NDA Content | Examples, Language & Analysis for M&A

Jacob Orosz headshot
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

This article explores each section you’ll find in most NDAs, providing example language and key advice on protecting your information. The sections and their highlights are as follows:

  • Introductory Paragraph: Most confidentiality agreements open with an introductory paragraph that covers who is signing the NDA and how the confidential information can be used.
  • Definition of Confidential Information: This clause defines what’s included in the definition of confidential information. Sellers seek a broad definition regardless of what form it was disclosed in and by whom, and buyers prefer a narrow definition that includes additional obligations such as a legending requirement.
  • Disclosure Scope: The disclosure period defines what time period is covered by the NDA as well as the type of communications covered. To ensure that all information is protected, the seller should include language that covers information disclosed prior to the execution of the agreement and information communicated orally, regardless of when.
  • Permitted Uses: Also called “Restrictions on Use,” this section determines what the buyer can do with the information and ordinarily restricts them to using the information solely for evaluating the transaction.
  • Permitted Disclosures: This clause specifies under what conditions confidential information can be disclosed to third parties, such as those required by law.
  • Definition of Representatives: This clause restricts the buyer from disclosing confidential information to third parties, though an exception is often granted that allows them to disclose to their “Representatives” for purposes of evaluating the transaction. Most NDAs make reference to the buyer’s employees, officers, advisors, and affiliates in this section. 
  • Confidentiality Regarding the Transaction: Sellers normally want to preclude the buyer from disclosing that negotiations are taking place or from disclosing specific terms of the negotiations, such as the price. By the same token, buyers seek to prevent the seller from disclosing the terms of the deal to other potential bidders to prevent the seller from “shopping” the buyer’s offer. 
  • Standards of Care: This clause specifies the standards by which the parties will be required to protect confidential information. 
  • Return of Information: Most NDAs require that the buyer return the confidential information at the end of the disclosing period. Given the prevalence of electronic information, the degree to which this protects the seller is questionable. 
  • Communications: Most sellers prefer all communications to be funneled through them and to prevent the buyer from talking to third parties, such as employees, customers, or vendors. This clause requires the buyer to do just that.
  • Non-Solicitation: The seller wishes to avoid the buyer poaching their employees or customers and does so by way of a non-solicitation or no-hire agreement clause in the NDA.
  • No Obligation to Proceed: Most NDAs include a statement that the mere fact the parties entered into an NDA doesn’t give rise to an obligation to sign a definitive agreement.
  • No Grant of IP Rights: This prohibits the buyer from licensing any intellectual property contained in the confidential information. Confidentiality agreements should also contain a provision stating that no implied license to the technology or information is granted to the buyer. 
  • Disclaimer of Accuracy and No Warranties: A “no warranty” clause is a statement by the seller that they make no warranty that the information is accurate or complete. If the parties proceed to a definitive agreement (e.g., purchase agreement), that agreement will contain representations and warranties related to the business. 
  • Term: The term specifies the length of time the NDA is active. Common terms range from one to five years.

Introduction

You’re ready to draft an NDA for interested buyers, but what should it look like? You may need to discuss the finer details with your M&A advisor or attorney and hammer out potential missteps in the language and clauses.

Will there be “derived information” in your discussions with buyers? Will it be spoken or written? Can the buyer be expected to separate this information from similar details they learn elsewhere? What if they’re one of your direct competitors?

The examples and analyses here don’t address every eventuality, but with this guide, you’ll be armed and ready for common issues that arise in drafting and negotiating an NDA.

The Opening Paragraph

Most confidentiality agreements open with an introductory paragraph. It’s important not to skip this paragraph as it covers several important points. (The bolding in this example is used for emphasis – it won’t appear in your final version.)

This Agreement is made and entered into between the undersigned, both individually and on behalf of the undersigned’s business entity, its officers, directors, partners, shareholders, employees, brokers, agents, and advisors (collectively “Buyer”), and “Seller.” Buyer has requested certain information for purposes of evaluating and investigating a possible acquisition through transfer of assets, stock, partnership interests, or otherwise, merger or joint venture involving all or part of the interests of the Seller (“Transaction”). Therefore, parties agree as follows: Buyer shall not disclose any information concerning the Seller, [other than as legally required] whether provided by Seller or by any third parties on behalf of Seller, and whether provided before, during, or after the effective period of this Agreement, except to Buyer’s employees, officers, advisors or other associated persons for the sole purpose of evaluating the Transaction and only provided that such persons have agreed in writing to be bound by this Agreement.

