FEATURE

Information disclosure
The sellers perspective

nly the most fortunate of sellers can expect to get the best price for his wares without displaying them to the buyer (and often to more than one potential buyer). However, no sale is complete until the ink on the contract is dry and the very act of showing too much of the goods on offer to too many or even any buyers can severely reduce their value to the seller, whether in terms of the price which can be obtained from another buyer or in circumstances where no sale takes place at all and the seller continues to own and run the business. The seller will therefore want to control the manner in which information is made available not only to keep any trade secrets safe, but also to minimise the damage to the business in the event that a potential buyer does not like what he sees. Confidential information Subject to any regulatory consents and other requirements to which he may be

ANDREW COLLINS and JONATHAN MACFARLANE explain how sellers can control information disclosure to potential buyers in corporate transactions.

In almost all businesses there is information which those running the business want to keep to themselves. The first step before any information is made available to a potential buyer is to spell out the basis upon which the information is being provided. This will involve a confidentiality agreement requiring, in summary, that information provided will be: G Kept confidential and used only for assessing the prospective transaction. G Returned (including all copies, notes and, ideally, other information and documents generated from such information) if and when either the seller says so or the buyer does not intend to proceed. There are a number of refinements which can be included in order to improve the practical usefulness of confidentiality agreements, such as requiring a sworn statement from an officer of the buyer that all information has been returned or destroyed in the event that the transaction does not proceed. This can
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subject (for example, the City Code on Takeovers and Mergers, confidentiality obligations to customers and suppliers etc.) the seller will usually recognise that in order to achieve a sale he will need to provide at least some information to a buyer. The extent and timing of that information disclosure will depend (as does so much in these circumstances) on the negotiating positions of the parties and also on third party considerations.

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City Code
Competing offerors. Under the City Code on Takeovers and Mergers target companies are under an obligation to provide equality of information to competing offerors (Rule 20.2). This Rule is designed to ensure that a favoured bidder is not given an unfair advantage over a less favoured rival, making it more difficult for the latter to compete and perhaps depriving shareholders of a better offer. In practice, however, the Rule is limited because the Code provides that the less welcome offeror or potential offeror should specify the questions to which it requires answers. It is not entitled, by asking in general terms, to receive all the information supplied to its competitors. Because the less welcome offeror will not generally know what information has already been supplied to any competitor, this usually results in extremely long, catchall questionnaires being sent by the offerors advisers to the offerees advisers (often at regular intervals) in an attempt to catch everything which might conceivably be of interest. In the bid for Midland Bank plc in April 1992, HSBC Holdings Limited (a subsidiary of the Hong Kong & Shanghai Bank) announced a recommended offer for Midland, and Lloyds Bank plc later announced that it was considering making an offer for Midland. A precondition of Lloyds offer was Lloyds receiving all the information which HSBC had received help to instil a degree of discipline in the buyer in the way the information is used. In the case of an unscrupulous buyer or a competitor on a fishing expedition, the very delivery of information to the buyer can disadvantage the seller. As damages will seldom provide an adequate remedy for breach of confidentiality, it is essential that the agreement provides the seller with as clear and smooth a path to injunctive relief as possible. The whole area of protection of confidential information is an equitable doc38

from Midland. The Panel, on appeal by Midland from a decision of the Executive, had to decide whether it should modify or relax Rule 20.2 since it was not disputed that Lloyds was other than a bona fide potential offeror for the purposes of the Rule. The Panel decided not to modify the Rule and Midland was advised to hand over to Lloyds the information which had previously been passed to HSBC, because in the Panels view, the likelihood of damage being done to Midland shareholders was greater if the relevant information was to be withheld than if it were to be given to Lloyds. In addition, the Panel pointed out that Midland should have been aware that other less welcome potential offerors would become entitled to request the information when they passed it to HSBC, and so this should have been borne in mind when deciding what to pass to HSBC. MBOs. With regard to management buy-outs, an MBO offeror must, on request, promptly furnish the independent directors of the offeree company or its advisors with all information which has been furnished by the offeror or potential offeror to its equity or debt financiers (Rule 20.3). Further, it is this information which has to be furnished to competing offerors in so far as it is information generated by the offeree company. The Panel expects the directors of the offeree company who are involved in making the offer to cooperate with the independent directors of the offeree company and its advisers in the assembly of such information. trine and the absence of specific and precise terms will not help the Courts exercise their discretion in the manner in which the seller may have intended. Areas where attention is most required include the definition of confidential information, the parties, and a full analysis of those to whom obligations of confidentiality should apply. In practical terms it is of course not possible to bind someone who is not a party to the agreement directly. But as regards employees of the recipient, for example, the recipi-

