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I n my prior column, I wrote about the protection of commercially sensitive information in a merger

investigation and challenge by the government. In this column, I ad-dress the protection of confidential information between the merging parties themselves.

Confidentially issues frequently arise in mergers between competi-tors, which are defined as “hori-zontal mergers.” The parties are competitors because they sell or manufacture products that are substitutes. They compete to entice customers to buy one party’s prod-ucts over the other’s. By definition, each of the parties will have compet-itively sensitive information which, if they were to remain competitors, they would not want the other party to know. This includes information about prices, costs, output, future marketing strategies and future product development.

Until the parties close, they remain competitors. Indeed, if they began to “collude” on decisions regarding these areas, they would have violated the antitrust laws. The

Jeffery cross, is a columnist for Today’s Gen-eral Counsel and a member of the Edito-rial Advisory Board. He is a

partner in the Litigation Practice Group at Freeborn & Peters LLP and a member of the firm’s Antitrust and Trade Regula-tion Group.jcross@freeborn.com

T HE A N T I T RUS T L I T IGAT OR

Protecting Confidential Information from a Potential Merger PartnerBy Jeffery M. cross

government refers to this as “gun-jumping.” (See my column “Take Control of the M&A Process” in the December/January 2015 issue of Today’s General Counsel.)

The process of protecting confi-dential information begins before the completion of an asset or share purchase agreement. This is true even if the parties to the merger or acquisi-tion have been identified. It is especially true in an auction. During the auction process, parties will express an inter-est in acquiring the seller or the seller’s assets. These interested parties will want to review information and data to facilitate their bids. In many cases such information may be confidential and commercially sensitive.

The first step in protecting con-fidential information is to prepare a “Confidentiality Agreement.” Employees of the acquiring party or a potential bidder in an auction should not have access to confidential information unless they have signed a confidentiality agreement. It should put limits on access to current and fu-ture competitively sensitive informa-tion. One way is to limit the type of employee that can have access to such information. The information should not be made available to employees who are making decisions about price, output, marketing strategies, and future product development.

As for the type of information that should be restricted, the “touchstone”

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test that I suggest to my clients is whether it is information they would want their competitor to have if the deal fell apart.

Another way to limit access to competitively sensitive information is to use a virtual data room. There are many financial and corporate service companies that can provide virtual data rooms. The client can down-load data and documents into the virtual data room, then employees of the other party can access such data and documents electronically using security features such as passwords. Access can be restricted to specific documents or types of documents. Indeed, the best virtual data rooms can provide security to the page and even the character level. In addition, the party providing documents and data can see who is accessing the data room and what they are seeing down to each second of access.

Finally, the downloading and printing of documents and data can be restricted. This makes it more difficult for a confidential document to be inadvertently forwarded to an employee who should not be permit-ted to view it.

I recommend to my clients that they place more restrictions on the access of competitively sensitive information early on in the process, and relax that access as the process moves towards closing.

For example, in a bid or auction process, parties may want to see confidential information and data in order to make a bid. Many compa-nies that will remain competitors will potentially be seeing confidential in-formation. In this situation, I recom-mend that the potential bidder have access only to historical information, and in many cases, aggregated data.

Sometimes it is necessary to mask certain information. In one recent deal that I was involved in, a bidder wanted to know contract expiration dates. This was clearly competitively sensitive information. If the com-petitor knew when contracts with a customer would expire, it could solicit that customer. I recommended

that the client provide that informa-tion, but assign numerical identifiers to each customer. The bidder also wanted to know the dollar value of each customer, and the client felt that such information would poten-tially allow the competitor to iden-tify certain large customers. In that situation, I recommended that the client provide ranges of dollar value on expiration dates.

One potential solution to an acquir-er that insists on detailed information is to require the use of a third-party “clean-team.” The third party, such as an accounting firm, would be permit-ted to review detailed confidential and commercially sensitive information

and prepare an aggregated report to the acquiring company. Of course, this necessitates an agreement with the third party that restricts how the data can be presented.

Protection of a party’s commer-cially sensitive information should also be built into the asset or share purchase agreement. I always recom-mend that the purchase agreement provide that a party have the ability to designate certain data and docu-ments as “Confidential – Outside Counsel Only.”

The purchase agreement also frequently addresses the sharing of each party’s Hart Scott Rodino (HSR) submission to the government. Confidential information included in a party’s HSR submission should also be protected. For example, the HSR Notification and Report Form calls for the submission of potentially commer-cially sensitive information in Items 4 through 7. These include internal

marketing studies, revenue informa-tion and ownership data. Sometimes parties to a merger or acquisition will include in the purchase agreement that only Items 1 through 3 can be shared. These items cover basic identification information as well as a description of the transaction.

I recommend to my clients, how-ever, that they also share documents and information covered by Items 4(c ) and 4(d). These items call for the production of studies, surveys, analyses and reports prepared for the purpose of evaluating or analyz-ing the acquisition with respect to market shares, competition, competi-tors, markets, the potential for sales growth or expansion and synergies. If the purchase agreement permits either party to designate material as “Confi-dential – Outside Counsel Only,” the commercially sensitive nature of this information should be protected.

I counsel my clients, however, that it’s important for the lawyers representing both merging parties to have access to this material in order to evaluate whether there are antitrust issues that might require a proactive effort with the agency involved. Often these materials are the only documents and data that the agencies will see prior to permitting the merger to close or asking for ad-ditional information.

A merger or acquisition can be an exciting venture that results in syner-gies and pro-competitive benefits. Counsel should not forget, however, that until a horizontal merger closes, the parties are competitors, and com-petitively sensitive information and data should be protected. ■

The best virtual data

rooms can provide secu-

rity to the page and even

the character level.