Review of the Opening Paragraph

“Individually”: In this example, the buyer is signing the non-disclosure agreement both individually and on behalf of the entity they’re representing. Some buyers may strike “individually,” attempting to limit their personal liability. This is a reasonable request if they’re a financial buyer, such as a private equity firm. But if the buyer is a small, private business with a sole owner, the term should remain in the agreement.

“Purposes”: The NDA limits the buyer to using the information for the sole purpose of evaluating the possible transaction. 

“Possible”: This is included to avoid implying any purchase agreement between the parties until such an agreement is in writing. 

“Third parties”: The introductory paragraph also expands the scope of the NDA. “Third parties” clearly outlines who is included in the agreement.

“Before, during, or after”: This includes information disclosed before execution of the NDA.

Section #1 – Definition of Confidential Information

The definition of confidential information is usually one of the first paragraphs in a non-disclosure agreement and includes a general introductory paragraph, such as the one outlined above. It’s sometimes also called “Definition of Evaluation Material,” “Confidential Information,” or simply “Information.” 

The Seller’s Goals

The seller’s goal is to define confidential information as broadly as possible and then explicitly list exclusions in a separate paragraph, which is typically under the heading “Exclusions from Confidential Information.” Sellers will attempt to expand the definition to include information that is:

  • conveyed orally,
  • regardless of who disclosed it,
  • in any form, and
  • at any time (before or after executing the agreement).
  • Information derived from confidential information such as analyses, forecasts, or other compilations.

The Buyer’s Goals

Buyers will attempt to narrow the scope of the definition of confidential information. They can do this by including the phrase “to the extent.” This phrase prevents entire documents from being characterized as confidential information just because they contain a singular piece of confidential information. Buyers can also try to exclude information conveyed orally or from third parties, information obtained before execution of the agreement, or by requiring the seller to identify confidential information with a “confidential” stamp.

In most cases, the parties agree to an expansive definition of confidential information and then limit it by way of explicit exclusions. This is because the buyer has minimal risk with an expansive definition due to the limited requirements of the agreement – to keep the information confidential. The likelihood of the seller alleging a breach and proving damages is minimal, and the evidentiary burden is on them to prove that the buyer made a disclosure. 

Type of Information

Confidential information, or proprietary information as it’s sometimes called, is wide-ranging. Any information that flows between the parties can be considered confidential – for example, data, know-how, prototypes, engineering drawings, computer software, test results, tools, systems, specifications, schematics, photographs, strategic plans, customer lists, financial data, and more. Confidential information is also not limited to hard copies – it can be transmitted orally.

Degree of Negotiation

As a result of the NDA’s limited requirements of the buyer and the fact that the evidentiary burden is on the seller, confidentiality agreements and NDAs are rarely negotiated in practice, quite unlike the letter of intent and the definitive agreement, which are heavily negotiated documents.

Example Clauses – Definition of Confidential Information:

Evaluation Material includes, without limitation, the Transaction and the Seller’s intellectual property, products, services, technical and business information, and contact lists, together with all analyses, compilations, summaries, notes, and data [derived information] and information conveyed in any form whether oral, visual, written, or electronic, and whether provided to Buyer before or after the date of this agreement.


Any information concerning Seller, regardless of form, manner, or nature of information, which is provided to Buyer, and any notes, summaries, compilations, analyses, or other documents prepared by Buyer to the extent that they contain or are based on, in whole or part, information provided to Buyer.


All of the Disclosing Party’s (i.e., Seller) business plans, present or future, or potential customers (including the names, addresses, needs and/or any other information concerning any customer or consumer), marketing, marketing strategies, pricing and financial information, research, training, know-how, operations, processes, products, inventions, business practices, databases and information contained therein, its wage rates, margins, mark-ups, finances, banking, books, records, contracts, agreements, principals, vendors, suppliers, contractors, employees, applicants, skill sets of applicants, sales methods, marketing methods, costs, prices, price structures, methods for calculating and/or determining prices, contractual relationships, business relationships, compensation paid to employees and/or contractors, and/or other terms of employment, employee evaluations, and/or employee skill sets.

Common Issues in Defining Confidential Information

Derived Information

“Derived Information” is sometimes treated to its own restrictions. In reality, the buyer’s analysis of the business may be fused with their own proprietary models, and they may, therefore, want to ensure the seller doesn’t obtain rights to their proprietary formulas, methods, forecasts, or other IP. A happy medium is often achieved by defining confidential information to the extent that it explicitly includes the seller’s confidential information as well.

Labeling

A labeling or “legending” requirement demands that the seller label any information that’s confidential. In practice, this is an impractical administrative burden on the seller, especially because of the high volume of information that is electronic or oral, such as management discussions or customer interviews. 

