Non-Disclosure Agreement (NDA) | A Complete Guide for M&A

An Introduction to M&A NDAs and Confidentiality Agreements

Maintaining confidentiality is essential when it comes to selling your business. Many critical issues are addressed in a properly drafted non-disclosure agreement (NDA), including non-solicitation and other “sales process” issues. It’s tempting to assume that all NDAs are boilerplate, but a mistake at the stages of negotiating and signing an NDA can close off critical options later in the process. In extreme cases, leaks can destroy your business.

A properly drafted confidentiality agreement also sets expectations and signals to buyers that you are well-represented. This means buyers will be less likely to use negotiating tactics that are unlikely to work on a sophisticated seller who is properly represented.

In nearly every M&A transaction, a confidentiality agreement (CA) is executed, but a CA is only one of many tools in your arsenal that you can use to maintain confidentiality during the sale process. This article explains strategies you can use in combination with a properly drafted CA both before and during the sale to offer a high level of control over your sensitive information.

The information in this article is also especially important if the terms of a confidentiality agreement are integral to the sale of your business, especially if you are approaching direct competitors, the inherent risks of which are high.

This article is also an excellent primer for any professional advisor such as an accountant or attorney who would like to better understand both the role of CAs in the grand context of the sales process and the detailed mechanics of negotiating an NDA.

If you’re about to put your business on the market, read this first.

Table of Contents

• Topics Covered in a Non-Disclosure Agreement
• The Importance of a Properly Drafted NDA
• The Process
• When to Execute a Confidentiality Agreement or NDA
• What are the Benefits of Signing an NDA for a Buyer?
• Types of NDAs
• Differences in NDAs by Type of Buyer
• Content & Analysis of NDA Language
  • Introductory Paragraph
  • Definition of Confidential Information
  • Exclusions from Definition of Confidential Information
  • Permitted Uses
  • Definition of Representatives
  • Confidentiality Regarding the Transaction
  • Standards of Care
  • Permitted Disclosures
  • Return of Information
  • Communications
  • Non-Solicitation
  • No Obligation to Proceed
  • No Grant of IP rights
  • Disclaimer of Accuracy & No Warranties
  • Dispute Resolution, Enforcement, Remedies & Relief
  • Dispute Resolution Mechanism
  • Indemnification & Legal Costs
  • Term
  • Misc. Provisions
• Problems, Tips & Strategies
• FAQs
• Conclusion

Topics Covered in a Non-Disclosure Agreement

At a minimum, an NDA will usually cover the following:

• The definition of confidential information
• Restrictions in using the confidential information
• Obligations of the recipient
• Standards of care
• Term
• Remedies
• Permitted disclosures
• Return of confidential information
• Disclosure period
• No obligation to proceed
• No grant of IP rights
• Enforcement
• Law & jurisdiction
• Dispute resolution

With regard to the confidential information, the buyer is obligated:

• To use the information only for purposes described in the agreement
• To disclose the information only to persons with a need to know the information for purposes of evaluating the transaction
• To use appropriate or reasonable efforts to keep the information secure
• To ensure that anyone to whom the information is disclosed further abides by obligations restricting use, restricting disclosure, and ensuring security at least as protective as the agreement
• To not share the information with third parties, unless required to by law, for a minimum period of time, typically one to five years
• To safeguard the information they receive with reasonable precautions that are at least as stringent as the safeguards they use to protect their own information
• To not reverse engineer or decompile the information
• To notify the disclosing party of any leaks of the disclosed information
• To comply with all government rules and regulations, including export and import laws
• To cease use of the information and return it to the disclosing party upon termination of the NDA.

The Importance of a Properly Drafted NDA

It’s tempting to assume that all NDAs, or confidentiality agreements (CAs) are boilerplate. However, a seemingly infinitesimal mistake at the stage of negotiating and signing a non-disclosure agreement can close off critical options later in the process. In other cases, a leak in confidentiality can destroy your business.

The language in M&A confidentiality agreements has evolved over the years and is no longer restricted to language which only addresses confidentiality. Despite the implication of the name “confidentiality agreement,” many additional critical issues are addressed, such as non-solicitation and other sales process issues.

A properly drafted confidentiality agreement sets expectations with buyers, which is critical to the M&A process. A properly prepared agreement signals buyers that you are well-represented, and buyers will be less likely to use negotiating tactics that are unlikely to work on a sophisticated seller who is properly represented.

