Friday, November 27, 2015

Disclosures under Non-Disclosure Agreements?

[The following guest post is contributed by Yogesh Chande and Malek-ul-Ashtar Shipchandler of Shardul Amarchand Mangaldas. Views expressed herein are personal and solely that of the authors.]

A recent post titled “Confidentiality Agreements in M&A Transactions” (available here) discussed confidentiality agreements in the context of a US based M&A transaction. From a view point of insider trading laws vis-à-vis conceptualizing and drafting confidentiality agreements in Indian M&A transactions, Regulation 3(4) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“Insider Trading Regulations”) is of significance.

Regulation 3(4) of the Insider Trading Regulations mandates the execution of a non-disclosure agreement (“NDA”) for purposes of communicating, providing, allowing access to or procuring unpublished price sensitive information (“UPSI”) between parties to a transaction which under Regulation 3(3) of the Insider Trading Regulations (i) triggers an open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) and (ii) which does not trigger an open offer under the Takeover Regulations.

Regulation 3(3) of the Insider Trading Regulations states:

“Notwithstanding anything contained in this regulation, an unpublished price sensitive information may be communicated, provided, allowed access to or procured, in connection with a transaction that would:–

(i) entail an obligation to make an open offer under the takeover regulations where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company;

(ii) not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company and the information that constitute unpublished price sensitive information is disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine.”

Regulation 3(4) of the Insider Trading Regulations states:

“For purposes of sub-regulation (3) the board of directors shall require the parties to execute agreements to contract confidentiality and non-disclosure obligations on the part of such parties and such parties shall keep information so received confidential, except for the purpose of sub-regulation (3), and shall not otherwise trade in securities of the company when in possession of unpublished price sensitive information.”

The Insider Trading Regulations do not appear to envisage an otherwise very common scenario: (i) what happens if an investor is provided with UPSI in connection with a proposed transaction that does not consummate? or (ii) what happens if a target company allows multiple due diligences to be conducted on itself wherein more than one investor is allowed access to UPSI of the target company to conduct its due diligence and subsequently only one investor consummates the transaction with the target company?

In such situations, the investor (and its lawyers, auditors and consultants who have received UPSI during the due diligence) who is not going ahead with the proposed transaction assumes a precarious situation: the investor being privy to the UPSI is barred from trading in the securities of the target company. It therefore becomes imperative to answer the question as to when such investor can resume trading in the target company’s securities. Trading restrictions can only be lifted when investors have been “cleansed” of the UPSI that they received, i.e., when the UPSI in their possession no longer gives them an informational edge over other market participants.

If either of the transactions contemplated under Regulations 3(3) of the Insider Trading Regulations do go ahead, the cleansing process is automatic viz.

(i) the note to Regulation 3(3)(i) of the Insider Trading Regulation states:

NOTE: It is intended to acknowledge the necessity of communicating, providing, allowing access to or procuring UPSI for substantial transactions such as takeovers, mergers and acquisitions involving trading in securities and change of control to assess a potential investment. In an open offer under the takeover regulations, not only would the same price be made available to all shareholders of the company but also all information necessary to enable an informed divestment or retention decision by the public shareholders is required to be made available to all shareholders in the letter of offer under those regulations.”

and

(ii) Regulation 3(3)(ii) states of the Insider Trading Regulations states:

“not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company and the information that constitute unpublished price sensitive information is disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine.”

On the other hand, if the transaction does not occur or is postponed, practically speaking, companies are unlikely to announce aborted or postponed transactions. Thus, the investor who is in possession of UPSI finds itself in a grim situation of not knowing whether the information they have received still constitutes UPSI or whether they can resume trading.

To “cleanse” such investor: (i) the target company should be required to make a public disclosure of the UPSI provided to such investors or (ii) the UPSI must no longer remain relevant (e.g. the UPSI has been outmoded by subsequent events that have been disclosed).

With respect to point (i) in the immediately preceding paragraph, the NDA could encapsulate a provision stating to the effect that in the event the proposed transaction is aborted or delayed by “x” number of days, the target company must make the UPSI shared during the negotiation/due diligence stage with the investor “generally available” (as defined under Regulation 2(1)(e) of the Insider Trading Regulations) and that in an event the target company fails to do so, the investor would have full prerogative to make such UPSI “generally available” in order to “cleanse” itself. The NDA could also specify the kind of information that would be treated as UPSI or indicate a folder on the virtual data room which comprises only of UPSI (since the definition of UPSI under Regulation 2(1)(n) of the Insider Trading Regulations is indicative and not exhaustive) – this would avoid conflicts between the investor and target company in determining what information is UPSI at the time of dissemination, if a proposed transaction is aborted/delayed and the investor wishes to “cleanse” itself.

- Yogesh Chande & Malek-ul-Ashtar Shipchandler

1 comment:

Anonymous said...

It seems that the article assumes it is (or should be) the target company's obligation to "cleanse" a potential investor, after having provided such investor unpublished price sensitive information during a due diligence exercise. If a balance is to be drawn between the ability of an investor to trade in the shares of the target and the protection of confidential price sensitive information of the target, it should be the duty of a listed company to ensure that protection of its confidential information takes primacy while executing NDAs and allowing due diligence access to the investor.

In any event, the investor may take comfort from the fact that under the Listing Obligations and Disclosure Requirements Regulations, 2015, a listed company is required to disclose all "material" information and events and one of the tests for determining "materiality" of any event or information is whether such information or event will trigger a "significant market reaction".