Sellers should vehemently fight any legending requirements. Requiring the seller to stamp information is impractical in the IT age, as most information is now conveyed electronically. Having a labeling requirement also slows down the process, and time is the enemy when selling your business.

 Sellers should vehemently fight any labeling or legending requirements.

Oral Information

Most of the information provided to buyers in an M&A transaction is oral, such as interviews with managers or negotiations with key stakeholders. For this reason, any definition of confidential information should include information that’s conveyed orally.

Obligation to Provide Information

The NDA shouldn’t obligate the seller to provide any information. In certain cases, a sophisticated buyer may include language that requires the seller to provide the buyer with any information the seller has offered to other interested buyers. However, such an obligation may be unreasonable in the case of disclosing sensitive information to a direct competitor. 

For example, it’s riskier to share customer information with a direct competitor than with a private equity firm that doesn’t directly compete with the seller. In general, contracts include an implied duty of good faith, which can be argued to negate the need for an explicit duty for the seller to provide information. 

Additionally, different information is customarily shared with different groups of buyers, and an obligation to provide information would greatly restrict the seller’s strategy regarding what, when, and to whom information should be released. A clause protecting the seller could look something like this: 

Seller has no obligation to provide Buyer any confidential information, and Seller retains the right, in its sole discretion, to determine what information to provide to Buyer.

Time Frame

The buyer might attempt to exclude information that wasn’t obtained in connection with the possible acquisition or information that was obtained before the execution of the NDA, such as a teaser profile or financial information. A well-drafted NDA should cover the time period before the execution of the NDA.

Exclusions from the Definition of Confidential Information

Normally listed immediately after the “Definition of Confidential Information” is a paragraph detailing specific exclusions to the definition.

Buyer’s vs. Seller’s Goals

The seller’s preferred approach is to be as broad as possible in scope while explicitly listing exclusions. The recipient (i.e., the buyer) will likely want the opposite, which is a broad exception to the definition of confidential information.

Common Exclusions

Typical exceptions to the definition of confidential information include: 

  • Information publicly known or in the public domain prior to the time of disclosure
  • Information publicly known and made generally available after disclosure through no action or inaction of the recipient
  • Information already in the possession of the recipient obtained pre-NDA
  • Information obtained by the receiver from a third party without a breach of confidentiality
  • Information independently developed by the recipient

Section #2 – Disclosure Scope

Information disclosed outside of the disclosure period is also sometimes excluded from the definition of confidential information. The seller should include language that covers information they disclosed prior to the execution of the agreement to ensure that all information is protected, regardless of when it was disclosed.

Disclosure Scope: Sample Clauses 

Clause 1 – Intersecting Confidentiality Agreements

Information already in the buyer’s possession, provided the information is not subject to another confidentiality agreement.

The buyer may wish to add a knowledge qualifier here regarding the existence of another confidentiality agreement, such as “to buyer’s knowledge,” “to the best of buyer’s knowledge,” “to buyer’s actual knowledge,” “to buyer’s constructive knowledge,” etc., to protect themselves in the event of a clash of agreements. 

A more restrictive definition could include “as established by documentary evidence,” which is intended to shift the burden of proof from the seller to the buyer. 

Clause 2 – Public Knowledge

Information available or generally known to the public, [other than as a result of disclosure by Buyer] [other than through the fault of the Buyer] [other than through a breach of this Agreement].

Striking “generally” lessens the burden of proof on the seller. Information “known to the public” could also potentially include information that becomes available to the buyer on a non-confidential basis from a third party.

Clause 3 – Buyer-Developed Information

Information Buyer develops without the aid of the confidential information. 

or 

Information that is independently developed by Buyer without the use of Confidential Information.

Most sellers will take issue with this clause because the burden of proof rests on the seller. It may be difficult for the seller to prove that they provided the buyer with summaries or analyses if the buyer reconstructs the information in a different form. 

Additionally, once the buyer develops an understanding of the information, they could reconstruct it to be excluded from the definition of “Confidential Information,” and they would be free to use the information as they please.

Clause 4 – Residual Information

Buyer shall be free to use the residuals resulting from any Confidential Information provided hereunder for any purpose. “Residuals” means information in non‑tangible form, which may be remembered with access to the Confidential Information, including ideas, concepts, know‑how, or techniques, in their unaided memories.

Once read, confidential information exists in the mind of the buyer. It would be difficult for a buyer to purposefully forget or “delete” the information when making strategic decisions. The residuals clause addresses this concern by excluding information the buyer retains in their unaided memory from the definition of confidential information.