If an investment banker or M&A advisor represents you, expect your advisor to have a template. Because most M&A advisors represent sellers, their template will be seller-friendly.

If your situation is unique, consult with your attorney to draft a custom NDA. In most cases, buyers will make few requests about the language contained in your NDA, but you should be prepared to negotiate the terms of the agreement as requests are varied.

In practice, most NDAs are drafted by the disclosing party, usually the seller in M&A transactions. Sellers negotiate with multiple buyers, and maintaining consistent language across the agreements simplifies the process. Most NDAs never make it past the first stage of selling a business (i.e., signing an NDA and reviewing the offering memorandum), and you may execute dozens of non-disclosure agreements with potential buyers during the sale process.

The Process

For transactions in the middle market, most intermediaries first provide a teaser profile to the prospective buyer before requesting that the buyer sign a non-disclosure agreement. Most buyers in the middle market prefer to see if the business is a good fit before committing to the terms of an NDA.

The teaser profile and NDA are often contained in the same document, and the buyer is asked to sign the NDA if they would like to access the confidential information memorandum (CIM) on the business. Since moving forward relies on this document, the non-disclosure agreement is usually signed early in the process.

When to Execute a Confidentiality Agreement or NDA

The non-disclosure agreement is the first document to be signed in a transaction and sets the tone for the negotiations, making it a critical component in the sale process. Depending on the type of business being sold, the name and location of the business can be highly sensitive. A seller may want to protect that information until they know the buyer is genuine and sincere.

The goal of the intermediary representing the seller is to protect their client’s sensitive and confidential information while providing enough information to a potential buyer so the buyer can decide whether or not to pursue the business. Needless to say, this is a delicate balancing act.

If the business is being sold through a broker or M&A intermediary, the NDA will usually be executed before the business’s name is disclosed. If the owner has been approached by a competitor directly, then an NDA is often signed before substantive discussions take place or before the seller shares confidential information with the buyer.

What are the Benefits of Signing an NDA for a Buyer?

Many buyers view an NDA as one-sided for the sole benefit of the seller. This is initially true, though the buyer will also benefit from the protections afforded in the NDA. Potential buyers who did not end up purchasing the business, but who may be the business’s competitors, will have still signed an NDA before accessing confidential company information.

The fact that a business is for sale may, for example, cause a significant customer to reconsider their relationship with the company. A non-disclosure agreement helps prevent this and also benefits the buyer.

By signing the NDA, the buyer is letting the seller know they’re serious about buying a business. A seller is unlikely to share highly sensitive and critical information about their company without a signed NDA. Most sellers refuse to have further discussions with a buyer who is unwilling to sign a confidentiality agreement. Sellers become more cooperative in relation to the degree to which the buyer is cooperative.

Types of NDAs

There are two basic types of NDAs — a unilateral NDA and a mutual NDA. Most NDAs do not clearly state whether the document is unilateral or reciprocal. However, this can be discerned after briefly reading the contract.

• Unilateral: Only one party is obligated not to disclose confidential information in a unilateral or one-way agreement. Most NDAs when selling a business are unilateral, whereby the buyer is the recipient and the seller is the disclosing party, and the seller has no reciprocal obligations.
• Mutual: In a bilateral or mutual agreement, both parties provide information that is intended to remain secret. This type of agreement is common when businesses are considering some form of a joint venture or merger.

Differences in NDAs by Type of Buyer

As a matter of custom, nearly all private equity firms will agree to sign a non-disclosure agreement.

On the other hand, venture capitalists, who are financial buyers investing in speculative opportunities, will rarely agree to sign an NDA. Entering into an NDA increases the risk that the venture capitalist (VC) may face charges of trade secret misappropriation if the VC develops similar information in the future or inadvertently discloses or uses the information. This is the primary reason that VCs will not sign NDAs.

Content & Analysis of NDA Language

The guide below does not address every eventuality but instead covers the most common issues that arise in drafting and negotiating a confidentiality agreement.

Introductory Paragraph

Most confidentiality agreements open with an introductory paragraph. It’s important not to skip this paragraph as several important points are covered.

(Keywords are bolded for emphasis) “This Agreement is made and entered into between the undersigned, both individually and on behalf of 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.”

