When exploring possibilities for a company merger,
an acquisition of assets, or just a simple business arrangement, the standard
and most effective approach to this challenge is through a letter of intent
with a confidentiality provision. The advantage of this strategy is that you
can “test the waters” of entering a potential business relationship without
losing control of any information you deem proprietary.
Within
any letter of intent, exclusivity and confidentiality are key elements;
business interests are mutual, and neither party should divulge or share any of
the private information contained in the letter with third parties. It’s
important to note that while all letters of intent always include a
non-disclosure or confidentiality provision, a non-disclosure agreement can
also stand alone or serve as an addendum to other contractual documents.
When
developing a letter of intent, your desired goals need to be spelled out and tailored
specifically to the proposed business relationship you’re seeking. You also
need to state any contingencies that make the business relationship
conditional. These provisions usually relate to financing or logistics
requirements, which if not satisfied, will void the proposed agreement. Equally
important, you need to secure some protection for both parties regarding
sensitive or confidential information. A non-disclosure provision allows you to work together without fear
that you’re going to be subverted or undermined by someone else’s actions —
perhaps a price-bidding maneuver, high or low, depending on your positioning.
Recently, I helped two
companies in merging their businesses into one larger operation, all of which
began with a letter of intent to explore the possibilities. Part of that process
required the sharing of financial records, private information that no company
wants escaping into the public domain. Consequently, we created a
non-disclosure provision citing mutual confidentiality in exchanging certain
information. We needed to confirm that if the business relationship were not
successful, then all the exchanged documents on paper would have to be returned
or destroyed, including originals and photocopies, and that an agreed-upon
mechanism for purging sensitive e-mails and attachments would have to be
established.
I generally advise setting
a long-term non-disclosure period, regardless of the planned success or
unexpected failure of the business relationship, and that any exchanged information
shared outside of the signing parties within their respective organizations should
be on a strictly need-to-know basis. In proposed agreements where
subcontractors may be involved, they too must be bound by the same terms of
confidentiality contained in the original letter of intent and sign a
non-disclosure agreement.
As noted earlier,
exclusivity is important, much like having a serious, committed relationship
with someone — engaged but not yet married. In fact, any letter of intent
should always point out that during the course of specific business
negotiations, both parties are mutually exclusive and must not deal with anyone
else with the same agenda. In other words, both parties need to be able to
proceed in good faith with some assurance that they are going to be working together
exclusively during the term of the letter of intent. As in the case of a
personal engagement that doesn’t work out, if the business relationship doesn’t
come to fruition, then either party is free to pursue further transactions with
other parties.
In summary, it is
important to remember that the primary objective within any letter of intent is
to assure exclusivity and confidentiality regarding the business relationship
you’re proposing and to ensure an effective negotiation, with all parties
protected.