If the NDA includes a residual clause, a buyer may use any information the buyer retains in their “unaided memory” (“residual information”) without violating the terms of the NDA. This allows a buyer to use the general knowledge acquired about the business but not specific information. For example, the buyer could use information about the estimated number of product types but not software code.

Those in favor of the residuals clause reason that people acquire information holistically over time and that it would be difficult to compartmentalize knowledge while making decisions. While this may be true in the case of those who negotiate transactions for a living, such as private equity firms, careful consideration should be given when drafting this language if you’re negotiating and sharing highly confidential information with a direct competitor. 

Work with your counsel to restrict the scope of the clause in such a case, such as excluding rights to intellectual property, or stating that no license is being granted to the buyer to use such information. Finally, consider employing additional strategies, such as restricting highly sensitive information to select individuals, or releasing such information only at later stages in the transaction once critical milestones are reached, such as after signing a definitive agreement.

If you’re approaching direct competitors and must share highly sensitive information, preparing the confidentiality agreement is paramount importance to minimize the possibility of damage. 

Unfortunately, disclosing sensitive information is a necessary evil when selling your business and is sometimes unavoidable, especially when selling to a competitor. 

Section #3 – Permitted Uses

Also called “Restrictions on Use,” this section determines what the buyer can do with the disclosed information and usually restricts the buyer to using the information solely for evaluating the transaction.

Confidential Information will be used solely for the purpose of evaluating a possible acquisition and for no other purpose, including in any way detrimental to Seller.

Common Issues

Buyers sometimes object to the phrase “in any way detrimental to Seller.” Some buyers contest that the language could be characterized to prohibit them from using the information to compete with the seller, given that such competition would be “detrimental to Seller.” 

Financial buyers who own a portfolio company in the seller’s industry may also consider this language overly restrictive. They prefer to avoid the problem of separating their understanding of the industry from their knowledge of this particular business. This is exacerbated by the fact that private equity firms and other financial buyers may evaluate hundreds or thousands of transactions per year. The administration required to track thousands of NDAs across hundreds of portfolio companies in dozens of industries would be impractical nightmare. 

Consider Who You’re Dealing With

While a well-crafted NDA sets boundaries and protects you in the case of a breach, there is still always a risk when disclosing information about your business. The least risky entity to disclose information to is a private equity firm. Their partners are often based in a central head office and handle multiple deals at a time. The most risky entity is your direct competitors.

There is a risk that arises between these two – the chance that when dealing with a private equity firm, you end up disclosing your private information to a portfolio company that includes direct competitors.

For this reason, most investment bankers prioritize their buyer list according to risk and contact financial buyers first in the process. They’ll only contact direct competitors if they’re likely to pay a premium or once the positioning and messaging of the sale are tightened up from the initial round of buyers’ feedback. 

Section #4 – Permitted Disclosures

Disclosures to Third Parties

The agreement may either limit disclosure of information to certain third parties on a need-to-know basis (e.g., buyer’s executives, attorneys, employees) or prohibit disclosure to third parties entirely.

To evaluate the proposed transaction, the buyer may have to share the information with their advisors and employees. The buyer must inform these advisors of the confidential nature of the information and require these individuals to sign NDAs or agree to be liable for their breach.

Disclosure Required by Law

Most NDAs allow the buyer to disclose confidential information if required pursuant to a court order, but only to the extent required. In these cases, sellers prefer advanced notice and may include language that requires disclosure only after a written opinion is obtained from their legal advisors. The seller will often modify the language to ensure that it is stated as “required” as opposed to “requested” to limit the scope of the disclosure. This gives the seller an opportunity to defend the request before the information is disclosed. 

Requests by governmental institutions are sometimes questionable and may be politically motivated in certain situations. Ed Thorp, the founder of Princeton/Newport Partners, had his offices raided by federal agents in 1987. The raid was politically motivated by Rudolph Giuliani at a time when he was running for re-election as the New York District Attorney. Giuliani later dropped the charges once his political objectives were met. 

A buyer may consider the use of “required” as too strict, so “request” may be deemed more reasonable. This is because it allows the buyer to cooperate with authorities instead of risking penalties or damaging relationships. Here is a sample of this clause:

In the event either party is required [requested] by law to disclose any of the Confidential Information, such party shall, to the extent permitted by law, provide the other party with prompt written notice and make such disclosures without liability.

Some sellers prefer to obtain a legal opinion before granting the request to the buyer, though buyers may soften this language by modifying it to include “consulting with an attorney” or “upon the advice of outside counsel.” “Outside” is included as the parties often prefer a neutral party’s advice, as opposed to the buyer’s or seller’s counsel. 

