Exclusivity or Confidentiality: Two Different Promises

Confidentiality restrains what either side may say about the transaction and about what it has learned. Exclusivity restrains who the sellers may talk to. Both are signed at the same moment and get read as one promise, and they are opposites in almost every respect: one protects both sides, the other protects the buyer, and only one of them survives a collapse.

What does each of these two promises actually restrain?

Start on an ordinary street. A woman who runs a sweet shop wants to sell it. A buyer turns up and asks to see the books: the daily takings, the wedding season orders, the rent she pays, the two customers who account for most of the festival business. She is not going to hand any of that over to a stranger without a promise, so she asks for one. The promise she asks for is that he will not repeat what he sees to anybody, and will not use it to open a competing shop two streets away if he decides not to buy.

The shopkeeper has asked for a confidentiality promise, and the object of that promise matters. The promise covers the records she is about to open. The promise says nothing at all about who else she may show the shop to.

Now the buyer asks for a promise of his own. He is about to spend money on a surveyor and an accountant, and he does not want to spend it only to find she has been running the same conversation with three other people and will take the best number at the end. So he asks her not to talk to anyone else for a while.

The buyer has asked for an exclusivity promise, and the object of that promise matters too. The exclusivity promise covers the people she may sit with. The exclusivity promise says nothing at all about the records.

The objects are different in kind. One restrains information and the other restrains counterparties, and no amount of familiarity with the first tells anybody anything whatever about the second. The two clauses are not variations on a theme, so a person who has signed twenty confidentiality undertakings has learned nothing about exclusivity from any of them. The two clauses answer two unrelated worries that happen to arrive on the same afternoon.

The same two promises, at transaction scale

Put the same pair at the scale of a company sale. Harivansh Packaging Limited is buying all of Sundarban Polymers Private Limited, an unlisted maker of flexible packaging films with revenue of Rs 880 crore and earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs 132 crore, both invented for teaching. The two businesses sell to some of the same customers. The overlap is why the transaction exists at all, and it is also why the information problem here is unusually sharp.

The confidentiality undertaking on this transaction restrains what may be said. The undertaking covers the fact that a conversation is happening at all. The same undertaking covers everything Harivansh Packaging learns about Sundarban Polymers once the seller starts opening files: customer names, contract terms, pricing, the rejection rate on a particular film line. And because these two sell to overlapping customers, some of that material is more sensitive to this buyer than it would be to any other buyer on earth. Controlling diligence information works that point through in detail.

The exclusivity undertaking restrains something entirely different. The exclusivity undertaking says that for a stated stretch of time the sellers of Sundarban Polymers will not solicit, entertain or negotiate with any other counterpartyThe other side in a negotiation or a contract. Here it means whoever the sellers might sit down with about selling their business.. The clause is often called a no-shopThe plainer name for the same clause. While it runs, the seller may not shop the business around to anybody else. clause, and no-shop is the clearer name because it says exactly what it does: no shopping. Exclusivity has nothing to say about the data room, the customer names or the pricing. Somebody could breach it without disclosing a single fact.

Breach is the cleanest way to keep the two apart. Exclusivity can be breached while nothing at all is said. Confidentiality can be breached while talking to nobody except the person already permitted. The two restraints do not overlap. Neither of them even touches the other.

Who does each one protect?

Back to the street for a moment. Two neighbours agree that whatever they overhear across the shared wall stays between them. Both of them have something they would rather not have repeated, so the promise runs in both directions and both are better off for it. Now one of the two agrees not to get a quote from any other electrician for a month while the first neighbour's cousin prices the job. The second promise runs in one direction only. One neighbour has given something up and the other has received it.

A confidentiality undertaking on a transaction is the first kind. The undertaking is drafted as a mutual undertakingA promise given by both sides in the same words, so that each of them is bound to the other in the same way., meaning both sides are bound in the same words. People assume the seller is the only one with something to lose, and the mutuality here is real in substance and not only in wording.

The seller has more to lose, certainly. Sundarban Polymers is about to describe itself in detail to a competitor for the same customers. If the transaction collapses and that description leaks, the sellers have handed a rival a map of their business for nothing. The exposure is real, and it is why the seller usually pushes hardest on the drafting.

But Harivansh Packaging Limited is a listed company, and the plain fact that it is looking at a purchase of this size is itself information it needs kept quiet. A transaction that becomes public before its parties are ready creates problems that are covered separately. So the buyer wants the promise too, in its own right, and the mutuality is not a courtesy.

Exclusivity is the second kind, and it is not mutual in any sense at all. There is no version of it that binds the buyer. Harivansh Packaging Limited is entirely free, all the way through, to look at other targets, to price other films businesses, to walk into a different negotiation next week. Nothing in the document stops it. The restraint runs one way and only one way, from the sellers to the buyer, and it is a straightforward concession.