ent should be asked to procure that they will observe the obligation of confidentiality (for a detailed description of the contents of a confidentiality agreement, see PLC, 1994, V(9), 22-23). Timing the release of information Control of information is often vital; confidentiality agreements are useful but should not be relied upon as providing complete protection. A measured and orderly release of information to buyers is also very important and serves several purposes: G It enables the seller to ensure equality of information between competing buyers. G It enables the seller to hold back on his more precious and sensitive commercial information and to comply and be seen to comply with his obligations of confidentiality to third parties in relation to information in which buyers are interested. G It will help the seller keep the fact of the proposed sale confidential from those working in the business which is up for sale. All this requires careful preparation and no little investment of time and effort on the part of a potential seller but, like time spent in reconnaissance, it is seldom wasted. A typical sequence of events might be: Information memorandum. The seller and his advisers prepare an initial information memorandum about the company or business to be sold giving outline information about its history, development, limited financial information, markets and market share, products, premises, plant and machinery, management and staff and prospects. This will be a selling document and is likely to contain outline information and a disclaimer and health warning (see inset box Disclaimer and health warning which contains a basic short form example); it will only be made available once a confidentiality agreement has been entered into.

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The financial information contained in the information memorandum must be carefully prepared and reconciled with both the most recent audited accounts and operating results; any adjustments must be capable of clear explanation. Buyers will form their first views based on this information and much scope for negotiation and argument based on misunderstanding of what the initial information meant will be reduced if this is prepared and presented carefully and with the end game in mind. Data room. The seller and his advisers will invite initial indications of interest and indicative offers based on the information memorandum and then make a further quantity of information available to the selected prospective buyers in the form of a data room. This will involve allowing the prospective buyer or buyers access to prepared files of documents for a limited amount of time. They may refine the price they are prepared to pay after inspection of the documents. The contents of the data room, which (like the information memorandum) should be prepared with the help of the sellers lawyers, should be designed to answer the sort of enquiries which the buyers and their lawyers and accountants would be expected to raise, subject to the seller excluding information which is commercially sensitive or which it would be in breach of law or contract to disclose. A typical set of data room rules will regulate attendance at the data room, copying or dictating the contents of documents, and will include a reminder of the confidentiality of such documents (see inset box Data room rules). If the information memorandum and the data room are prepared discreetly and carefully and the data room is located at the sellers lawyers office or elsewhere away from the business being sold, it should be possible to provide the buyers with a considerable amount of detailed information and hence obtain a realistic indication of price and other terms without advertising to the companys work force, customers, suppliers or the world at large that the business is for sale.
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DISCLAIMER AND HEALTH WARNING

This document has been issued by [the Seller] in connection with its proposed sale of [ ]. This document and the information contained in it are confidential and are made available subject to and on the terms contained in the confidentiality letter between [the Seller] and [the Buyer] on [ ] 199[ ]. The information in this document is subject to updating, verification and amendment. No reliance may be placed for any purpose whatsoever on the information contained in this document or on its completeness. No representation or warranty, expressed or implied, is given by [the Seller], any of its directors or its advisers as to the accuracy of the information or opinions contained in this document and no liability is accepted by any of them for any such information or opinions. This document is being made available to interested parties on the basis that they are persons who fall within paragraph (3) to Article 9 of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988.