Additional modifiers may be included regarding efforts taken to obtain counsel, such as “best efforts” or “commercially reasonable efforts.” The agreement should also address who will bear the expense of obtaining a legal opinion or seeking legal counsel. The common approach is for the seller to bear the expense of protecting their own information.

Section #5 – Definition of Representatives

Confidentiality agreements restrict the buyer from disclosing confidential information to third parties. However, an exception is often granted so the buyer can disclose confidential information to their “Representatives” for purposes of evaluating the transaction. Most NDAs include the buyer’s employees, officers, advisors, and affiliates in the “Definition of Representatives” section. 

Common Issues

Buyers prefer an expansive definition, but having one can expose them to increased liability if they retain liability for breaches made by the “Representatives.” 

Read this section carefully before signing. The language may include “financing sources,” for example but, without a clear definition, this could be extended to include any party that’s providing “financing,” whether debt or equity, and in any amount. With a little imagination, this could be used as a tool to vastly expand the scope of the NDA and include third parties without your explicit consent. 

Representatives shall include the directors, officers, employees, agents, affiliates, [potential] financing sources, or third-party advisors.

Recommendations

At a minimum, any third parties should be bound by the terms of the NDA. The buyer should remain liable for any breaches made by third parties and bear responsibility for ensuring their representatives comply with the terms of the agreement. 

A possible exception exists for professionals who have an implied duty of confidentiality, such as attorneys and accountants. Additionally, third parties should be explicitly limited to evaluating the transaction and used for no other purpose (also covered in “Section 3 – Permitted Uses”). 

Sample Language

The following sample language addresses the buyer’s liability towards their “Representatives:”

Buyer will ensure its Representatives comply with the terms of this agreement and will be responsible for any breach of this agreement by its Representatives. (Liability will be imposed on Buyer for breaches caused by Representatives.)

Buyer shall keep all Confidential Information received by it confidential and shall not disclose Confidential Information, in whole or part, to any person, except to Buyer’s Representatives who need to know the Confidential Information for purposes of evaluating the Potential Transaction, provided that such Representatives are informed by Buyer of the confidential nature of the information and comply with the terms of this Agreement. (No explicit liability imposed on Buyer for breaches caused by Representatives.)

Disclosure Obligation

Finally, the buyer should also be compelled to inform the seller in the event of a breach of confidentiality by their “Representatives,” as provided in the language below:

Buyer agrees to promptly inform Seller in the event of a breach of confidentiality made by itself or its Representatives and will assist Seller in remedying the breach.

Addressing Liability from Third Parties

Many confidentiality agreements state that a breach caused by a “Representative” of the buyer will be treated the same as a breach by the buyer. If so, the buyer would have strict liability for the actions of their representatives. This helps ensure the buyer will exercise a high degree of caution in protecting the seller’s confidential information.

In some cases, buyers will agree to take measures to ensure their representatives’ compliance with the NDA but will absolve themselves from strict liability for doing this with insiders, such as directors, officers, or employees. 

As an alternative, the seller could request that the buyer’s representatives sign a separate NDA, thereby offering the seller a direct remedy to the third party (e.g., the seller could sue the third party directly, in addition to suing the buyer), or add the representative as a signatory on the NDA by way of a joinder, thereby accomplishing the same objective. 

Without a separate NDA with any third parties or the buyer’s liability for third-party actions, the NDA would be useless against the actions of third parties. In essence, the seller would not be able to enforce the terms of the NDA directly onto third parties, and the buyer would bear no responsibility for the third party’s actions, and no one would be on the hook. The buyer should, therefore, bear responsibility for the actions of their “Representatives” in the absence of a separate NDA or joinder signed with the “Representatives.” 

Section #6 – Confidentiality Regarding the Transaction

Sellers normally want to preclude the buyer from disclosing that negotiations are taking place (also called “keeping quiet about the deal”) or from disclosing specific terms of the negotiations, such as the price of the business. By the same token, buyers seek to prevent the seller from disclosing the terms of the transaction to other potential bidders, which serves to prevent the seller from shopping the buyer’s offer. 

In most cases, the buyer will desire that this clause be mutual, whereby the seller is also obligated to keep quiet regarding the deal. The seller, however, should retain the right to disclose to other buyers that they are in negotiations with others without specifying the terms of the potential transaction.

The following are sample clauses:

Each party agrees that it will not disclose to any person (other than its Representatives) the fact that discussions or negotiations are taking place, any terms of negotiations, or the identities of the parties thereto.