Here are our comments:

• In the language above, the buyer is signing the non-disclosure agreement both individually and on behalf of the entity they are representing. Some buyers may strike “individually,” thereby attempting to limit their personal liability, which is a reasonable request if the buyer is a financial buyer, such as a private equity group. However, this may be unreasonable if the buyer is a small, private business with a sole owner. In this case, it’s wise to ensure the buyer signs the NDA both on behalf of their entity and individually.
• The NDA limits the buyer to using the information for the sole purpose of evaluating the possible transaction.
• “Possible” is included to avoid implying any agreement between the parties until such an agreement is in writing.
• The introductory paragraph also expands the scope of the NDA:
  • 1) by people involved: to include reference to “third-parties,” and
    2) in time, to include information disclosed before execution of the NDA.

Definition of Confidential Information

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

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 called “Exclusions from Confidential Information.” Sellers attempt to broaden the scope by expanding the definition to include information that is:

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

Buyers narrow the scope of the definition by including the phrase “to the extent” to prevent entire documents from being characterized as “confidential information” because they contain one singular piece of confidential information. Alternatively, buyers prefer to use a narrow definition, attempting to exclude information conveyed orally or from third parties, or information obtained before execution of the agreement, or requiring the seller to stamp information “confidential.”

The risk to the buyer of an expansive definition of “confidential information” is minimal due to the limited requirements of the agreement — to keep the information confidential. The potential for the seller to allege a breach and prove damages is minimal, and the evidentiary burden is on the seller to prove that the buyer disclosed confidential information. Therefore, in most cases, the parties agree to an expansive definition and then limit the definition by way of explicit exclusions.

The type of information that can be included under the umbrella of confidential information is broad in scope. Any information that flows between the parties can be considered confidential — data, know-how, prototypes, engineering drawings, computer software, test results, tools, systems, and specifications. This list is not exhaustive but does illustrate the breadth of items that can be deemed confidential. Confidential information does not have to be limited to written information — it can also include information that is transmitted orally.

This information can range from schematics and photographs to strategic plans, customer lists, and financial data. It is collectively referred to as “confidential information” or “proprietary information” throughout the agreement.

The definition of confidential information is sometimes subject to negotiation. The seller often seeks a broader definition, such as “all information relating to the seller, which is disclosed to the buyer.” The receiving party (i.e., buyer) may not want to shoulder the burden of a broad definition and may seek to narrow the definition or require that “confidential information” be stamped by the seller.

The seller may also want third-party confidential information to be deemed confidential. The receiver will want to narrow the definition of confidential information in order to avoid being “tainted” by the information. The definition can be narrowed by

• limiting it to information disclosed in writing, or oral disclosures reduced to writing within a specific time frame
• specifically marking the information confidential
• specifying the information that is deemed confidential
• specifying the dates of disclosure

In reviewing the confidential information, the buyer may produce reports or summaries derived from the confidential information. The definition of “confidential information” should include these studies and analyses — this is often called “derived information.”

As a result of the limited requirements of the agreement on the buyer and the fact that the evidentiary burden is on the seller, confidentiality and non-disclosure agreements are rarely negotiated in practice. This is in direct opposition to the letter of intent and the definitive agreement, which are heavily negotiated documents.

Examples:

“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 separately with its own restrictions. In reality, the buyers’ analyses of the business may be inseparably fused with their own proprietary models, and buyers may therefore want to ensure that the seller does not obtain rights to the buyer’s proprietary formulas, methods, forecasts, or other intellectual property. A happy medium is often achieved by defining confidential information to the extent that it explicitly includes the seller’s confidential information.
• Labeling: A “labeling” or “legending” requirement demands that the seller label any information that is confidential. In practice, this is an impractical administrative burden on the seller due to the high volume of information exchanged in a transaction and given that much of the information is electronic or oral (e.g., management discussions or customer interviews). Sellers should vehemently fight any legending requirements. Requiring the seller to stamp information is impractical in the age of information, as most information is now conveyed electronically. Doing so also slows down the process, and time is the enemy when selling your business.
• 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 is conveyed orally.
• Obligation to Provide Information: The agreement should not 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 buyers. However, such an obligation may be unreasonable in the case of a requirement to disclose sensitive information to a direct competitor. For example, it’s riskier to share customer information with a direct competitor than with a private equity group that does not 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 such an obligation to provide information would greatly restrict the seller’s strategy regarding what, when, and to whom information should be released.
  • Example: “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 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. However, the time frame would still exclude information listed in the “Exclusions” section (discussed in the next section), such as information that is “generally known or available to the public.”

