M&A Insights: Doing deals with the competition

How to prevent rivals from picking up key business information just by joining in the auction.

A seller looking for the best price for its business will often run an auction. It gives information on the business to likely buyers. The buyers submit their bids. The seller goes forward with the best bid.

But what if in that pool of possible purchasers lurks the competition?

If a rival is in fact the best bidder, then losing key business information to that rival may be an acceptable, and inevitable, price of the deal. There can be no guarantee that is how the auction will play out, however - the rival may drop out or submit an inferior bid and so be eliminated.

How, then, to prevent rivals from picking up key business information just by joining in the auction?

The seller has a number of protections it can deploy. Perhaps unexpectedly, the law is also there to help.

Information access

First, the auction is the seller’s process. It therefore controls access to the auction.

Accordingly, the seller could decide simply not to invite rivals into the process. It can also use confidentiality agreements to prevent auction participants from on-sharing any information they receive.

Deciding who should have access to information will be particularly delicate where the target is a public company. This is because, under the rules of the Takeover Code, a target company which discloses information to a bidder must then disclose the same information to any further potential bidder, even if that other bidder is unwelcome.

The principle here is that all bidders must be given access to the same information. The Takeover Panel has made it clear that this will apply even where a potential bidder is a competitor.

In providing access to information, even to a very welcome suitor, a public company target will therefore always need to consider how open to be, as it will be required to grant the same access to any other potential bidder - even if unwelcome and a competitor - at a later stage.

These concerns aside, rival players may be exactly who the seller wants in the process to maximise price. How then to guard against handing key business information naively to the competition?

Technology

Auction processes typically involve a phase of legal review, or due diligence, through a data room. This data room will be an electronic platform - the seller uploads large amounts of detailed information on the target business onto the platform for the bidders to review.

Outside the public company context where the Takeover Code considerations above may apply, the seller has a great degree of control over how the bidders then see the information on that platform - who (specifically) can see it, when they see it, what they see.

Delivery of information can be staggered, with more sensitive information withheld to later stages, when the deal seems more certain and the pool of bidders is narrowed - perhaps down to just one.

The ability to print can be withheld or controlled. Pages can be watermarked to identify the viewer and guard against abuse.

The seller can monitor which bidders are reviewing what information. Particular patterns of review may suggest particular areas of focus - and if the seller does not like a particular focus that is being applied, for example by a rival bidder, it can revisit how information is being made available.

Contract

The seller can use its confidentiality agreements to require bidders to use information which they receive only for the purposes of the transaction. Bidders who are eliminated from the process will need to return or destroy information which they are given.

Bidders can be restricted from sharing information which they receive beyond the limited group of those who need to know that information as part of evaluating the transaction.

Confidentiality commitments can also be made assignable to the successful bidder. This may be particularly important to that successful bidder - it will not want to find itself powerless to take steps directly itself against the parties that it just defeated in the auction, but that nonetheless may still hold detailed information on the target.

If confidentiality commitments are not assignable in this way, the successful buyer may be dependent on the seller taking action to enforce those commitments against unsuccessful bidders. As the seller no longer owns the business, it may not be incentivised to do so - as well as simply not wishing to have that responsibility. Equipping the buyer to help itself may therefore be in both parties’ interests.

Competition law

Quite apart from these kinds of commercial steps which the seller may wish to take, there may be a natural legal brake on the seller sharing information with the competition.

Under EU and UK competition (anti-trust) law, it is illegal for competitors to exchange competitively sensitive information. Two parties to a potential transaction will be competitors until that deal completes.

This may include information on, for example, specific pricing, discount levels, margins, volumes, sales levels, market share, commercial policy, strategy, terms and conditions, planned promotional campaigns and so on.

It may be fine for the seller to share this kind of information where it is already public. This is unlikely to be the case in practice, however.

If not public (or stale), then these types of information should not be shared on an individualised basis. Rather, they should be provided only on a more aggregated basis - so, for example, average prices, total volumes, anonymised data and so on.

This detailed information may of course be exactly the kind of information that a competitor is most interested to receive in evaluating a deal. Despite this, the law prevents key buyer staff - most notably sales and marketing staff - from accessing the information. This is to prevent the market being distorted to the disadvantage of customers, and to the detriment of competition.

Bidders who are determined to receive these kinds of information may still do so, but only through a “clean team”. This clean team may be made up of, for example, external consultants, financial advisers, accountants, lawyers or staff in appropriate non-customer-facing functions - in any event, individuals who are not involved in sales, marketing or other business decisions of the buyer in respect of the relevant market, from whom the clean team must be separated by robust internal information barriers.

The clean team may therefore gain access to necessary data for their own analysis but may then feed their conclusions back to colleagues in the wider buyer team only where they do not thereby transfer any competitively sensitive information. Specific confidentiality agreements will need to be in place addressing this.

Conclusions

Sharing competitively sensitive information between competitors is against the law. This of itself will therefore provide both a strong incentive and a cogent rationale for a seller to keep key business information from its rivals.

More generally, other techniques - whether technological or contractual - can assist a seller in keeping close control over its valuable information through a sales process. Armed with these, a smart seller can do much to open up a process whilst still closing down its risks.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.