One of these is a shared protection and the other is a concession by one side. Calling both of them mutual undertakings is exactly how a seller talks itself into the second. The confidentiality part genuinely is mutual, and the document heading usually says mutual. The word then covers the whole document.

When is each given, and how long does each run?

Both are given at the same moment, and that moment is the earliest one there is. On this transaction the milestones run in a fixed order: approach and confidentiality, indicative offer and term sheet, confirmatory diligenceThe detailed checking a buyer does after the shape of a price is agreed, to confirm that what it has been told holds up., documentation, signing, the conditions periodThe stretch between signing and completion, during which the agreed conditions to completion are worked through., completion. Both undertakings sit in the first of those. Both are given before the term sheet exists, before any price is agreed, before the buyer has seen anything worth seeing.

There is a good reason for the confidentiality half. Nothing can be shown until it exists, so it has to come first. There is a different reason for the exclusivity half, and it is worth saying out loud: the buyer asks for exclusivity at the point where it has the most leverage and the seller has the least information. The seller does not yet know what the buyer will pay. The seller has not yet spent anything. The seller is being asked to give up its alternatives in exchange for a process that has not started.

The durations then split completely.

Confidentiality outlasts the transaction

A confidentiality undertaking carries a stated end dateThe day on which a promise stops, written into the document itself rather than left to depend on how the transaction turns out. or a stated period, and the period normally runs well past whatever happens to the transaction. The long period is not a drafting flourish. The period follows from the purpose of the promise. The information does not become less sensitive because the parties stopped talking. If anything it becomes more sensitive. The person holding it is now a competitor with no further reason to be careful.

Exclusivity is usually shorter than the work it covers

Exclusivity is set once, at the front, against work that nobody has scoped yet. Nobody knows at the approach how long confirmatory diligence will take, how many counterparties will need to be consulted, or how long the drafting will run. So a period gets agreed anyway, and it is routinely shorter than the work turns out to be.

One consequence is worth carrying away. When exclusivity runs out mid-process, the buyer asks for an extension, and the extension is a fresh concession asked for at a moment when the seller has spent more money, disclosed more of its business and has even less of an alternative than it did at the start. The second ask is easier to obtain than the first, and the third easier than the second.

Both durations are fixed in the same conversation at the same moment. The people fixing them are thinking hard about only one of the two. Everyone in the room understands what the confidentiality period is doing, and that period gets argued over. The exclusivity period gets a number because a number was needed.

What survives if the transaction collapses?

The collapse test is the sharpest test of the difference, and it is the one to reach for whenever the two blur together.

The household version first. A landlord shows a prospective tenant round a flat. In the course of the viewing the landlord mentions that the ceiling in the back room leaks when it rains hard. Saying so is better than letting them find out. The tenant seems serious, so the landlord also agrees not to show the flat to anybody else for a fortnight. Then the tenancy falls through.

Two things are now true at once. The promise not to show the flat to anybody else is simply over: there is no tenancy to protect, so there is nothing for the promise to do. And the person who walked away still knows about the leak. The leak cannot be unsaid. Whatever promise that person gave about repeating it is the only thing standing between that fact and the next person who asks them about the flat.

Now the transaction version. Suppose this purchase had ended in the conditions period, after signing and before completion. The conditions period runs nine weeks on this transaction's record.

The sellers of Sundarban Polymers Private Limited would be free to talk to anybody the day exclusivity expired. The buyer it was protecting has gone, so nothing would be left for the clause to protect. The clause does not need to be terminated or negotiated away; it simply has nothing to hold.

Harivansh Packaging Limited would still be bound. Everything it saw in the data roomThe controlled place, almost always online now, where a seller puts the material a buyer is permitted to examine, with a record of who opened what. is still disclosed, and it is still a competitor for some of the same customers. The customer level material that was restricted for exactly that reason is now sitting in the heads of people who work for a rival. The undertaking is the only thing addressing that, and it goes on addressing it for its stated period.

The property has a name. SurvivalThe part of a document that keeps working after the rest of it has ended, so that certain promises outlive the arrangement that carried them. is the drafting term for a promise that outlives the arrangement it sat inside. Confidentiality is the classic example.

A collapse separates the two completely: the sellers walk away holding their freedom and a disclosure they can never take back, and the buyer walks away holding an obligation and no rights at all. Neither of those positions is visible from the fact that both undertakings were signed on the same sheet by the same people.

What does a breach of each one cost, and who finds out?

Every promise is worth what it is worth in the world, not on paper, and the world treats these two very differently. How a breach comes to light decides almost everything else.

A breach of exclusivity is usually visible. A seller talking to somebody else involves other people: another buyer's team, another set of advisers, meetings that get mentioned, a management presentation that has to be prepared. A fact with that many people in it surfaces. Businesses that might buy a films maker are not numerous and they talk to the same advisers. The buyer very often finds out because somebody tells it.