Exclusions from Definition of Confidential Information

Normally listed immediately after the “Definition of Confidential Information” is a paragraph listing specific exclusions to the definition. The seller’s preferred approach is to be as broad as possible in scope while explicitly listing exclusions.

The recipient (i.e., buyer) will want broad exceptions (exclusions) to the definition of confidential information. 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, without confidentiality restrictions
• Information obtained by the receiver from a third party without a breach of confidentiality
• Information independently developed by the recipient

Disclosure Period

Information not disclosed during the disclosure period is also sometimes excluded from the definition of confidential information. The seller should include language that covers information disclosed prior to the execution of the agreement to ensure that all information is protected, regardless of when it was disclosed.

Sample language and commentary

• “Information already in the buyer’s possession, provided the information is not subject to another confidentiality agreement.”
  • Comments: The buyer may wish to add a “knowledge qualifier” here regarding the existence of a 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 an unknown confidentiality agreement that may address the information. Another more restrictive definition designed to shift the burden of proof from the seller to the buyer could include “ … as established by documentary evidence …”
• “Information available or generally known to the public, [other than as a result of disclosure of Buyer] [other than through the fault of the Buyer] [other than through a breach of this Agreement].”
  • Comments: 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.
• “Information Buyer develops without the aid of the confidential information,” or “Information that is independently developed by Buyer without the use of Confidential Information.”
  • Comments: Most sellers will have an issue with this clause because the burden of proof rests on the seller. It may be difficult for the seller to prove that the buyer’s summaries or analyses were provided by the seller if the buyer reconstructs the information in a different form. Additionally, once the buyer develops an understanding of the information, it may be possible for the buyer to reconstruct the information in such a manner as to intentionally recharacterize it so it would be excluded from the definition of “Confidential Information” and the buyer could then use the information as they please, even competitively.
• “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.”
  • Comments: Confidential information exists not only in writing but also in the mind of the buyer. It would be difficult for a buyer to “forget” or “destroy” the collective information when making key strategic decisions. The “residuals” clause addresses this concern by excluding information the buyer retains in their unaided memory from the definition of confidential information, though this depends on the definition of “residual information” in the agreement.
  • In reality, 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. However, the buyer could not use specific information, such as software code. The argument advanced by proponents of the residual clause reason that people acquire information holistically over time and it would be difficult to consciously separate generalized information from their thought processes. While this may be true in the case of those who negotiate transactions for a living, such as private equity groups, careful consideration should be given when drafting this language if you are negotiating with a direct competitor, and sharing highly confidential information.
  • 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 (e.g., signing a definitive agreement). In cases in which you are approaching direct competitors and must share highly sensitive information, preparing your business for sale is of paramount importance to ensure a brisk, problem-free sale, which thereby minimizes the possibility of damage. As a final note, disclosing sensitive information is a necessary evil when selling your business and is sometimes unavoidable, especially when selling to a competitor.

Permitted Uses

Also called “Restrictions on Use.” This section determines what the buyer can do with the information and ordinarily 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.”

Buyers sometimes object to the phrase “in any way detrimental to Seller” and contest that such language could be broadly characterized to prohibit the buyer 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 due to the difficulty of separating the buyer’s understanding of the industry from their knowledge. This is exacerbated by the fact that private equity groups and other financial buyers may evaluate hundreds or thousands of transactions per year. It may become an administrative impossibility to track thousands of non-disclosure agreements across hundreds of portfolio companies in dozens of industries in which they may operate.

In practice, the risk of damage is far less when disclosing information to a private equity group (PEG) than when doing so to a competitor, unless you are dealing with an executive (e.g., CEO) at one of the PEG’s portfolio companies. The executives you will deal with at a PEG are normally located at the corporate office and have almost no involvement in the operations of their portfolio companies.

For this reason, most investment bankers prioritize their buyer list according to risk and normally contact financial buyers first in the process due to the lower amount of risk involved. They will only contact direct competitors if they are likely to pay a price premium. They will also contact direct competitors later in the process once the positioning and messaging is tightened up from feedback from the initial round of buyers. The initial conversations with buyers will highlight problems in the offering memorandum so that these can be addressed and strengthened as the sales process unfolds.

Definition of Representatives

Confidentiality agreements restrict the buyer from disclosing confidential information to third parties, though an exception is often granted that allows the buyer to disclose confidential information to the buyer’s “Representatives” for purposes of evaluating the transaction.

