1. M&A In the USA for foreign enterprises: The non-disclosure agreement or NDA

Issue 01-2023

The following series of posts serves as a basic overview for Italian enterprises contemplating entering the US marketplace via an acquisition of or merger with an existing US business. In this post, we discuss the initial approach to FDI in the U.S. and the roles which two initial agreements   plays in opening the door for the Italian suitor to conduct a full investigation of the subject acquisition target, namely the nondisclosure agreement and a term sheet (aka,  letter of intent or memorandum of understanding)

A foreign direct investment project carries enormous significance for the Italian client as it entails the investment of permanent capital upon foreign soil. Unlike deploying a sales channel in the United States which can easily be disbanded if sales do not materialize, a direct investment of capital into the U.S. signifies a long-term commitment of capital which can only be returned thru profit distributions, liquidation or sale of the entity. As a direct commitment of capital, it presents the highest risk level as compared to lesser forms of doing business such as foreign sales agents, distributors or licensees. With high risk of course comes high reward as the untaxed appreciation of investment capital deployed is the surest form of wealth creation.

A foreign direct investment project begins with the search for a qualified acquisition target or candidate. In many instances, the Italian acquiror may already have a target or several in consideration through its existing sales channels in the US of thru competition in the marketplace. In other cases, the services of an Investment Banker with specialization in the chosen field of interest will also present an array of possible acquisition targets. Initial contacts with the target can be made thru various channels, such as direct contact by the Italian suitor within the target organization at a high level, or thru a third-party intermediary such as the Italian enterprise’s  counsel, accountant or investment banker if employed.[1]

The initial discussions remain of course at a high level wherein the Italian suitor will explain its business and interest in expanding its operations in the US through a strategic alliance with a key business partner, such as the target. Should the target want to explore further this alliance, the next step would entail  the disclosure by the target of certain proprietary information, commonly expressed by a written Nondisclosure Agreement (“NDA”). Where the NDA covers only the protection of target’s proprietary information, the NDA is unliteral in nature whereas often times, the Italian suitor will also disclose confidential information to the Target, thus the need for a mutual NDA.

Regardless of whether the NDA is unilateral or mutual in form, the target is very concerned with the nature of the information first disclosed to the Italian suitor. In many instances, the information disclosed is closely curated by the target with often key financial or technological information only superficially disclosed. Only later in the acquisition process where a definitive term sheet or MOU is agreed upon does more fulsome proprietary information begin to be divulged.

Moreover, NDAs within the acquisition process demand careful attention and scrutiny as disputes and litigation can arise particularly where the Italian suitor decides not to follow thru with the acquisition after having the benefit of the target’s confidential information. This is particularly in play where the Italian suitor and target are competitors in the marketplace where an inartful NDA may be grounds for claims of wrongful use of the target’s confidential information in the marketplace by the ex-suitor

Also, where the target is a public company with shares traded upon a US stock exchange, there is a  standard methodology and practice which has evolved with respect to NDA’s, particularly where the target has decided to sell itself via an auction process.[2]

No matter the context of the manner in which NDA comes into play, whether in a private or public setting, the key feature for Italian suitor which an NDA grants is the right to conduct due diligence of the target within  defined time limits. Thus, the NDA is the gateway to whether a commitment of permanent investment capital by the Italian suitor is warranted. Moreover, the NDA should provide sufficient confidential information to allow the foreign suitor to decide whether to proceed with offering a term sheet outlining the basis economic and legal terms of a prospective acquisition or merger with the Target. At the same time, the NDA should be drafted in a way to avoid inadvertent constraints or unexpected limitations upon the suitor’s future activities in the US market or internationally, in the event the deal does not go through.

Under every angle, the proper drafting of an effective NDA from a suitor’s perspective is the first, crucial step on the march towards a successful acquisition deal in the US market.

Term Sheets and MOUs will be explored in the next post.


[1] An Italian suitor may also be invited to participate in an auction of the target where the Board of the target has decided to market the sale of the target thru an auction process. In this instance, the sale process is governed by strict rules  often promulgated by an Investment Banker managing the sale process. Italian companies competing in an auction process will be discussed in a separate post.

[2] See Footnote 1.