Without the prior written consent of the Seller, or as required by law, you will not disclose to any person: (i) the fact that investigations, discussions, or negotiations are taking place regarding a potential transaction, (ii) any of the terms, conditions or other facts regarding the potential transaction, or (iii) the existence of this Agreement.

Section #7 – Standards of Care

Most NDAs require that each party treat the confidential information in the same way they treat their own information. Known as Standards of Care, this treatment is acceptable only if the buyer has reasonably high standards for handling confidential information. 

Therefore, before signing a confidentiality agreement, it would be prudent to investigate the buyer’s practices regarding the secrecy of their own information. If those practices are substandard or nonexistent, the confidentiality agreement should contain specific provisions concerning limiting access to confidential information, such as clearly marking the information as “confidential”.

Section #8 – Return of Information

Most NDAs require that at the end of the disclosing period, the buyer must return the confidential information, including any copies or analyses. However, given the prevalence of electronic information, the degree to which this protects the seller is questionable. 

Practical Implications

In practical terms, it’s difficult to return all confidential information, especially information provided to third parties, such as the buyer’s representatives. Unless every communication has been tracked and labeled, it’s also easy for buyers to forget to delete electronic copies of information, including emails.

Most buyers also prefer to destroy information rather than return it, because it is simpler and less costly. Even though many NDAs include a requirement to “return” information, few parties follow through on the promise, and rarely do sellers enforce it. In reality, most NDAs are only reviewed and enforced in the event of a breach.

The following sample language addresses the return of information:

At Seller’s request for any reason, Buyer will promptly return to Seller or destroy all Confidential Information…

Buyer shall use commercially reasonable efforts to return or destroy Confidential Information stored electronically.

Exceptions

An exception exists for buyers in regulated industries where they are required by law to retain copies of certain information to comply with regulatory requirements. In these cases, buyers draft exceptions to the clause that details their obligation to return or destroy information. This allows buyers to comply with document retention or other compliance policies. Such a clause can also be used to address electronic information, which is often archived but difficult to destroy. 

As a safeguard in these cases, the seller may wish to retain certain precautions to ensure the request is legitimate. In this example, the seller reserves the right to review, approve, or be immediately informed of the request before any confidential information is shared:

Buyer may retain a copy of Confidential Information in the offices of its outside counsel, to the extent required to defend any litigation relating to this Agreement, or to comply with any legal or regulatory requirements or document retention policies.

Derived Information

In most cases, the NDA’s definition of confidential information includes the buyer’s analyses, compilations, and other models based on the seller’s disclosed information (“derived information”). The seller usually agrees that derived information will be destroyed rather than returned, as buyers seldom want to share their own analyses since it may contain proprietary information.

Certify vs. Notify

Finally, a differentiation may be made between “certify” and “notify,” the latter being less restrictive on the buyer.

Section #9 – Communications

Most sellers want all communications to go through them and don’t want the buyer talking to third parties, such as employees, customers, or vendors. Fastidious buyers will make sure they keep the “contacts made in the ordinary course of business” language to ensure the NDA does not serve as a backdoor non-compete.

Here’s a common clause we see regarding communications:

Without the prior written consent of the Seller, you will not initiate any communications with the Seller’s employees, officer(s), director(s), agent(s), affiliate(s), supplier(s), distributor(s), or customer(s) regarding the Transaction and Confidential Information, except in the ordinary course of business.

Section #10 – Non-Solicitation

Sellers want to avoid the buyer poaching the seller’s employees or customers. This is done using a non-solicitation or a no-hire clause. The latter only applies to employees, with the former being less restrictive on the buyer. 

Scope

In most cases, non-solicitation or no-hire agreements have a limited duration or may be limited in scope to specific employees, such as managers or other key employees, as in this example:

Buyer agrees that, for a period of two years from the execution of this Agreement, Buyer will not solicit to hire any [officer or management-level] employee of the Seller without the prior written consent of the Seller.

Common Issues

Prudent buyers prefer not to track their HR department’s compliance with non-solicitation, especially if they evaluate more than a few potential transactions per year. For one thing, it presents issues around disclosure. How would a large buyer inform their HR department not to hire someone from XYZ company (the “seller”) without risking a confidentiality breach? The following language is intended to limit the scope of the non-solicit:

Provided that Buyer will not be prohibited from using non-targeted or general solicitations which are not targeted at Seller’s employees, using search firms as long as such firms do not specifically solicit Seller’s employees, or hiring anyone who contacts Buyer independently without being solicited by Buyer.

