This article has been written by Riya Dubey pursuing a Diploma in Merger and Acquisitions (PE and VC transactions) from LawSikho.
Mostly high value is decided by the buyer and seller in M&A transactions for maintaining the confidentiality of the deal. The buyer’s concern is if any information will be leaked it will result in competition for the deal and the seller’s concern is that leak of any confidential information will result in the widespread knowledge of an impending M&A deal. Another concern of the seller is that if the pending M&A deal comes into the knowledge of the public and ultimately falls through, the seller will be left with no option but will be less leveraged for all the other buyers and there are chances that it could be labeled as “damaged goods”.
In this article we are going to discuss “What’s the role of social media in due diligence, is there any confidentiality risk associated with social media due diligence during an M&A transaction, what are the consequences of breaching the confidentiality agreement, what are the consequences of breaching the confidentiality agreement, and what are the takeaways?”
What’s the role of social media in due diligence?
- Often we see that we hesitate in trying new products and services and stick to the brands we are using. The same is with potential new business partners who maybe are not able to recognize the value of the merger or acquisition. In such conditions, we can make good use of social media for giving reassurance to its customers and potential business partners of the advantages of reorganization through merger or acquisition.
- Many times companies fail to notice the pitfalls during the merger or acquisition. And this decreases the chance of getting success. Social media can be used for communication and for creating synergy across the reorganized companies. For example merger between Schneider Electric and Invensys, post-merger the competition was sponsored by Invensys and Schneider Electric amongst its employees for commenting and posting pictures which shows what “Better Together” meant for the two companies. And the corresponding amount was donated for charity by Schneider Electric for every post.
Is there any confidentiality risk associated with social media due diligence during an M&A transaction?
During the initial stage of an M&A, transaction parties limit the information to very few people i.e. to the key members from the founder’s or the seller’s side and the due diligence team from the investor or buyer side. Therefore, the confidentiality clause is made binding in a term sheet. Often, a confidentiality agreement is the first agreement in which the parties enter. It assures that the information which has been exchanged between the parties will not be disclosed and will be kept confidential. It even prevents the buyer from hiring the key employees and managers of the seller.
Confidentiality plays a very crucial role in buying or selling a business. And if any confidential information gets leaked it can derail the transaction and have a negative impact on the ongoing business operations. This looks efficient and beneficial from the investor’s or buyer’s perspective but there is a certain risk that is associated with this kind of approach of doing due diligence. For example, there have been cases in the past where employees from the seller end notice an increase in the amount of activity on the LinkedIn account from the investor’s or buyer’s end. And this can put the pending M&A transaction from the seller’s end at risk. This can have an impact on the seller’s management team and can even distract employees of the seller.
Other than the above-mentioned issue there are few more direct or indirect ways by which social media due diligence can leave shreds of evidence behind which can leverage the M&A transaction for both the buyer and seller.
We can take the example of LinkedIn. It has an option of view box known as “People also viewed” through this option we can see what other profiles have recently viewed. This feature can be used to infer useful information without many technicalities. The seller can even use this to ascertain whether the M&A team from the buyer side, that is viewing its employee’s profile, is also viewing the employees of prospective targets or not.
The same can be beneficial for the buyer or investor too. The buyer can even perform similar due diligence on the seller. Thus, the seller should behave more conservatively while negotiating. In both ways, this is going to be beneficial for the seller since they will be able to notice the efforts being made by the buyers in social media due diligence. The buyer will get to know whether the seller is in contact with other potential buyers. Even third parties can know about the M&A transaction by monitoring this data.
It is not only that certain sites provide the background of the target companies employees but there are web analytics tools that can be used by the buyer and even this technique can even give the flag to the employees of the target company about the transaction which maybe is going to happen. And can have an impact on the seller’s employees.
What are the consequences of breaching the confidentiality agreement?
In an M&A deal, it is generally prohibited to disclose or use any confidential information of the parties involved. The agreement usually puts the risk of the breach on each and every party involved in the transaction if the breach of agreement occurs by any “officer, director, employee or agent” of the parties. Thus, any confidential information if leaked outside the company results in a breach of an agreement. But the leak of confidential information doesn’t need to be outside the company, which can very easily result from disclosing the information to those who were involved in the transaction. Elements that are mostly covered by the confidentiality clause are as follows:
- Identities of the parties;
- Definition of what will be the confidential information;
- The timeframe should be defined clearly;
- Legal implication for disclosing;
- The return or destroying of the confidential information;
- Remedies; and
- Attorney’s fee.
In case of a breach, the aggrieved party can get remedies as per the agreement they have entered into like, the court can ask the party who breached the agreement to award the specific amount if (i.e. liquidated amount) if they have mentioned in the agreement, or, the court can ascertain the amount of loss the aggrieved party has suffered and ask the breaching party to pay the amount, or the court the ask the breaching party to pay the amount of profit that they have made by breaching the agreement (disgorgement) or even criminal action can be taken in certain cases like if it has affected the company severely or if there is some theft of intellectual property, etc.
- Both the buyer and seller can agree that they will not perform social media due diligence on each other’s employees. They can ask for all the essential information from each other instead of doing social media due diligence or they can collect it from other public sources; or
We can ask the seller to allow social media due diligence to the buyer but in a restricted manner like putting a condition that it should not result in “tipping off” to the seller’s employees. The buyer should be allowed to do due diligence on employees but by keeping themselves anonymous.
“The Buyer shall not use any internet or social networking sites for ascertaining any information regarding the seller or its employees if that can result in informing or alerting any employee or consultant of the seller that both the buyer and seller are having a discussion regarding the purpose.”
2. If the parties are involved in the agreement that the buyer’s careless due diligence should not be done in such a way that creates the risk of a breach to the seller then the confidentiality agreement should be drafted in such a way that it reflects this risk.
“The sole responsibility of the breach of confidentiality provisions shall be of the Buyer if breach results from any direct or indirect action of the Buyer that violates the provision of the agreement which violates using the Internet, including social networking sites without limitation, for gathering information of the seller or its employees.”
The internet has made our lives very easy but social media due diligence has certain risks associated with the M&A transaction. The use of the internet and social media acts as a backdrop in maintaining the confidentiality of transactions and can have a negative impact on the ongoing M&A transaction since it leaves behind certain shreds of evidence that can be very easily used by the other party and even by the third parties to draw some inferences. Thus, the parties should address all the risks that can be associated with the transaction and enter into a proper confidentiality agreement to mitigate the risk associated with social media due diligence during an M&A transaction.
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