Requests for information. An alternative (or further intermediate step) to the data room approach is to invite and respond to a request for information, or to send a prepared pack of detailed information to preferred bidders. Often prospective purchasers will send their own information request, without having to be invited. In any event, it is essential to keep a careful record of all information provided, and when and to whom it has been given. This should be dealt with through a central outlet in order to avoid duplication and confusion

and to help the process of agreeing what may subsequently be treated as suitable material for inclusion in the disclosure letter. The seller may wish to impose a discipline on the buyer or buyers such that they understand that if they do not comply with the timetable for considering information and progressing negotiations they will be required to return all information received. Disclosure against warranties It is, of course, not the case that all information which has been supplied to a buyer is necessarily appropriate to be disclosed against whatever warranties are finally negotiated (particularly if the seller is asked to warrant the accuracy of the disclosures!). Disclosure against any warranties should be seen as a separate exercise, and it is not normally appropriate for the seller to try to disclose, for instance, the whole contents of the data room. Whilst, following the Court of Appeals decision in Eurocopy v Teesdale (PLC, 1991, II(10), 63), a seller may hope that a purchaser will be fixed with actual knowledge of facts and circumstances
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DATA ROOM RULES

[Target Co.] Data room
The rules These rules regulate the manner in which visitors may use the facilities made available to them at the Data Room located at the offices of [LAWYERS]. The documents contained in the Data Room in connection with and relating to [TARGET CO.] (the Information) are made available subject to and on the terms contained in the information memorandum issued by [ ] in [ ] 199[ ] on behalf of [PARENT CO.] (the Information Memorandum), as if references therein to the Memorandum were to the Information. In addition, no representation is given and no liability is accepted by [LAWYERS] or any of the other advisers to [PARENT CO.] as to the accuracy or completeness of the Information. You are reminded that the Information constitutes Confidential Information as defined in the Confidentiality Agreement exchanged between yourselves and [PARENT CO.] relating to the disposal of [TARGET CO.]. 1. Appointments 5. Conduct (a) The Data Room will be opened in the week commencing Monday, [ ], 199[ ] and will be available for use by prior appointment during the hours between 9.00 a.m. and 6.00 p.m. on each working day during the period to [ ], 199[ ]. Appointments must be made by contacting either [ ] or [ ] (Tel: [ ]) of [EG. FINANCIAL ADVISERS] at least 48 hours in advance. (b)The name and position held of each person viewing the Information is required to be disclosed to [FINANCIAL ADVISERS] in writing at the time the appointments are made and any changes thereto should be notified in writing before entry to the Data Room. 2. Admission (a) Visitors shall only be admitted to the Data Room with the consent of [EG LAWYERS] acting on behalf of [PARENT CO.] which consent may be withdrawn at any time and without prior notice). (b)Visitors must at all times comply forthwith with any request by the [EG LAWYERS] representative to leave the Data Room. (c) Visitors must submit to any reasonable security regulations and procedures required from time to time. (a) No document may be marked, altered, modified, varied (including varying the sequence thereof), damaged or destroyed in any way. (b)The [LAWYERS] representative in attendance at the Data Room is instructed only to supervise the operation of the Data Room. Visitors are not permitted to ask any questions of such representative as to the documents other than to ask where a certain document may be found. 3. Documentation (a) No documents in the Data Room may be either removed from the Data Room or copied. In exceptional circumstances and with prior written notice (to be submitted to [LAWYERS]) the provision of photocopies of limited numbers of documents may be considered. (b)Documents or records in files or folders or otherwise collected (and not bound or contained in a ring binder in a particular sequence) may be removed for viewing or examination but must be replaced in the same place and manner in which they were found. Documents in a ring binder or otherwise bound must not be removed from the binder or other container in which they are held. 4. Services A sandwich lunch and beverages in the Data Room can be provided if requested. A telephone for local calls will be situated in the Data Room.

We hereby agree to comply with the rules set out above. Signed by: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Date:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A duly authorised officer for and on behalf of: ..............................................

