Apr 10, 2018
Overview of Non-Disclosure Agreements in the Context of Private M&A Transactions
A non-disclosure agreement ("NDA") is typically the first agreement entered into in an M&A transaction. The purpose of an NDA is to safeguard the sharing of confidential information in the consideration and negotiation of a proposed deal. NDAs are often unilateral for M&A transactions, with the sellers being the providers and the purchasers being the recipients of confidential information. Therefore, the parties' interests diverge when settling on a form of NDA. From the seller's perspective, the NDA should be comprehensive as to adequately protect its proprietary information, while from the purchaser's perspective, the NDA should not be so prohibitive as to impose obligations that are unduly burdensome or overreaching. This article sets forth a number of key terms contained in an NDA, as well as a brief commentary from the point of view of both parties.
1. Definition of Confidential Information
Defining what constitutes confidential information is paramount to any NDA since the restrictions on disclosure will only apply to information that falls within the definition. The seller will want to define confidential information as broadly as possible to cover all of the information and materials disclosed to the purchaser before, on or after the date of the NDA. In addition, the seller will want to ensure the fact that discussions are taking place between the parties, as well as the existence of the NDA, form part of confidential information to protect against the premature disclosure of transaction-related information. The purchaser will seek to limit the definition of confidential information to exclude information that (i) is or becomes publicly available, other than through a breach of the NDA, (ii) is received from a third party not bound by any confidentiality obligations, (iii) was already in the possession of, or available to, the purchaser on a non-confidential basis, and (iv) was developed without use, or reference to, the confidential information.
2. Use and Disclosure
An NDA should stipulate the purpose for which the confidential information is being shared, and restrict the use to that single purpose. In an M&A context, the seller will want to restrict the use of the confidential information solely for the purpose of evaluating the potential deal. The seller will also want to ensure the confidential information is only shared by the purchaser with its designated agents and representatives on a need-to-know basis, and that the purchaser will be held responsible for a breach by any of them. In some instances, it may also be appropriate to have certain agents and representatives sign a separate NDA with the seller. Conversely, the purchaser will want to ensure that the NDA permits disclosure of confidential information when required by law. To that end, the seller typically requests that a reasonable prior notice be given by the purchaser, and such forced disclosure is limited to that which is legally required to be disclosed.
3. No Representations or Warranties
The seller will want to clarify that the confidential information is being provided without any representations or warranties to avoid liability to the purchaser. The purchaser will seek to negotiate appropriate representations and warranties with the seller in a definitive agreement to preserve its rights in case there are errors in the disclosure materials.
The term of an NDA is generally dictated by the sensitivity of the information and the rate at which it changes. If the passage of time would not make the confidential information any less confidential, the seller will want to ensure that the term is indefinite. The purchaser, however, will want to consider limiting the term of an NDA to a specific time period if the information is likely to become stale and diminish the importance of strict confidentiality over time.
5. Return or Destruction
NDAs generally require purchasers to return or destroy confidential information upon termination of discussion of a proposed deal and/or upon request of the sellers. The purchaser may try to negotiate with the seller for the right to destroy information rather than return information because it is less onerous. The purchaser may also try to include language that allows it to keep copies of confidential information (i) for archival or evidentiary purposes, (ii) if required to do so under law, regulation or rule, (iii) for compliance purposes, or (iv) to comply with document retention policies. The seller may agree to some or all of these exclusions provided that the confidentiality and permitted use restrictions contained in the NDA remain in force with respect to such retained information.
6. Non-Solicitation of Employees
NDAs often include a provision that restricts the purchaser from soliciting or hiring the seller's employees. This is particularly important when the parties compete in the same market. The term and scope of this non-solicitation clause are often vigorously negotiated by the parties. The seller often demands that all employees be captured in the non-solicitation clause, and the purchaser typically tries to limit this to key employees to whom the purchaser was first introduced in connection with its evaluation of the potential deal.
It is common for the seller to request an acknowledgment from the purchaser that the seller will have the right to apply for an injunction, specific performance and other relief in situations where the purchaser breaches or threatens to breach the provisions of the NDA.
The first step to safeguarding any proprietary information in the context of an M&A transaction is to have a strong NDA in place. It is recommended that the NDA be tailored to the specific deal. Both the seller and the purchaser should carefully identify and consider the key terms before entering into the NDA.
more Taking Care of Business Law posts