In any transaction process, two of the most important considerations for a company are:
1) where to draw the line as to what is considered confidential information
2) at what point confidential information is shared.
The dividing line of what is and isn’t confidential depends on what a company is willing to share without first entering into a CDA (Confidential Disclosure Agreement). The CDA, in its most basic form, is a document that lays out the terms and conditions under which a company will share its confidential information with a third party and includes what rights the company has if confidential information is shared or used in violation of the specific purpose described in the CDA. This means that once a third party enters into a CDA, it is committing itself to restrictions on what it can and can’t do with the information it learns (or has learned) going forward. In human relationship terms, it is the transition from casual conversation to deciding to go on a first date.
There are strategic considerations as to when a company should request a potential partner enter into a CDA. To extend the dating metaphor, a company needs to determine how much of itself it wants to share with the potential partner before asking to go on that first date (it is almost always the sell-side partner who asks the other out). Share too little and the potential partner is likely to pass on the asset because of its inability to understand the opportunity; share too much and the company’s most important information becomes publicly available, which can never be reversed, and the potential partner has no restrictions on what they can do with that information. There is, therefore, a necessary balancing act in which the company needs to provide enough detail on the asset to get potential partners interested in the opportunity, but not share so much information that the company’s interests are harmed. Ultimately, it comes down to the attractiveness of the asset – the more desirable the asset and the more interested potential partners, the easier it is for the company to keep more information confidential. Whereas, if it is difficult to find interested partners, it may become necessary to share more information than originally desired. By having realistic expectations of the number of likely partners and a true understanding of its most important information, the company can usually find the right balance of what information to share prior to a CDA.
Even once a CDA is in place, selectively sharing information in the data room is a useful control lever to ensure information is only shared with those partners most interested in pursuing a transaction. Most interested potential partners have their own assets in the same therapeutic area in development on the market and company’s should acknowledge the risk that it is possible a prospective partner is on a competitive intelligence gathering mission rather than actually interested in the asset. While this is certainly not typical of most prospective partners, the company is still laying itself bare and should consider what steps it can take to protect itself just in case. By holding back certain information (for example, FDA correspondence, customer lists, trade secrets, and detailed development plans) until a potential partner first submits a bona fide indication of interest or even an initial bid, it helps protect the company against sharing information with potentially non-serious partners. As an added benefit, a stage-gated transaction process helps create the sense of a competitive dynamic, regardless of the number of other parties actually interested in the asset. It also helps ensure the company isn’t inappropriately using its limited resources with management presentations or follow-up diligence meetings and calls with a partner that is not serious about doing a transaction. As with the CDA, however, it is important to ensure the partners have enough information to make an informed enough decision about whether to use their own resources to take the next step in the process. If done correctly, what results is a streamlined transaction process that filters out unlikely partners and allows the company to identify the partner it wants to transact with.
Ultimately, all transactions are different and it is up to the company and its advisors to help determine the right balance with respect to the company’s confidential information and when in the process it is shared. CDAs and stage gating confidential information for diligence are important tools, but depend on the required timelines to consummate a transaction, competition for the asset and the nature of the specific confidential information for the asset. It takes experience to know how to use CDAs and data rooms to one’s advantage for a particular transaction.
To learn more about how to best structure a transaction process, including what information should be shared on a non-confidential basis prior to entering into a CDA and how to determine what process is best for a particular situation, you can attend the next Locust Walk Institute course on business development and financings, May 3-4, 2017 in San Francisco.
Written by Andy Meyerson