Reviewing the M&A nondisclosure agreement

Mergers and Acquisitions Alert (US)

In this overview, Mr. Wang updates his original 2005 review of M&A nondisclosure agreements, one of the most popular articles on DLA Piper.com.

 

A nondisclosure agreement, often referred to as an NDA or a confidentiality agreement, is typically the first agreement to be entered into in a mergers and acquisitions transaction.  The agreement is designed to protect the confidentiality of information exchanged in connection with the consideration and negotiation of the transaction and information exchanged in the course of a party’s due diligence review of the other.  In a situation where a party is presented with the other side’s form NDA, a careful review is warranted. 

Set forth below is a summary checklist and commentary concerning some of the more important items to consider when reviewing an NDA.  The checklist and commentary refer to “Providers” and “Recipients,” regardless of which part is the buyer or seller.  That is because while the selling party generally is the “Provider,” in some situations, such as where the buying party is issuing its equity as part of the transaction consideration, the buyer may also providing substantial amounts of confidential information to the seller for the seller’s due diligence on the buyer.  Where the italicized prefaces “Providers should” or “Recipients should” advocate actions to take in your review, keep in mind that business reasons may dictate the importance of certain provisions and the lesser relevance of others.  The checklist does not contain every matter you may desire to negotiate and is not a substitute for review by sophisticated M&A counsel – it is merely intended to address some of the more common issues you should be aware of in reviewing an NDA.

General

Providers and Recipients should

  • Confirm that the form of NDA used is a proper one, as often parties mistakenly start with an NDA that is designed for providing information to vendors or with another short-form NDA that is not tailored for an M&A transaction.

Definition of confidential information

Providers should

  • Confirm that the definition of “confidential information” sufficiently covers the information and materials to be provided (and, to the extent applicable, confidential information that may have been previously provided).
  • Consider removing legending requirements (that any written materials be marked “confidential” or that oral statements be reduced to writing and so marked to be considered confidential) to avoid accidental failures to legend leading to unprotected confidential information.
  • Consider having any subset of extremely confidential information being supplied (such as pricing information, patent information, or source code) carved out and addressed separately under a special NDA implementing careful controls and procedures to limit the distribution and access of the information to those advisors or agreed upon personnel of the Recipient whom the Provider believes cannot exploit the information commercially, especially where the Recipient is a close competitor.
  • Remove any “residual” clause which allows the Recipient to use, in future products or services, all information retained in the memory of the Recipient’s employees which was obtained from reviewing the confidential information.

Recipients should

  • Confirm that the exclusions from what is considered confidential information properly reflect the principle that information should not be protected if it was created or discovered by the Recipient prior to, or independent of, any involvement with the disclosing party.
  • Consider removing legending requirements to avoid a burdened diligence process.

Use of confidential information

Providers should

  • Confirm that there exists language limiting the use of the confidential information to that contemplated (evaluation of the specific transaction) and not for any other purpose.
  • Confirm that there exists language clarifying that no license is being granted to the Recipient or its representatives to use the confidential information except for the specific purpose of evaluating the transaction, and that no license is being granted to any of the Provider’s intellectual property.
  • Confirm that the Recipient is responsible/liable for its representatives’ proper use of the confidential information to the extent that the Provider does not request such representatives to be parties to the NDA.
  • If the Provider is a publicly traded company, confirm that the Recipient will not use confidential information in violation of applicable securities laws.
  • Consider implementing controls and procedures to limit the distribution and access of the information if there is extremely confidential information being supplied or if the Recipient is a close competitor, but where these factors do not arise to the level of affording treatment of the more sensitive portion under a special NDA.
  • Confirm there exists language clarifying that information provided does not constitute any representation or warranty of the Provider but that such representations and warranties are limited to what is provided for in the definitive agreement.

Non-disclosure of discussions

Providers should

  • Confirm that the NDA contains language clarifying that the fact of discussions between the parties regarding the transaction is confidential, especially if the Provider is a publicly traded company.   
  • If the Provider is the selling company in an auction context, attempt to retain some limited ability to disclose the fact that the Recipient is bidding or, to the extent possible, to disclose the terms of any bid made by Recipient.

Recipients should

  • Confirm that the NDA contains language clarifying that the discussions between the parties regarding the transaction are confidential, including the identity of the parties and the terms of any bid if the Recipient is the acquiring company.
  • If the Recipient is the acquiring company and needs financing for the transaction, obtain a carve out allowing information to be disclosed to financiers.

Legally required disclosures


Providers should

  • Consider requiring the Recipient to fully cooperate with the Provider in obtaining any applicable protective order if requested.

Recipients should

  • Confirm there exists an exception to the NDA allowing the Recipient to disclose information which is legally required to be disclosed.

Return or destruction of materials

Providers should

  • Confirm there exists language providing for the return or destruction of any written confidential information provided.
  • If a copy is to be retained for archival/evidentiary purposes, confirm that this is kept by outside counsel.

Recipients should

  • Consider ensuring outside counsel the right to retain one copy for archival/evidentiary purposes.
  • Confirm that the Recipient is permitted to destroy or certify destruction of information to satisfy obligation.

Non-solicitation/employment

Providers should

  • Confirm that the NDA contains language providing for protection against the Recipient’s solicitation of the Provider’s employees for some amount of time (the typical range is six months to two years; one year is common) as well as against solicitation of former employees recently departed (six months is common).
  • The Recipient may argue strongly against this because it is a large entity that will have difficulty keeping track of solicitation and hiring activities.  If this occurs, consider these alternatives: limiting scope of non-solicit to “key” employees or those Recipient had contact with or were identified during the diligence process, or limiting the interaction between both parties’ employees by restricting which Provider employees the Recipient will be allowed to contact.

Recipients should

  • Consider a limiting provision that would apply only to “key” employees or employees of the Provider who Recipient had contact with or were identified to the Recipient during the diligence process.
  • Confirm that there exists a carve out for general solicitation not directed at Provider employees.
  • Consider removing this provision altogether if it concerns a large entity that would have difficulty keeping track of solicitation and hiring activities.

Term

Providers should

  • Consider language providing that the NDA does not expire, as what is confidential now may need to remain just as confidential many years from now.
  • Consider setting an unlimited term for trade secrets.

Recipients should

  • Consider limiting the NDA to a specific time period (range is generally one to five years).

Remedies

Providers should

  • Confirm there exists language having the Recipient acknowledge and agree that monetary damages are insufficient to remedy breach of the NDA, and that the Provider is entitled to equitable relief in addition to any other remedies.

Miscellaneous provisions applicable to providers and recipients

  • Privileged information.  Consider language stating that disclosure is not deemed to have waived or diminished attorney-client privilege, attorney work-product protection, or any other privilege or protection applicable to the confidential information, which relies upon a form of the joint defense doctrine.  Note that effectiveness of this provision is not certain.

Other

  • Binding agreement.  Confirm that language exists clarifying that the NDA does not constitute an agreement to enter into or even negotiate a transaction, as sometimes courts have found an agreement to negotiate absent such language.
  • Standstill provisions.  These provisions are only applicable where the target company is publicly traded or likely to be public soon, and, due to their complexity, these provisions should be carefully addressed and reviewed by sophisticated M&A counsel.
  • No shop.  The seller should delete provisions restricting it from shopping as these are not typically agreed to until at least a term sheet or basic transaction terms are agreed upon.
  • Export laws. If the Providers have a particular concern about providing technical information to non-US persons, they should consider adding a provision ensuring that a Recipient complies with applicable export laws.

 

For more information about M&A nondisclosure agreements, please contact Eric H. Wang