And the remedy is comparatively clean. The buyer is released from its own side of the arrangement, and it may have a claim for the costs it has run up on the strength of a promise that was not kept. The record of this transaction carries no figure for those costs and no walk-away payment of any kind. The record supports only the shape: there is a countable sum to point at, and the party pointing at it is the one that has been spending.

A breach of confidentiality is very often invisible. Information moves without leaving a track. A competitor who now knows the two customers that matter most to Sundarban Polymers does not have to do anything visible with that knowledge. The competitor can price a little sharper on the next tender, or approach a customer relationship it would otherwise have left alone. The effect shows up months later as business that went somewhere else, and there is usually no way of tying that to a particular disclosure by a particular person on a particular day.

So the confidentiality claim exists and proving it is another matter. Even where the effects are obvious, the route the information took very often is not. And a further asymmetry sits underneath that one. Nobody enjoys it: the undertaking that is easier to police is the one protecting the buyer. Nothing puts information back once it has moved, and no remedy makes a seller un-described.

Why do these two get read as a single promise?

Because everything about how they arrive says they are one thing.

Both arrive in one document. On a great many transactions that document is the letter of intent, whose binding islandThe small set of clauses inside an otherwise non-binding document that both sides do intend to be enforceable, sitting like an island in the middle of it. is a short set of clauses that both sides do intend to be enforceable, sitting inside a document that mostly is not. Confidentiality and exclusivity are the two residents of that island on almost every transaction there is. The two clauses are neighbours in the same short list.

Both are signed by the same people, on the same day, in the same meeting. Devyani Kulkarni, the chief financial officer of Harivansh Packaging Limited, and Ashwin Rege, who leads its transaction team, do not walk into two meetings. There is one signing, one set of initials, one email afterwards saying it is done.

And they are discussed in one conversation. When a seller's advisers report back, they report on the document, not on the clauses. The seller hears that the confidentiality arrangements are in good order and that the buyer wants a period of exclusivity, and those two facts arrive in the same breath, from the same person, about the same document.

Then there is the title. A document of this kind is almost always named after the protection somebody asked for. Confidentiality Undertaking. Confidentiality and Mutual Undertakings. Non-Disclosure Agreement. The seller wanted a confidentiality promise and asked for it, and the document is named after the thing the seller wanted. Exclusivity sits inside it as one clause among several, under a heading that does not mention it.

A seller concentrating hard on protecting its information agrees to a restraint on its own alternatives, and the second concession travels through on the strength of the first. Nothing about that is careless. The document did what it said on the front. The document also did something else in clause nine.

Which of the two should a seller read hardest?

Confidentiality is worth having and costs a seller almost nothing. Read that sentence carefully. Nothing in it criticises the clause. A seller who promises not to repeat what it learns about the buyer has given up nothing it wanted to do. The seller had no plan to describe Harivansh Packaging Limited to anybody. The promise is real, it binds, and it sits harmlessly on top of behaviour the seller was going to follow anyway. In exchange it receives protection for the thing it is genuinely exposed on. The trade is about as good as a document ever offers.

Exclusivity is a different animal, and here is the plainest way to see why.

A seller's negotiating positionWhat one side can credibly do instead of agreeing, which is what gives it room to push. Take away the alternative and the room goes with it. in a sale rests on one thing above all others, and that one thing is not the quality of the business, the growth, the margin or the pitch. The one thing is the existence of somebody else. A seller with a second interested party does not have to threaten anything, argue anything or bluff anything. The alternative does the work by simply being there.

Exclusivity does not reduce that. Exclusivity removes it, for as long as the clause runs. And the removal runs in two directions at once. One of the two directions usually gets missed.

The first direction is obvious. The seller cannot run a process. The seller cannot invite another party in, cannot ask for a competing offer, cannot even take a call.

The second direction is quieter and costs more. While exclusivity runs, the seller cannot find out what an alternative would pay, and the buyer knows perfectly well that no other conversation is happening. The seller is now negotiating price against a counterparty who is certain there is no competition, using a number the seller has no way of testing. Not a weak position, exactly. An uninformed one, opposite somebody informed.

Here is the ordinary version. A household selling a flat gets one offer and, before anything is agreed, promises the buyer they will take it off the market for two months. Whatever the flat was worth, they now have no way of discovering it, and the person across the table knows nobody else is looking. The offer may be a perfectly fair one. The seller has simply given away the only means it had of finding out.

What did the two undertakings have to cover on this transaction?

Put both promises on this transaction's own sequence and let the elapsed weeks do the arguing. The weeks that follow belong to this purchase alone, and no transaction has a standard length.

