Confidentiality Agreements andLetters of Intent

R. Hector MacKay-Dunn, Q.C. , Senior PartnerChristopher Gora, AssociateBrigham H. Jagger, AssociateFarris, Vaughan, Wills & Murphy LLPE-mail: hmackay-dunn@farris.com Calgary Conference

April 26 & 27, 2007

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Outline

1. Introduction

2. Confidentiality Agreements• Purpose• Key Elements• Cases of Interest

3. Letters of Intent• Purpose• Key Elements• Cases of Interest

4. Questions and Answers

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INTRODUCTION

Typical Transaction Timeline

Identify Target

Initiate Contact

ExecuteCONFIDENTIALITY

AGREEMENT

Conduct DueDiligence

Execute LETTEROF INTENT

NegotiateDefinitiveAgreement Finalize Definitive

Agreement andClose Transaction

Confidentiality Agreements

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Confidentiality Agreements

⇒ Purpose

– To allow for the free flow of information in connection with theevaluation of a potential transaction

– To control the transaction process (i.e. managing the progress ofthe transaction: due diligence evaluation offer closing/non-completion)

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Confidentiality Agreements (Cont’d)

⇒ Key Elements (Outline)

1. Receiving Party

2. Definition of Confidential Information

3. Carve Outs from Definition

4. Non-Disclosure and Restricted Use of Confidential Information

5. Return and Handling of Confidential Information

6. Confidentiality of Discussions and Existence of ConfidentialityAgreement

7. Standstill

8. Non-Solicitation

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Confidentiality Agreements (Cont’d)

1. Receiving Party

– The receiving party generally includes:

• The receiving party’s representatives (i.e. counsel, lenders,bankers, co-investors and other advisors)

• The receiving party’s affiliates

– Include representative and affiliates only if they agree to be placedunder the same confidential obligations as the receiving party

– The receiving party should be responsible for any breach by itsrepresentatives and/or affiliates

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Confidentiality Agreements (Cont’d)

2. Definition of Confidential Information

– Confidential information generally includes:

• Non-public information (business v. technical) concerning thedisclosing party’s business

• Reports, summaries, compilations and and other material orinformation derived from such confidential information (i.e.“Evaluation Materials”)

• Information disclosed by third parties under an obligation ofconfidentiality

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Confidentiality Agreements (Cont’d)

3. Carve Outs from Definition

– Information that:

• is or becomes generally available to the public

• is or becomes available to the receiving party on a lawful or non-confidential basis

• is independently acquired or developed by the receiving partywithout access or reference to the confidential information

• is required to be disclosed by law

• the disclosing party consents to being disclosed

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Confidentiality Agreements (Cont’d)

4. Non-Disclosure and Restricted Use of Confidential Information

– Restricted to the “Permitted Purpose”

– “Permitted Purpose” should be narrowly defined

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Confidentiality Agreements (Cont’d)

5. Return and Handling of Confidential Information

– At the end of term, or upon request, the receiving party mustpromptly return or destroy all confidential information

Issues:

• Destruction of Evaluation Materials

• Archiving to verify compliance

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Confidentiality Agreements (Cont’d)

6. Confidentiality of Discussions and Existence of ConfidentialityAgreement

– To avoid public speculation regarding a potential transaction

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Confidentiality Agreements (Cont’d)

7. Standstill (Key Elements)

1. Common Terms

2. Special Terms

3. Time Frame

4. Potential Carve Outs

5. Who Should the Standstill Provisions Apply To?

6. Auction Process Issue - Should the Standstill Fall Away?

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Confidentiality Agreements (Cont’d)

⇒ Standstill - Common Terms (Typically Seen in Public CompanyAuction Processes)– The receiving party will not (without the consent of the disclosing

party):• trade, or otherwise deal in the listed securities of the disclosing party• acquire assets or property• solicit any proxies• attempt to control the board• make any disclosure about the potential transaction• assist any other person to do anything inconsistent with the

confidentialilty agreement

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Confidentiality Agreements (Cont’d)

⇒ Standstill - Special Terms

– The receiving party WILL NOT ask the disclosing party to amendor waive the standstill

– “Most Favoured Nation” clause

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Confidentiality Agreements (Cont’d)

⇒ Standstill - Time Frame

– A number of factors at play including: the complexity of thetransaction, market activity, the leverage of the disclosing partyand the regulation of the industry

– Market Range: 9-18 months

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Confidentiality Agreements (Cont’d)

⇒ Standstill - Potential Carve Outs

• De minimis acquisition of securities (caution)

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Confidentiality Agreements (Cont’d)

⇒ Standstill - Who Should the Standstill Provisions Apply To?