Most non-disclosure agreements include reference to the buyer’s employees, officers, advisors, and affiliates in the “Definition of Representatives” section. Buyers prefer an expansive definition, but having one can expose the buyer to increased liability if they retain liability for breaches made by the “Representatives.”

Diligently read this section before signing. For example, the language may include “financing sources,” however, without a clear definition of “financing sources,” this could be extended to include any party that is providing “financing,” whether debt or equity and in any amount. With some creative thought, this could be used as a tool to vastly expand the scope of the NDA to include third parties without your explicit consent.

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

At a minimum, any third parties should be bound by the terms of the NDA and the buyer should remain liable for any breaches made by third parties and bear responsibility for ensuring that 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, use by any third parties should be explicitly limited to evaluating the transaction and for no other purpose (also covered in “Permitted Uses”). Following is sample language addressing 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.)

In some cases, buyers will agree to take measures to ensure compliance with the confidentiality agreement by its representatives but absolve themselves from strict liability from doing so, with the exception of 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.

In the absence of a separate NDA with any third parties, and in absence of the buyer’s liability for third-party actions, the NDA would be toothless against the actions of third parties. In essence, the seller would lack the ability 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.” 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.”

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 its representatives. This helps ensure the buyer will exercise a high degree of caution in protecting the seller’s confidential information.

Some buyers will attempt to avoid strict liability for the actions of their advisors. If the advisor is playing a critical role in the sale process, it may be wise to ask the third-party advisor to sign a separate CA. This allows the seller to enforce the CA directly on the representative. As mentioned previously, attorneys and accountants have an implied duty of confidentiality, and their professional obligations are normally viewed as sufficient.

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 also 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 another buyer without specifying the terms of the potential transaction. Following is sample language:

“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.”

Standards of Care

An important point that must be covered in any confidentiality agreement is the standard of care by which the parties will be required to protect the confidential information.

Most NDAs require that each party treat the confidential information in the same way it treats its own. 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 maintaining 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 (e.g., clearly marking the information as “confidential”).

Permitted Disclosures

Disclosures to Third Parties

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

In order 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 cases when the buyer is required by law to disclose confidential information, such as by governmental authorities, sellers prefer advanced notice and may also 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” or attempt 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. As an example, Ed Thorp, the founder of Princeton/Newport Partners, had offices that were raided by federal agents in 1987. The raid was politically motivated by Rudolph Giuliani at a time when he was running for re-election. The charges were later dropped by Giuliani once his political objectives were met.

“Required” may be considered too strict by the buyer. “Request” may be deemed a more reasonable standard so the buyer can cooperate with authorities instead of risking penalties or damaging relationships with authorities for not doing so, as shown below:

“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 the language to include “consulting with 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. A common approach to this is that the seller should bear the expense of protecting their own information.

Return of Information

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

In practical terms, it’s difficult to return all confidential information, especially information provided to third parties, such as the buyer’s “Representatives.” Many buyers forget to permanently delete electronic copies, including emails. Buyers prefer to destroy information, as opposed to returning information, which is simpler and less costly. Despite the fact that many NDAs include a requirement to “return” information, few parties follow through on the promise. In reality, most NDAs are only reviewed in the event of a breach. Following is sample language addressing “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.”

An exception exists for buyers in regulated industries that are required by law to retain copies of certain information to comply with regulatory requirements. In these cases, buyers draft exceptions to their obligation to return or destroy information. This allows them to comply with document retention or other compliance policies or 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 by offering for the seller to review, approve, or be immediately informed of the request before any confidential information is shared, as in this example:

“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.”

In most cases, the “Definition of Confidential Information” also includes the buyer’s analyses, compilations, and other models (“derived information”). The seller usually agrees that derived information will be destroyed, as opposed to returned, as buyers seldom desire to share their own analyses, since they may contain proprietary information.

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

Communications

Most sellers desire all communications to be funneled through them and wish to avoid the buyer talking to third parties, such as the employees, customers, or vendors. Exceptionally punctilious buyers will modify the language to ensure this does not serve as a backdoor non-compete by excluding “contacts made in the ordinary course of business.” Here is 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, director, agent, affiliate, supplier, distributor, or customer of the Seller regarding the Transaction and Confidential Information, except in the ordinary course of business.”

