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When it is decided to enter into negotiations to carry out a sale of a company or part of its shareholding, the preparatory phase (prior to the signing of the sales contract or Shares Purchase Agreement “SPA”) is of great importance, and can frustrate the operation as a whole if it is not given the appropriate attention.

At Devesa & Calvo, we use four types of agreements prior to the signing of any SPA, as follows:

1. Non-disclosure agreement or Confidentiality Letter.

Preliminary deals between the parties to the transaction are not normally binding on them, with one exception: there is one obligation that must always be assumed, in order to guarantee that both parties will preserve the confidentiality of the transaction, and that is the NDA.

During the negotiation process, it is common for the parties to exchange documents by means of which they define their mutual positions in the purchase and sale process, and for this reason, the figure of the confidentiality letter becomes particularly relevant, which consists of a document that obliges the parties to guarantee each other certain privacy, with regard to the existence of the business opportunity, but also in relation to the information that they may reach through their negotiations and any confidential documentation that the other party has sent to them and that is considered especially important to safeguard its secrecy.

This document may treat as confidential all information exchanged between the parties, whether or not it is expressly identified as “confidential”, and whether it is provided orally or in writing.

The exclusions specific to confidential information are as follows:

(a) Information which the receiving party could prove that it had in its possession before it was disclosed by the party providing the information;

b) Information that was in the public domain prior to the signing of the NDA, and information that subsequently falls into the public domain for reasons that are not attributable to the receiving party;

(c) information that the receiving party can prove that it received from a third party on a non-confidential basis if that third party is not bound by an obligation of confidentiality;

d) Information that the receiving party can prove was developed by the receiving party or was available to the receiving party by its own means prior to the NDA or was developed by its employees who did not have access to the Confidential Information.

e) Information that is required to be disclosed by law, or by means of a judicial or administrative order. In this case, it is usually agreed that the receiving party will notify the sending party, as soon as it becomes aware of this obligation, which is obliged to share certain confidential information, expressly indicating which confidential information has been requested so that the former can take all the necessary steps to mitigate the effects of such disclosure.

Normally, the breach of the confidentiality obligations assumed by the parties is subject to high indemnities considered as a penalty clause.

2. Lockout letter or Reservation Document.

It is common for one of the parties to demand a certain degree of exclusivity in the negotiation from the other party, for a certain period of time until the terms of the negotiation are agreed upon or, on the contrary, the other party withdraws from the negotiation. By means of a Lockout letter, the parties (or only one of them) undertake not to negotiate with third parties about the company that is the subject of the negotiation. This is intended to avoid interference in the negotiation by third parties aspiring to collaborate in the project, guaranteeing the reliability of the negotiations and avoiding competition until the parties establish the basis for the negotiation.

While there are infinite possibilities for agreeing with this reservation, there is no defined typology of these documents, which are notable due to their diversity.

3.Heads of Agreement or Letter of Intent.

In the negotiation process, it is common for the parties to decide to set down in writing the result achieved in the maturing of their different commitments, giving a preliminary structure to what, in the future, will become the elements that make up the contract.

Normally, this letter is a merely written protocol, without binding effects between the parties, although it is common to find this type of document with clauses of the type “everything referred to in this Letter of Intent is legally binding between the parties, unless expressly stated otherwise” or clauses indicating exactly the opposite, with the safeguard included clause by clause (“Without prejudice to the provisions of paragraph ***, this clause is legally binding“).

We must be careful when granting binding effects to the commitments set out in Letters of Intent, and this insofar as the Supreme Court has established case law differentiating this legal figure from that of the pre-contract (Art. 1451 of the Civil Code) and considers that any document expressly described as a “letter of intent” is a mere preliminary agreement as long as it does not expressly refer to the essential elements, and therefore requires a subsequent agreement in order to be considered more than “mere prior agreements” (by way of example, the Supreme Court ruling of the 21st of March 2012).

4. Non-binding offer (Data Room).

On another note, it is common to find that, in a sales process open to several interested parties, the prospective buyer is required to submit a non-binding offer. These competitive (non-closed) processes are usually governed by a calendar in which a date is set for interested buyers to submit an indicative or non-binding offer. Once these offers have been received and depending on the number of interested parties, a pre-selection of candidates will be made, and the next stages of the process will be determined on the basis of this information.

Generally, the next step will consist of providing interested parties with more detailed information about the company and the shares for sale, which is executed through a process called a data room, which is normally set up online (e.g. Merryl Data Site).

María Roldán

Attorney at Law. Associate in the Legal Division at Devesa & Calvo Abogados.

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