Contemplating an M&A transaction? Negotiating a confidentiality agreement, often referred to as a non-disclosure agreement or “NDA,” is one of the first steps in the M&A process. Although NDA negotiations may seem like a perfunctory step in the M&A process, NDAs present many issues that buyers and sellers should carefully consider before escalating discussions and venturing further toward a deal.
An NDA defines what information exchanged between the seller and the buyer is confidential and limits how the buyer may use the seller’s confidential information. NDAs balance the need for a buyer to obtain confidential and proprietary information to adequately evaluate the target seller with the seller’s interest in guarding against undesirable or harmful misuses and dissemination of its confidential information.
Unlike confidentiality agreements in other commercial transactions, NDAs negotiated at the onset of the M&A process are often non-mutual and only bind the buyer with respect to the seller’s confidential information. As a result, negotiating an NDA typically begins with a form prepared by the seller or its investment bank or their respective legal counsel. Key negotiation points will vary depending on the characteristics of the proposed transaction and relationship of the parties.
The following areas are commonly important to buyers and sellers negotiating NDAs.
Not all information shared between a buyer and seller should be considered confidential, and NDAs define the boundaries of what shared information will be confidential. Sellers typically seek the broadest possible parameters of what constitutes confidential information, including information shared in all formats (oral, visual, written and electronic), information not expressly labeled as “confidential” when produced and work product incorporating protected information (memos, reports, etc.). Buyers should generally be open to such breadth unless a specific concern has been identified.
Exclusions From Covered Confidential Information
NDAs expressly exclude certain information from application of the NDA. Buyers generally require that the NDA, at minimum, exclude from confidentiality restrictions all information already in the buyer’s possession (and not subject to some other confidentiality restriction), information that becomes generally available to the public (other than through the buyer), and information that becomes available to the buyer on a non-confidential basis.
Representatives of the Buyer
NDAs enumerate the specific representatives of the buyer (e.g., directors, officers, employees, advisors) permitted to receive confidential information covered by the NDA. Buyers should consider whether certain representatives need to be included as permitted recipients of the seller’s confidential information, including equity or debt financing sources. Sellers concerned with the dissemination of confidential information to representatives of the buyer with a more tenuous relationship to the contemplated transaction sometimes insist that confidential information may only be shared with representatives who “need to know” the protected information. Sellers might also require that each representative execute a separate joinder to the NDA.
Access to Employees
Sellers sometimes pursue limitations on contact by buyers with seller employees to prevent internal leaks and to control the flow of information disclosed to the buyer. Buyers should ensure that contact is permitted with enough key employees to permit an adequate diligence review.
Access to Suppliers, Distributors, Customers and Other Business Relations
Contact by buyers with suppliers, distributors, customers and other business relations of sellers can concern sellers for a variety of reasons, including the confidentiality of the potential transaction, competitive concerns and the desire to manage relationships with important customers. Sellers may insist that access to these parties be delayed until late in the diligence process (if at all).
Keeping Quiet About the Deal
Sellers almost universally require that buyers not disclose the potential transaction (including the terms, existence of negotiations, etc.) due to worries over possible disruptions to the business. Buyers generally want this obligation to be mutual for similar reasons, but should be prepared to address possible concerns from the seller that its obligation not be so broad as to impede its ability to run the sale process.
Non-Solicitation / Non-Hire Obligations
The seller may wish to prohibit the buyer from soliciting for employment, or hiring, the seller’s employees. Buyers with concerns about the ramifications of these limitations on the future hiring may want to eliminate non-hire restrictions, limit the covered categories of employees or time period (typically 18-24 months) or add certain exceptions (e.g., general solicitation activities, use of search firms, employee-initiated contact, hiring of terminated employees).
Return or Destruction of Confidential Information
In most instances NDAs require that the buyer return or destroy confidential information that the seller has shared once the process has ended (or at some other specified point in time). Buyers should consider negotiating for the option to decide whether to return or destroy confidential information in light of the difficulty that may be involved in returning confidential information that was provided in certain formats. Buyers may also wish to provide for limited retention copies.
Public Company Sellers
A standstill provision is generally only included in an NDA when the seller is a public company. Standstill provisions limit the buyer’s acquisition of securities or other rights in the seller, involvement in the solicitation of proxies with respect to the voting of securities of the seller, and other similar activities with respect to the seller’s securities. These provisions are meant to protect the public company seller against a hostile buyer following failed negotiations. A standstill can be accomplished through an explicit provision or through a backdoor limitation on use of confidential information solely for the negotiated transaction. Public company sellers may also consider including an acknowledgment by the buyer of insider trading restrictions under federal securities laws.
Private Equity Buyers
Private equity buyers will often want to negotiate express authority in the NDA permitting them to continue ordinary course investment activities. They are also generally sensitive to the scope of restrictive covenants and whether portfolio and other related companies within the private equity structure are restricted by the NDA. Private equity buyers should pay particular attention to their ability to share confidential information with debt or equity financing sources.