Bank Mergers: Non-Disclosure Agreements – How to look at them

As the CEO of your bank going through the bank merger process, you’ve got a great deal at stake, it’s palpable.

We have discussed the importance of keeping things quiet internally (see The Savvy Banker newsletter 032 – Bank M&A: Board “Insider Agreements” is it a best practice to get them?”).

You have external concerns as well.

They are nothing less significant than the internal concerns.

Not to beat a dead horse, but any word leaking out whatsoever will have your competition putting on a full-court press to take your customers and your employees.

It would be devastating.

You’re having the interested parties sign a non-disclosure agreement (NDA) for access to your most revealing information.

It is worth pointing out there may be more there than meets the eye.

It can be a bit of relief at a time when any relief is welcomed.

The objective of the NDA is to make sure the party receiving the confidential information doesn’t use it for their own benefit.

Customer names, employee names, compensation information and other sensitive data like this are at risk.

A well-written NDA typically includes the covenant that confidential information may only be “used solely for the purpose of evaluation of the potential transaction” or words to that effect.

NDAs usually exclude certain information which doesn’t amount to a breach of the confidential clause.

Some exceptions are:

• Information that is already in the public domain.
• Information disclosed prior to signing the agreement.
• Information that was received by a third party where the third-party was not obliged to keep the information confidential.
• Information that was in the lawful possession of the receiving party before the date of the signing.

The disclosing party should always want to include a provision that all information, including physical and electronic data, should be destroyed if the parties call off the talks.

However, it’s worth noting the receiving party generally negotiates that the destruction of such records does not apply to any electronic backup storage.

An NDA is only as strong as the checkbook prepared to defend it.

That is my belief and the same goes for most legal agreements.

The biggest checkbook usually wins as it can provide the most vigorous argument or delay the process until you run out of cash.

Now, having said that, this is where I believe the NDA in this case carries more weight.

And that is reputation risk on the party that breaches the NDA.

An acquirer, especially a serial acquirer or an acquirer with aspirations of many acquisitions to perhaps build out or complete a geographic footprint as an example, certainly does not want their reputation tainted with a breach.

Word will get around the investment banking community and they will see new opportunity deal flow that slows to a trickle if not being completely shut off.

Investment bankers won’t want to be associated with that.

That gives me some comfort. I know it’s not perfect, but it does carry weight in my book.

Within the NDA, are some very good provisions that you want to make certain you have.

It’s up to you and your lawyers to get this done.

Typical NDAs prevent the signers, for a period of (generally) two years, from:

• Disclosing anything about a contemplated transaction.
• Disclosing they are having conversations with you about a transaction.
• Disclosing they are evaluating anything regarding a transaction.
• Soliciting an employee.
• Hiring an employee.
• Directly or indirectly contacting any customers, clients, or partners, of whom they became aware of through the evaluation materials.

These are just a few of the terms being agreed to and this is not complete—just some highlights for reference.

This edition of The Savvy Banker newsletter is very brief.

However, non-disclosure agreements are significant to you as CEO of the bank.

Everybody is counting on you.

An agreement like an NDA could just get lumped in with all the typical boilerplate legal agreements.

I think this serves as an example of where the implications of this particular agreement go beyond what it actually says.

There is heavy reputation risk tied to this agreement which goes beyond a transaction, or the size of the potential buyer’s resources.

I hope this view of the NDA provides some comfort to you during the process.

(As a reminder, I am not a lawyer, an accountant, or an investment banker. I am just a former bank CEO who has been in your shoes).

Action plan:

• The biggest action plan item, from my perspective, is just to pause and think about what is in this newsletter. Take some time to clear out all other thoughts you have and focus on the points discussed.
  • They have a great deal at stake if they let any word of this slip.
  • They can’t solicit or hire your employees for an agreed period of time.
  • They can’t directly or indirectly contact any customers, clients, or partners, of whom they became aware of through the evaluation materials.
• Does the agreement guaranty nothing will happen? No. There is always a risk.
• Do they have a bigger checkbook to defend their argument? You bet.
• Do they stand a great deal to lose if they let word get out, call on your customers, or hire your employees. Absolutely.

There are zero hacks or tricks in this newsletter. Just proven tactics that help you choose the right path for your bank.

Your path will:

• Inform your strategic plan.
• Guide your annual business plan and budget.
• Clarify priorities.
• And define your message so it can be communicated with confidence.

This is how savvy bankers navigate.

They build smart and valuable banks they can own forever or sell tomorrow.

I hope you found this helpful.

What are your thoughts?

I’ll see you next week.