One of the first steps in an M&A transaction is the signing of a non-disclosure agreement (NDA), also referred to as a confidentiality agreement. Although NDAs can be used in many different situations, in the M&A context these agreements are an essential prerequisite to the sharing of company information and the formal due diligence process.
An NDA can be either ‘one-way’ or ‘mutual’. A one-way NDA is structured so that only one party will be disclosing information and the other party receiving it. In contrast, a mutual NDA contemplates that either party may disclose or receive information, and imposes mutual obligations of confidentiality.
There are a number of terms that should be included in an NDA, including the following essentials:
- Parties: An NDA can be crafted to apply narrowly (e.g. to specific individuals only), or broadly (e.g. an entire company, including its employees, professional advisors and other related parties). Consider whether these additional persons or entities should also formally agree to be bound by confidentiality obligations.
- Definition of “confidential information”: The typical approach is to define confidential information broadly, subject to exclusions (see next point). However, parties can also impose specific requirements, such as labelling documents “Confidential”.
- Exclusions: For practical purposes, most NDAs exclude certain information from the definition of confidential information. Typical exclusions include: (1) information that was already publicly available, other than through a breach of the NDA; (2) information received from a third party who was not subject to any confidentiality obligations; and (3) information that the receiving party already had.
- Permitted purpose: An NDA should state for what purpose the confidential information is being shared, and restrict the use of the confidential information to that purpose. For example, in an M&A context, a company looking to attract prospective bidders would limit the use of confidential information to considering and possibly completing a transaction.
- Non-disclosure: Similarly, an NDA should make clear that the confidential information cannot be used for any other purpose or disclosed for any reason whatsoever, unless required by law. It is typical to request that prior notice of such forced disclosure be given to the other party, if possible, so that precautionary measures can be taken.
- Non-solicitation of employees: NDAs used in an M&A context often include a provision that restricts a potential bidder from poaching the disclosing party’s employees. This is especially important when the parties operate in the same competitive space and the employees in question are particularly experienced or otherwise valuable.
- Term: The obligations created by an NDA will usually last for a specified amount of time, as negotiated by the parties. A disclosing party will benefit when protective provisions last longer, while a receiving party will prefer that potentially restrictive obligations expire sooner than later.
Although standard form NDAs are frequently used, parties should always consider whether the agreement fits the particular circumstances and risks. Also, as with all contract law, when drafting or negotiating an NDA remember that seemingly innocuous changes can sometimes have unintended consequences (see, for example, this blog’s recent post regarding “time is of the essence” clauses and what they really mean).