Non-Disclosure Agreements (NDAs), sometimes referred to as Confidentiality Agreements, are universally binding contracts intended to ensure the confidentiality of shared information. They are frequently used in a wide variety of business transactions, including Mergers and Acquisitions (M&As).
It can be difficult for those who don’t have dedicated legal experience to understand exactly what information needs to be included in a Confidentiality Agreement. Given that these forms are considered to be binding contracts, it’s important for buyers and sellers to know what they’re agreeing to when they sign on the dotted line, though. This article will introduce the key terms of NDAs, including the most striking differences between standard form NDAs and M&A MDAs.
As stated above, NDAs are designed to ensure the confidentiality of information being passed from one party to another. There are two basic formats for NDAs: mutual and non-mutual agreements. The former is typically used in business transactions where both parties will likely be sharing confidential information, while the latter is often more appropriate for M&As, in particular.
Since sellers are the ones who typically release confidential information during the M&A process, NDAs are designed primarily to protect their interests. Often, though, the terms of NDAs are negotiated prior to the sale. Thankfully, sellers do typically have substantial leverage when it comes to negotiations and sending out form NDAs is an accepted part of the sale process.
Why Go Non-Mutual?
The majority of M&A sellers prefer non-mutual NDAs, especially if they do not anticipate receiving confidential information from their buyers. The use of a non-mutual NDA offers prospective buyers the assurance that the seller will not be requesting access to restricted information, as well. The majority of serious, cash buyers don’t intend on sharing confidential information, to begin with, so although the use of a non-mutual NDA is of primary benefit to the seller its use generally goes unquestioned by buyers, as well.
NDAs don’t have to be absurdly lengthy and complex documents. In fact, well-structured NDAs are typically only a few pages long. There are a few essential elements that should be included in every NDA, especially those issued in the process of M&As.
Every NDA should begin by identifying the seller and the buyer. It should also offer a precise definition of what is considered confidential information in the context of the M&A and what the scope of the confidentiality agreement will be for the recipient. Often NDAs include terms obliging the buyer to either return or destroy certain information that has been deemed confidential when it is requested by the seller.
The NDAs used in M&As typically contain a set term, as well. When that term expires, the agreement will be voided. If there are any exclusions from confidential treatment that will be in place throughout Defining Confidentiality.
Sellers should make a point of carefully defining what information is considered confidential, as disreputable buyers may intentionally seek out loopholes that allow them to start using the company’s valuable secrets before the term of the NDA has expired. Decide in advance whether oral information can be deemed confidential or if, by definition, confidential information must be actively defined as such in writing. Since orally conveyed information can be a tricky subject, many M&A NDAs contain stipulations that the confidentiality of any information conveyed orally to the buyer must be confirmed in writing within a certain period of time.
The purpose of sharing confidential information with potential buyers prior to executing an M&A is to facilitate negotiations. Most NDAs go one step further than just requiring recipients to keep confidential information to themselves, though. They also contain clauses specifying the intended use of confidential information, which is exclusively to be used for evaluating and negotiating the specific M&A transaction in question.
Sellers may not be happy about it, but the fact is that almost every NDA, no matter how beneficial to the seller, contains at least a few exclusions. These are intended to release the recipient from the terms of confidentiality and non-use in certain circumstances that may place an unreasonable burden on the buyer.
Exclusion clauses typically cover, at a minimum, information that was already available to the recipient prior to signing the NDA and not explicitly subject to the obligation, information that was publicly available prior to signing, and information disclosed to the buyer by a third party with no obligation of confidentiality. Some NDAs also allow for the use or disclosure of information that has been independently obtained by the buyer without the use of any information covered by the NDA.
Sellers should also bear in mind that there may be circumstances under which buyers will be forced by court orders to disclose confidential information. Even an NDA offering the maximum possible amount of seller protection cannot require buyers to break the law by withholding information. However, it can require the recipient to offer adequate advance warning prior to releasing information under a court order.
Return or Destroy Provisions
Every NDA, whether drafted in the context of an M&A or used for other business transactions, will include a provision that requires confidential information to be either returned or destroyed upon request. In the context of M&As, this provision is designed to protect sellers in the event that the acquisition does not move forward.
Sellers should word their return or destroy provisions carefully. They should ensure that the NDAs recipient is required to delete electronic files in addition to paper copies and to turn over any analyses that have been performed in-house using confidential documents.
The NDAs used for M&As may also include a number of additional provisions, although they are not required. It is not uncommon for sellers to include injunction clauses governing how breaches of the NDA will be handled, for example. Many sellers also require provisions that explicitly remove the contractual obligation to go through with the M&A except as provided in any future agreement and just about all of them include disclaimers regarding the accuracy and completeness of the information being provided, as well.