Tips and Answers to Your Questions
Due Diligence

Confidentiality Agreements

Strategic restructuring negotiations - and especially merger negotiations - necessarily entail the potential partners sharing sensitive, confidential or proprietary information with one another. For example, the due diligence process asks each party to disclose lawsuits, debts, and other obligations; staff integration negotiations will usually involve sharing salary information for all employees; development staff may compare donor lists to determine the extent of overlap, sometimes a critical concern; your partner's finance people will likely want to analyze your budget, balance sheet and investments; and staff programmatic reviews may reveal unique service components or approaches.

You may not be guarding the secret formula for Coca Cola, but chances are you have a few critical strategic advantages you would rather not share with the world, and you certainly would not like to hear that your salary was being discussed by your colleagues and competitors in the community. Sharing this information is essential if the boards are to determine the appropriateness of a merger or other high-integration partnership. But it is also scary, and potentially dangerous, if the partnership does not, in the end, occur.

To address this well-founded fear, it is common for nonprofits engaging in strategic restructuring discussions to enter into a confidentiality agreement: a statement of how information shared by the groups during negotiations and the due diligence process will be treated, now and forever after. Many nonprofits agree verbally and very informally that "no information shared during the process will be leaked to any third party." While we have never seen a problem arise with these verbal agreements, it may be wise to put this understanding in writing, and expand upon it.

Larger nonprofits will often ask their attorney to draft the confidentiality agreement for their consideration. These documents, which may look like business contracts, can run to several pages in length and be as obscure as any other legal document. Nonprofits not wishing to go to this length, and expense, might draw up a simpler agreement that covered the basics of the commitment. An example of this type of agreement is available for download in Adobe Acrobat format on this web site.

Whether you come to a verbal understanding, draw up your own agreement, or execute an agreement drafted by your attorney, it is important to note that no agreement of this type is by any means airtight. Your best assurance is the integrity of the leaders of the other organization. In any event, it can be extraordinarily difficult to establish that your major donor began giving to your ex-prospective merger partner because they stole her name from your donor list, or that your major funder is now questioning your administrative expenses because your erstwhile colleagues suggested that your management's salaries were a bit high. Nonetheless, implementing some sort of agreement can help people of good will from both parties to act in good faith by making explicit their mutual understandings and responsibilities regarding confidential information.