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even if not formally disclosed, it should also be noted that any deliberately or recklessly misleading information given by a seller to a purchaser in connection with a target, whether in a disclosure letter or otherwise, might constitute a breach of section 47 of the Financial Services Act 1986 (see below). As a practical point, it is often difficult for a seller to appreciate that information provided as part of the accounting due diligence exercise to, for example, the purchasers accountants, may also have to be sent subsequently to the purchasers lawyers as part of the legal due diligence and/or as disclosures. Environmental issues An area which has taken on increasing importance in recent years is the level of environmental compliance and possible contamination of land involved in the transaction. The seller is well advised to gather together some information about this subject before embarking on the sale process and certainly before any negotiations. Such information may already exist if environmental audits and internal monitoring are undertaken as part of the regular management processes within the target business and, if so, it will not be difficult for the seller to show that it is well on top of the issues and to enter negotiations from a position of strength based on knowledge. Not to know what the position is and, worse, to risk being seen by a purchaser not to care, can only be to the sellers disadvantage. If no records or reliable internal information exist, the seller can easily and reasonably cheaply commission a Phase 1 environmental report from one of the many consultants. It is possible to assemble quite a lot of information about a site on a desktop basis without visiting the site and certainly without digging holes in the ground. The terms upon which environmental consultants are retained should be settled at an early stage and examined with particular care in relation to limitations of liability and disclaimers. While the initial work may not be significant, it is easy to forget to look back at such points if more major investigations are subsequently commissioned.
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Very low liability limits are not uncommon but can often be negotiated upwards, albeit against some increase in the fees (to reflect the increased insurance premium costs to the consultant). Market position Sellers like to describe the business being sold favourably, which usually involves indicating a degree of market penetration or even dominance. This may be in direct conflict with the line to be taken in any negotiations with monopoly or anti-trust authorities from whom clearance for the transaction may be required. The best position to seek to achieve is one of flexibility in the future negotiations with regulators. By way of example, it is not unknown for the target of an unwelcome hostile bid to be arguing up its market share with the OFT in order to get the bid referred one minute and then to want to argue it down again when a white knight is found who turns out to have an existing market share as well! Misleading information and insider dealing Throughout the information disclosure process, sellers should avoid making false or misleading statements which may not only constitute misrepresentation or fraud under common law but may also be a criminal offence under section 47 of the Financial Services Act 1986 (which states that it is a criminal offence to give false or misleading information with the purpose of inducing another person to enter into an investment agreement).

Likewise, where the shares or assets of a company listed on a recognised stock exchange are involved, the seller (and the buyer) should be careful to ensure that the insider dealing provisions of the Criminal Justice Act 1993 are not breached. For example, disclosure of information to a prospective purchaser could make that person an insider as regards dealing in those securities, and disclosure of information to a third party (for example, notifying a major customer or supplier in order to seek approval of a forthcoming transfer of a business) may also make that third party an insider. While it may be necessary to make some people insiders as part of the sale process this must be done in such a way as to make them aware of the consequences and if necessary an acknowledgement of the position and an undertaking not to deal or disclose the information to anyone else should be obtained from the individuals concerned. The level of information disclosed There is a considerable amount of information which a purchaser can obtain about a seller and its company or business, often without informing the seller of the impending transaction, let alone any other person. However the purchaser will usually require much more, confidential information in assessing whether to proceed, and at what price and on what terms, whilst the seller will be concerned to preserve the confidentiality of his business. Depending on the bargaining positions of the parties, an arrangement must be reached between the parties as to the level of information disclosed. Generally the most critical information will be quite easily identifiable (perhaps a few sensitive commercial contracts) and the sellers aim (to leave such information until the last minute so as to complete the final pieces of the jigsaw) will directly conflict with the purchasers, who may want to know such details before deciding to proceed at all, and it is often solving this impasse which can help the transaction to proceed. G Andrew Collins is a solicitor with and Jonathan Macfarlane a partner in Macfarlanes.
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