Non-Solicitation

The seller wishes to avoid the buyer poaching the seller’s employees or customers and does so by way of a non-solicitation or a no-hire agreement (only applies to employees), with a non-solicitation agreement being less restrictive on the buyer. In most cases, “non-solicits” and “non-hires” 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.”

Any prudent buyer will wish to minimize their concerns of having to track the activities of their HR department to comply with the terms of the confidentiality agreement, especially if they evaluate more than a few potential transactions per year. 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.”

In larger companies, there is also an issue regarding disclosure. How would a buyer inform their HR department not to hire someone from XYZ company (the “seller”) without raising eyebrows? Wouldn’t such a request raise unnecessary suspicions amongst the buyer’s company?

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

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

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

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.

No Obligation to Proceed

Most NDAs include a statement that the mere fact the parties entered into an NDA does not give rise to an obligation to sign a definitive agreement. While it is common knowledge that a CA does not bind the parties to consummate a transaction, it’s good practice to state that neither party is obligated to consummate a transaction 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.”

No Grant of IP rights

NDAs should include a clause that 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.

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

Disclaimer of Accuracy & 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.

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. If the buyer does choose to purchase the business, the seller is customarily required to include extensive representations and warranties in the purchase agreement.

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.”

Representations and warranties are heavily negotiated and can only be negotiated in the context of tradeoffs and context. In practice, sellers are more comfortable making certain representations only once they understand the specific concerns and objectives of the other party. For example, a seller may be more comfortable making a representation regarding the accuracy of the financials once they have 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, also possibly after the seller has talked to CEOs of past companies the buyer has acquired.

It is sensible that the NDA include language that limits representations to those made at later stages, such as those included in a definitive agreement. However, 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 language by striking it entirely or adding modifiers.

Dispute Resolution, Enforcement, Remedies & Relief

The agreement should include a statement that breach by the buyer will entitle the seller to equitable — and legal — remedies. CAs are hard to enforce, and money damages are hard to prove or may not sufficiently compensate the seller. Sellers will want to retain the right to equitable relief and seek an injunction.

The most common legal remedy for breach of an NDA is to sue for money damages. The parties may agree to certain damages in advance of a dispute, by including a liquidated damages clause that contains agreed-upon damages for breaches. However, given the nature of secrets, it can be difficult to determine reasonable damages. A common approach is to acknowledge that breaches cannot 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) in the form of temporary restraining orders and court-ordered injunctions that bar the breaching party from using or disclosing the confidential information.

Money damages may not be an adequate remedy for most sellers, so it may be necessary to include the ability to obtain equitable relief. Arguably, the seller may have the right to pursue an injunction even if the agreement lacked this language. The agreement should also require the buyer to disclose any breaches or violations of the NDA.

The forum selection and choice of law clauses are usually written separately, but they also impact how a dispute is resolved. Most parties agree in advance that in the event of a dispute they will submit to the jurisdiction and laws of a particular state. This means that if either party wants to bring a claim, it must do so in the state named in the agreement and that state’s laws will govern the decision of the court or arbitrator.

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 a relatively standard clause:

“Money damages would not be 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.”

Indemnification & Legal Costs

In the absence of an indemnification, each party shall be responsible for its own attorney’s fees in the United States, with the possible exception of Alaska. The “loser pays” rule prevails in Canada, the United Kingdom, and most European countries, but not in the USA as a matter of statute (i.e., the parties must agree contractually). Buyers may agree to a “loser-pays” clause but may resist signing a “one-way attorney fees” provision, as in this example:

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

Term

NDAs commonly have terms of one to five years. 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.

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

Some sellers will argue for an absence of a termination date, 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 term when a definitive agreement is signed because many transactions fail to close, as this clause addresses:

“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

Following are additional miscellaneous provisions that are addressed in most confidentiality agreements:

• Assignment: Thought should be given to whether the CA could be assigned to a new buyer (successor). 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 & 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 separate states (e.g., California and Florida), they may choose a neutral state in which neither party has a hometown advantage, such as Delaware or New York. 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 concerts 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.”

