408 12 Acquisition of Shares in a Privately-owned Company for Cash
The Directive on market abuse provides for a duty to disclose inside informa-
tion to the public.^4 There is nevertheless a right to delay disclosure, provided the
public is not misled and the confidentiality of information is ensured.^5 Disclosure
of inside information to any third party triggers a duty to make the same informa-
tion public, unless confidentiality is ensured.^6 In other words, the issuer must use
NDAs.
The Directive on market abuse and implementing legislation require permanent
company-specific insider lists that are regularly updated. The persons required to
draw up lists of insiders must take the necessary measures to ensure that any per-
son on such a list that has access to inside information acknowledges the legal and
regulatory duties entailed and is aware of the sanctions attaching to the misuse or
improper circulation of such information.^7
Stock exchange rules can require project-specific insider lists. Such lists will be
drawn up before the commencement of takeover negotiations.
Data room. Data room is a place that contains documents (or computer files)
that help the acquirer to verify the seller’s representations and warranties. There is
thus a link between the contents of warranties (section 16.2), due diligence (Chap-
ter 13), and the contents of the data room. The data room helps the target to re-
strict access to confidential information not required for the purposes of the trans-
action.
12.3 Preliminary Understanding..................................................................
The negotiations will give rise to direct costs. The parties must invest in the pro-
duction and exchange of information, and pay fees for legal and other advice.
There are indirect costs caused by the involvement of management in negotiations
rather than in the actual running of the firm’s business. The talks can leak out, up-
set a party’s stakeholders, and increase the volatility of a party’s share price. Fur-
thermore, the negotiations can attract competing bidders and investors trying to
make money from blocking the deal.
For these and many other reasons, the preliminary discussions as to price, struc-
ture, and other factors will often be concluded by the signing of a letter of intent or
a similar preliminary contract.
A letter of intent is a way to manage information and risk. A letter of intent can
become necessary because there comes a point during the negotiations (a) when it
is not reasonable or safe for the seller or the target to disclose more information or
invest in its production unless they can be relatively sure of the acquirer’s serious
intent to buy (rather than to merely gain access to business secrets) (b) but the ac-
quirer does not yet want to be bound because the acquirer does not possess suffi-
cient information about the target.
(^4) Article 6(1) of Directive 2003/6/EC (Directive on market abuse).
(^5) Article 6(2) of Directive 2003/6/EC (Directive on market abuse).
(^6) Article 6(3) of Directive 2003/6/EC (Directive on market abuse).
(^7) Article 5(5) of Directive 2004/72/EC.