one party can have effect vis-à-vis third parties
Defer disclosure
Buyers should consider having CAs assigned
Consult with IP counsel
Privileged documents
Disclosure may create risk of waiver
Consider discussion among lawyers rather than provision of documents
Consider “common interest” language if disclosure necessary
But note that this language may flag the issue for third parties
Consult with litigation counsel

9. Definition of Confidential Information
Disclosures to competitors may create antitrust risks
Pricing or other competitively sensitive information
Potential approaches:
Exclude sensitive information from disclosures
Identify materials that will not be disclosed
Limit disclosure to recipient’s personnel not in a position to violate antitrust laws
Defer disclosure until late in the process
Avoid mutual exchanges
Be aware that express provision in CA may flag the issue
Consult with antitrust counsel

10. Obligation to protect the information
Limited purpose
“assist the bidder and its representatives in connection with a possible negotiated transaction”
“possible” in order to avoid implication that there is an agreement in principle
“negotiated” in order to reinforce that the company’s purpose is to facilitate a process which it controls and that it would be a breach for bidder to make a hostile bid (if target is a public company)
Agreement not to use the information “in any way detrimental to the Company”
Viewed as broad by recipients

11. Obligation to protect the information
Enforcement
Acknowledgment that money damages are insufficient
Express inclusion of injunctive relief and specific performance (non-exclusive remedy)
Governing law
Consent to jurisdiction of a specific court

12. Return of Information Return or destroy
At bidder’s or seller’s option?
Bidder may request to have the right to keep one copy (usually by its outside counsel)
Electronic data rooms

13. “Representatives” Who is covered? Disclosure on a “need to know” basis
Private equity bidders may be especially sensitive to the inclusion of “affiliates” in definition
Disclosure on a “need to know” basis
Bidder may seek to limit obligations for actions of its representatives
Execution of acknowledgements
“Clubbing” concerns
Definition of representatives may expressly exclude other equity participants; additional provisions may also prohibit clubbing
Definition of representatives may expressly exclude potential lenders unless identified; additional provision may prevent bidders from exclusive use of a debt financing source

14. Term/Integration Seller’s form may not include any term provision
Bidder will seek to limit (e.g., for 1-2 years)
Consider the type of the information disclosed
Trade secrets – specified term can thwart required efforts to maintain secrecy
Consider varying survival, if warranted
Consider delaying disclosure of the most sensitive information
Integration clause in definitive agreement
CA to be modified or superseded

15. Non-solicit of Employees
Non-solicitation of employees
Generally see 6 months – 2 years
Bidder may want to limit to those introduced through process
Exception for general solicitation or employees laid-off by seller
Non-solicitation clauses that extend to customers and suppliers could be a “back-door” non-compete

16. Most-favored nations clause
Bidder negotiates to receive most preferential terms granted to any other bidder.
Seller will want to retain flexibility to respond to bidders depending upon their individual circumstances.
For example, in the public company context, if a bidder already has commenced a tender offer, the company may agree to a CA without a standstill with such bidder and arguably it should not have to agree to waive its standstill with another bidder merely because the other bidder had obtained a most favored nations clause

17. Standstill (if a public company target)
Agreement by bidder to not pursue an acquisition of the target other than by negotiating with the target’s management and the board for a specified period
Prohibitions on acquisition of target securities
Prohibitions on proxy solicitations
Restrictions on requests for waivers
Advantages for target:
Avoid hostile offer
Greater control over auction process
Avoiding public disclosure
Advantages for bidder:
Access to non-public information

18. Standstill
Bidder may seek to limit the standstill so that it will terminate if a third party proposes to acquire the target
In two recent cases, bidders who had executed a standstill were precluded from making topping bid
Important to note that even if there is not an explicit standstill provision, receipt of material non-public information (for example, projections) and/or limited use clause may restrict bidder from proceeding on a hostile basis

19. Exclusivity Agreements
Agreement by potential seller to deal exclusively with one potential buyer for a specified period of time
Buyer may require before investing a significant amount of time and expense in due diligence and negotiations
Shift in leverage
Seller may desire to negotiate for as many material terms as it can upfront, in exchange for exclusivity, when its leverage is greatest
Buyer may ask for notification of unsolicited offers

20. Letters of Intent
Used to outline the material terms of a proposed transaction
Usually signed by both parties (as opposed to a term sheet)
Almost always intended to be non-binding, except for certain limited terms (such as confidentiality, exclusivity, expenses)

21. Letters of Intent Advantages to using an LOI Creates a roadmap
Helps to expose any “deal breakers”
May enhance parties’ commitment/ moral obligation to the deal
Solidifies understanding - helps to avoid “selective memory”
May be useful to buyer in seeking financing
Can help facilitate earlier compliance with regulatory requirements

22. Letters of Intent Disadvantages
For a public company it may create an obligation to disclose the proposed transaction before the parties would otherwise like
Risk of unintended consequence of being construed as a binding agreement
Pennzoil v. Texaco — $11 billion damage award against Texaco over its tortious interference with Pennzoil’s memorandum of agreement to acquire an interest in Getty Oil
Risk of unintended consequence of having an obligation to negotiate in good faith

23. Letters of Intent
Courts found obligation to negotiate in good faith when:
The parties did not state expressly an intention to be bound or not
Party’s reservation of right of approval to its board of directors did not leave it free to abandon the transaction
Language in the LOI
LOI stated that the parties “shall make every reasonable effort to agree upon and have prepared” a contract setting forth the terms and conditions of a merger to be agreed upon
Conduct of the parties after executing the LOI
Court noted that oral assurances, reliance and awareness of reliance was substantial enough to establish a triable claim under promissory estoppel doctrine

24. Letters of Intent To avoid unintended consequences
Be explicit and precise as to intent to be bound or not
Specify provisions that are binding and precise remedy for breach
If further negotiations are contemplated, a court may find a duty to continue to negotiate in good faith
To avoid uncertainty, parties may choose to affirm this duty or to expressly reject it
State that each party bears its own expenses whether or not definitive agreement is reached
Specify period for future negotiation

25. PLI Doing Deals March 28, 2007 Nicole E. Clark
Negotiating Preliminary Agreements – Pitfalls to Avoid in the M&A Context
PLI Doing Deals
March 28, 2007
Nicole E. Clark