– Receiving party

– Receiving party’s representatives (counsel, bankers, otheradvisors)

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Confidentiality Agreements (Cont’d)

⇒ Standstill - Auction Process Issue (Should the Standstill Fall Away?)

– No

• Unless the disclosing party approves

– Yes

• Bona Fide unsolicited third party offer

• Announcement of a negotiated transaction

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Confidentiality Agreements (Cont’d)

8. Non-Solicitation

– Employees, key customers or suppliers

– Market Range: 12-24 months

– Carve out examples:

• Does not apply to employees who:

– independently approach the receiving party

– respond to general solicitations

• Does not apply to customers or suppliers who:

– are known to the receiving party

– independently approach the receiving party

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Confidentiality Agreement Cases of Interest

⇒ Aurizon Mines Ltd. v. Northgate Minerals Corp. [2006] B.C.J. No.1584

– Issue: Is a receiving party bound by the standstill provisions of aconfidentiality agreement if no confidential information has flowedbetween the parties?

– Finding: Yes

– Ratio: All obligations contained in a confidentiality agreement areenforceable unless the agreement specifically states otherwise orincludes exceptions or qualifications

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Confidentiality Agreement Cases (Cont’d)

⇒ Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust[2007] O.J. No. 908 (decision upheld by Ontario Court of Appeal)

– Issue: Can covenants in a definitive agreement be used toenforce standstill provisions in the confidentiality agreement?

– Finding: Yes

– Ratio: A board can agree to a definitive agreement that preventsthe company from later considering alternative or superiorproposals from parties who have lost out in a bidding process andwho are bound by a standstill provision with the issuer

Letters of Intent

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Letters of Intent

⇒ Purpose

– To facilitate the start of a transaction between the parties byidentifying the key business and contractual concepts that will formthe basis of the definitive agreement

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Letters of Intent (Cont’d)

⇒ Factors favouring the use of a Letter of Intent

– Third party (lender) requires evidence of an intention to proceedwith the transaction in order to grant concessions (e.g. re-extending maturity dates, waiving defaults, etc.)

– Initiate regulatory approvals

– Need to focus the parties on difficult and divisive issues

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Letters of Intent (Cont’d)

⇒ Factors against the use of a Letter of Intent

– Potential use in litigation proceeding

– Possible creation of an implied duty to negotiate in good faith

– Vendor may be seen as “damaged goods” if letter of intent issigned but deal falls through

Disclosure Issue:

• Potential obligation to make timely disclosure for publiccompanies

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Letters of Intent (Cont’d)

⇒ Key Elements

– Binding vs. Non-Binding – the most litigated issue

• Binding Provisions:

– Confidentiality and non-solicitation (this can beincorporated by reference if a confidentiality agreementexists)

– Exclusivity

– Term and survival

– Costs

– Representations and warranties

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Letters of Intent (Cont’d)

⇒ Key Elements (Cont’d)

• Non-Binding Provisions:

– Transaction structure (i.e. negotiation and timing of thedefinitive agreement)

– Price and Payment terms

– Conditions to closing

– Due Diligence

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Letter of Intent Cases of Interest

⇒ Re AiT Advanced Information Technologies Corporation – SecuritiesCommission Settlement Agreement re “Timely” Disclosure of PendingTransaction - February 26, 2007

– Issue: At what point would a binding or non-binding letter of intentbe a material change subject to disclosure under applicablesecurities laws?

– Outcome: Although the determination of when a material changehas occurred is by its nature fact specific, the AiT settlementreinforces the importance of making timely and accuratedisclosure with respect to possible mergers and acquisitions

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Questions and Answers

Confidentiality Agreements andLetters of Intent

R. Hector MacKay-Dunn, Q.C., Senior PartnerChristopher Gora, AssociateBrigham H. Jagger, AssociateFarris, Vaughan, Wills & Murphy LLPE-mail: hmackay-dunn@farris.com

Calgary ConferenceApril 26 & 27, 2007