Problems, Tips & Strategies

• Definition of Confidential Information: The problems with confidentiality agreements arise when the “confidential information” that the agreement is intended to protect is defined so broadly that it is impossible, as a practical matter, to determine what it covers and whether that information is truly deemed confidential.
• Protecting Trade Secrets: Despite the importance of the NDA in maintaining trade-secret protection, confidential information may still be vulnerable to disclosure in various ways. There is also a risk of litigating trade secrets in open court, where disclosure is a necessity and enforcement can be uncertain. Perhaps even more important, signing an NDA with your counterparty helps to generally maintain the status of your confidential information as trade secrets. Courts will typically protect the secrecy of information deemed to be “trade secrets.” In order to qualify as trade secrets, the information must be kept secret or, if the information is communicated to a third party, the third party must be pledged to secrecy. The NDA serves as this pledge, and your trade secrets ideally will still be afforded the general protection of the courts.
• Use a Phased Release of Information: To minimize the risks, we recommend a phased release of information in which confidential and sensitive information is released in stages, as opposed to all at once.
• Use the Correct Legal Names of the Parties: Finally, ensure that you include the correct legal names of individuals and/or companies in any agreement. Getting any details wrong could leave you on dodgy ground if you have to enforce the agreement.
• NDAs are Not Needed When Working with Professional Advisors: If you engage licensed professionals, such as accountants or attorneys, a confidentiality agreement is not required as they have a duty of care once they accept you as a client. This means that confidentiality is implicit in their role, and a separate document specifying the need is not legally required.
• Enforcement: There are pragmatic issues related to the enforcement of NDAs: the seller may not always be aware of a confidentiality agreement breach.

FAQs about Non-Disclosure Agreements

How common is it to negotiate confidentiality agreements?

It’s rare for parties to refuse to negotiate the terms of an NDA. The first draft is always negotiable, but the degree to which the parties negotiate depends on their individual bargaining strength. Every buyer, whether a corporate or financial buyer, has their own idiosyncrasies in terms of the language they look for in a CA, based on the history of their past deals and what may have gone wrong. In practice, a minority of buyers request changes to a confidentiality agreement. However, the later you request an NDA from a buyer, the more prone a buyer is to attempt to negotiate the terms of a CA or NDA.

What is the role of my attorney and M&A advisor?

Every M&A advisor will have a template they use. However, your attorney should become involved if you have unique needs, such as trade secrets that need to be protected, or if your marketing strategy includes approaching competitors.

Do advisors sign NDAs?

PEGs nearly always sign NDAs when scouting for acquisitions, though few venture capitalists will sign an NDA. Most M&A advisors and investment bankers will sign a non-disclosure agreement, though some will view the request as naive due to their implied duty of confidentiality. Professionals (PEGs, venture capitalists, M&A advisors, investment bankers) wouldn’t be in business for long if they were in the business of stealing ideas. Attorneys and accountants will sometimes sign an NDA if the situation is unique, such as if they are part-owner in a competitive firm, but they are bound by an implied duty of confidentiality, and requesting them to sign an NDA is considered unnecessary in most situations.

A buyer approached me to potentially buy my company. Should I sign their “standard NDA”? Are they likely willing to negotiate the terms of the NDA?

There is no such thing as a “standard NDA.” Always have the NDA reviewed by your attorney before signing. Any company with a legitimate interest will be willing to negotiate the terms of their NDA.

Are NDAs one-way or two-way agreements?

Many NDAs are drafted to be one-way agreements in which the seller only attempts to restrict the buyer’s actions. Buyers often modify the NDA if they are disclosing information to the seller, or at least to protect the terms of the transaction so the seller can’t shop the buyer’s offer.

What is signed after the confidentiality agreement?

A “letter of interest” or “letter of intent” (LOI) is customarily signed after the parties have exchanged information and the buyer has expressed an interest in moving forward into due diligence. After due diligence is completed, the parties then replace the LOI with a definitive agreement (i.e., purchase agreement, asset purchase agreement, definitive purchase agreement), which is signed at closing to consummate the transaction.

Can the buyer disclose the specific terms of the negotiation after the CA expires?

Yes, unless the CA specifically prohibits this. An alternative is to remove the expiration date altogether, though a majority of buyers will argue that it may be difficult to monitor compliance with the agreement long-term. Some jurisdictions may also not allow a perpetual term.

Conclusion

Understanding a few basic points concerning confidentiality agreements can ensure that the important purposes they serve will not be defeated by ambiguities or ignorance of the meaning of terms used in the agreement.

As with any agreement, there is no “one size fits all” approach, and you should consider professional advice before taking action. In order to best assure the NDA is enforceable, careful consideration should be given to the above factors — especially since the protection of ideas and trade secrets is inherently difficult.