Solutions

To soften the requirements, buyers may limit the restriction to those who have access to confidential information or limit the scope of the non-solicit to executive-level employees or those introduced to the buyer. Alternatively, they may replace the “no-hire” with a “non-solicit” agreement, which would prevent them from actively poaching employees but would allow them to hire using a generalized search or search firms.

If the seller is dealing with a private equity firm, they may be worried the PE firm will offer more lucrative terms to the seller’s management team than other buyers and that the team will form a coup and intentionally derail the deal. In these cases, the following language can be used:

Buyer agrees it will not engage in discussions with Seller’s management regarding the terms of their employment post-closing or (i) the seller’s written approval, or (ii) the date a definitive agreement is executed between the parties.

One-Way vs. Two-Way Language

Buyers may also attempt to draft the non-solicit to be “two-way” if the seller will have contact with the buyer’s employees. This is most common when the buyer is a direct competitor.

Section #11 – No Obligation to Proceed

Most NDAs include a statement that the mere fact the parties entered into an NDA doesn’t give rise to an obligation to sign a definitive agreement. While it’s common knowledge that a CA doesn’t bind the parties to consummate a transaction, it’s good practice to state that neither party is obligated to proceed until a written agreement has been signed, as follows:

....until a written agreement between Seller and Buyer has been executed, neither party shall be under any obligation to consummate a transaction.

Each party reserves the right, in its sole discretion, to reject any proposals made by the other party, and to terminate negotiations at any time and for any reason.

Section #12 – No Grant of IP rights

NDAs should include a clause that prohibits the buyer from licensing any intellectual property (IP) contained in the confidential information and a provision stating that no implied license to the technology or information is granted to the buyer. 

The language should further state that all tangible embodiments of the information (e.g., models, data, and drawings) be returned upon request or by the end of the agreement term and that the buyer shall retain no copies.

Section #13 – Disclaimer of Accuracy and No Warranties

A “no warranty” clause is a statement by the seller that they make no warranty that the information is accurate or complete at this stage. If the parties proceed to a definitive agreement (e.g., purchase agreement), that agreement will contain representations and warranties related to the business. 

Purpose

Such a clause facilitates the free flow of information by limiting the seller’s liability regarding the accuracy of information until a definitive agreement is signed. 

Here is seller-friendly language regarding the accuracy of the information:

Seller makes no representation or warranty, express or implied, as to the accuracy or completeness of the information…

Buyer agrees that Seller shall have no liability to Buyer resulting from the use of Confidential Information or any errors or omissions.

The Role of the Purchase Agreement

If the buyer does choose to purchase the business, the seller is customarily required to include extensive representations and warranties (reps and warranties) in the purchase agreement. Reps and warranties are heavily negotiated, and this negotiation can only happen in the context of tradeoffs and circumstances. 

In practice, sellers are more comfortable making certain representations once they understand the specific concerns and objectives of the other party. For example, a seller may be more comfortable presenting the accuracy of the financials once they’ve built a strong, personal relationship and trust with the buyer. This may only come after they understand the buyer’s concerns regarding the financial statements and their reasoning behind the desired representation, and also possibly after the seller has talked to CEOs of past companies, the buyer has acquired. 

It’s sensible that the NDA include language that limits representations to those made at later stages, such as those included in a definitive agreement.

Issues

The buyer may request language that the seller has a “good faith belief” that the information is accurate despite any implied duties of the seller. Many sellers will resist this vague language and obligation by striking it entirely or adding modifiers.

Section #14 – Dispute Resolution, Enforcement, Remedies, and Relief

Types of Remedies

The agreement should include a statement that a breach by the buyer will entitle the seller to equitable – and legal – remedies. Sellers will want to retain the right to equitable relief and seek an injunction. 

The most common legal remedy for a breach of an NDA is to sue for monetary damages, which can be hard to prove or may not sufficiently compensate the seller. One option is to include a liquidated damages clause that contains agreed-upon damages for breaches.

Given the nature of secrets, it can be difficult to determine reasonable damages. A common approach is to acknowledge that breaches can’t be cured by monetary damages alone. The NDA may also provide equitable relief (i.e., remedies that require a party to act or refrain from certain actions). This relief can take the form of temporary restraining orders and court-ordered injunctions that bar the breaching party from using or disclosing further confidential information. 

Monetary damages may not be an adequate remedy for most sellers, so it may be necessary to include the ability to obtain equitable relief. Importantly, a seller may have the right to pursue an injunction even if the agreement lacked this specific language. 