Harivansh Packaging Limited and the sellers of Sundarban Polymers Private Limited give both undertakings at the approach. The approach is the first milestone. At that point there is no term sheet, no price has been agreed, and the enterprise value of Rs 1,320 crore, being 10.0 times the target's EBITDA of Rs 132 crore, has not been discussed by anybody. Neither has the equity value of Rs 1,140 crore that the bridge produces once Sundarban Polymers' own net debt of Rs 180 crore comes off. All of that is still ahead.

The derivation, from the record and nothing else

The purchase of Sundarban Polymers ran twenty two weeks from term sheet to completion. Of those twenty two, nine were the conditions period, the stretch between signing and completion. Subtract and thirteen weeks ran from term sheet to signing. The thirteen weeks are 59.09 per cent of the recorded span, against 40.91 per cent for the conditions period, and confirmatory diligence and documentation both sit inside them.

The arithmetic matters for one reason. Exclusivity is there to protect the buyer's spending on confirmatory diligence and documentation, and both of those sit inside the thirteen weeks. So an exclusivity period measured from the term sheet that ran shorter than thirteen weeks would have expired before the agreement was signed, on this transaction's own elapsed weeks. Add the weeks before the term sheet, a stretch this record does not carry at all, and exclusivity had to cover an unknown span plus something in the order of thirteen weeks.

The record carries no exclusivity period for this transaction. No length is standard practice either, so a seller shown one number as the norm has been shown a comparison it cannot check.

The survival test, on the same facts

Now run the collapse on these numbers rather than in the abstract. Suppose the transaction had ended during the nine week conditions period, after signing and before completion.

The sellers of Sundarban Polymers would be free to talk to anybody the day exclusivity expired, with no residue at all. Harivansh Packaging Limited would still be bound not to use or disclose what it learned about Sundarban Polymers in the data room, and that includes the customer level material that was restricted in the first place precisely because these two businesses sell to some of the same customers. Twenty two weeks of process would have produced, for the buyer, an obligation and nothing else.

Look at what that means about the two documents that were signed on the same afternoon at the approach. One of them turned out to be the only thing still standing. The other one turned out to have expired without ever being tested. And at the moment they were signed, they looked like a single item on a checklist.

How does a transaction team actually handle both of these?

Teams that handle this well are not doing anything clever. Such teams do three ordinary things that most teams skip.

The first is that the two undertakings are tracked in two places with two end dates. On a seller's side, Ashwin Rege's counterpart keeps a single line for each: what it restrains, who it protects, the day it stops. Two lines, not one document. The moment they are two lines, the difference is impossible to lose. One line has a date well past completion and the other has a date somewhere inside the process.

The second is that exclusivity gets its own approval. Somebody, in a room, has to say out loud what it costs, in plain terms: from this date until that one, the seller cannot ask anybody else what they would pay, and the buyer knows that. Said out loud, the cost is a very different thing from a line in a report saying the documentation is in order. A seller's board that hears the first sentence is making a decision. A board that hears the second is receiving an update.

The third is the extension. When exclusivity runs out mid-process, and it very often does because it was set against work nobody had scoped, the request to extend arrives looking administrative. The request is not administrative. The request is a second concession, asked for at a weaker moment, and the honest way to handle it is to price it as one: the seller has more to lose from a collapse now than it did at the start, and so does the buyer, and that is a negotiation rather than a form.

The buyer's side reads the same two clauses from the other end and reaches a shorter answer. Devyani Kulkarni's team cares about exclusivity because it decides whether the money about to go into confirmatory diligence is protected, and it cares about confidentiality because Harivansh Packaging Limited is listed and the fact of the conversation is itself sensitive. A lender being asked to fund a purchase reads exclusivity as the window in which its own credit work has to fit, and reads confidentiality as the reason its file cannot travel. None of these people needs a definition of either word. Everyone in that group needs to know which promise is doing which job, and which one is still doing it next year.

A team that can say out loud, in one sentence each, what the two undertakings cost it has already done the hard part. The rest is a diary entry.

What do the two undertakings have in common?

More than the contrast so far suggests, and it is worth setting down so the difference does not get overstated.

Both are private promises between the parties. Neither is filed anywhere, neither is published, and neither is granted by an authority. Both are given at the same milestone, before anything has been agreed and before either side knows whether there will be a transaction at all. Both go on binding through everything that follows. The term sheet, the drafting and the signing all happen on top of two promises made at the very beginning by people who had barely met.

Both are enforced the same way: one party makes a claim against the other, and nobody supervises them. And both are entirely separate from the securities law obligation that attaches to unpublished information about a listed company such as Harivansh Packaging Limited. The securities law obligation is set out under confidential and material information, it binds individuals and not just the company, and it is set by the Securities and Exchange Board of India (SEBI) at sebi.gov.in rather than by anything either side signed.

The two undertakings share one signature, one starting date and one method of enforcement, and almost nothing else. The survival test separates them in a single question, and that question is worth carrying away: the transaction has just collapsed, so who is still bound?