Sample Remedies Clauses

Most buyers agree to some version of equitable and injunctive relief, as in this example:

You agree that the Seller would be irreparably harmed by a breach of this Agreement and that money damages are not an adequate remedy. You, therefore, agree to grant specific performance of this Agreement and injunctive or other equitable relief in favor of the Seller as a remedy for such breach, without proof of actual damages, and you further waive any requirement for the securing/depositing of any bond in connection with such remedy. Such remedy shall not be deemed to be the exclusive remedy for a breach of this Agreement, but shall be in addition to all other remedies available by law.

Injunctive relief cannot be obtained through arbitration, which is why few NDAs include an option for arbitrating any claims. 

Here is another relatively standard clause:

Money damages would not be a sufficient remedy for any breach of this Agreement, and the Seller [both parties] shall be entitled to seek equitable relief, including, without limitation, injunction and specific performance, as a remedy for such a breach. Such remedies shall not be deemed to be the exclusive remedies for a breach of this Agreement but shall be in addition to all other remedies available by law.

Disclosure of Breaches

The agreement should require the buyer to disclose any breaches or violations of the NDA promptly.

Section #15 – Indemnification and Legal Costs

In the absence of an indemnification, each party is responsible for its own attorney’s fees in the United States, with the possible exception of Alaska. While the “loser pays” rule prevails in Canada, the United Kingdom, and most European countries, in the USA, it is not a matter of statute. The rule can be applied, but the parties must contractually agree to it beforehand. 

Buyers may agree to a “loser pays” clause but may resist signing a “one-way attorney fees” provision, as in these examples:

Buyer agrees to indemnify and hold harmless Seller from any loss arising out of a breach of this Agreement.

With respect to any dispute among the parties arising out of or relating to this Agreement, the reasonable attorneys’ fees and costs incurred by the prevailing party in connection with such dispute shall be paid by the other party or parties to such dispute.

Section #16 – Term

Common Terms

NDAs commonly have terms of one to five years. 

What does the term depend on?

The period of time depends on the strategic value of the information to the seller and how quickly the information may become obsolete. The term of the NDA will depend on what kind of information is being disclosed and is usually tied to the economic life of the information in question. 

Why do NDAs expire?

Buyers require termination of the CA to avoid the ongoing administrative obligations of ensuring compliance with and monitoring the terms of the agreement. Buyers normally prefer to limit the terms to two to three years. 

The Argument for No Termination Date

Some sellers will push for the NDA to never expire, arguing that the confidential information remains valuable after the proposed termination date. This could be persuasively argued in the case of IP that may have a longer life than the term of the CA, and separate terms can be drafted to address specific categories of information. Other provisions may contain different terms, such as a non-solicitation agreement.

Sellers should avoid terminating the NDA once a definitive agreement is signed because many transactions sign a definitive agreement but don’t make it to closing. These example clauses illustrate the edits sellers should make:

This Agreement shall expire upon the earlier of five years from the execution of this Agreement, execution of a Definitive Purchase Agreement between the parties, or upon the consummation of a Transaction between the parties.

[Modified] This Agreement shall expire upon the earlier of five years from the execution of this Agreement or upon the consummation of a Transaction between the parties.

Misc. Provisions

The following are additional miscellaneous provisions that are addressed in most confidentiality agreements.

Assignment

Thought should be given to whether the CAs should be assigned to the successful buyer. In the absence of such an assignment, it may be impractical for a retired seller who no longer has a vested interest in the business to enforce the CA on the buyer. In the case of a stock sale, such an assignment may be unnecessary. 

This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors. Any assignment of this Agreement without the prior written consent of the other party shall be void.

Choice of Law and Forum

Most sellers seek to be governed by the law of the state in which they are incorporated. Buyers seldom refuse this request unless the buyer has significant negotiation leverage over the seller. If the parties are located in different states, they may choose a neutral state in which neither party has an advantage. Clauses requiring arbitration are rare in CAs because the parties usually seek specific performance, which cannot be obtained through arbitration. The parties also sometimes include a clause waiving the right to a jury trial. Here is a common example:

This Agreement shall be governed by the laws of the State of Alaska. Each party hereby irrevocably consents to submit to the exclusive jurisdiction of the courts of the State of Alaska for any action, suit, or proceeding arising out of or relating to this Agreement.

Conclusion

Understanding the basic clauses of confidentiality agreements can ensure that the important purposes they serve aren’t defeated by ambiguities or ignorance of the meaning of terms used in the NDA.

As with any agreement, there’s no “one size fits all” approach, and you should consider professional advice before signing or making changes. To ensure the NDA is enforceable, you should carefully consider the factors laid out in this article – especially since the protection of ideas and trade secrets is inherently difficult.