02/04/2024
During the initial phases of an M&A deal, it is customary for the involved parties to execute a Non-Disclosure Agreement (NDA), also known as a "Confidentiality Agreement." Here, we aim to elucidate the objectives and primary components of such an NDA.
The execution of an NDA serves the interests of the seller by safeguarding the confidentiality of the target company's trade secrets and proprietary information. Similarly, it protects the confidentiality obligations of the target company's executive leadership. The NDA delineates which information is to be divulged to the potential buyer and specifies the handling of such information. Furthermore, it outlines the legal ramifications in case of NDA breach by the potential buyer and/or its advisors. The specifics of the NDA are tailored based on the identity of the prospective buyer, whether an investor, potential strategic partner, or competitor.
CONFIDENTIAL INFORMATION
Confidential information encompasses any data deemed as such by the concerned party. The seller typically includes all information disclosed throughout the M&A process, irrespective of format (written, oral, electronic), within the purview of the NDA. This includes information integrated into documents by advisors (e.g., due diligence and board reports).
CONFIDENTIALITY OBLIGATION
At the core of every NDA lies the confidentiality obligation, stipulating that confidential information must not be disclosed to third parties without prior consent from the seller. The provided information is to be treated confidentially, shared only with a limited group, and utilized solely for due diligence and further transactional processes. Exceptions may include disclosures mandated by law, court orders, or regulatory directives, with provisions for notification and involvement of the respective party.
CONTRACTING PARTIES
Care must be exercised to ensure the inclusion of appropriate contracting parties in the NDA. Typically, the seller, as the shareholder in the target company, is a signatory. However, circumstances may necessitate the involvement of the target company itself or other intermediary parties. Additionally, it is prudent to extend protection under the NDA to relevant individuals not explicitly mentioned.
RECIPIENTS
The seller's interest lies in limiting the dissemination of confidential information and permitting its transmission solely to individuals essential for evaluating the transaction. Conversely, the potential buyer may seek authorization to share information with its employees, affiliates, advisors, and potentially outside investors, subject to seller's consent.
LIABILITY
Provisions addressing liability for misuse of confidential information and breaches of the NDA should be clearly outlined, encompassing liability clauses, indemnification obligations, and possible liquidated damages. Other legal consequences may arise despite the absence of explicit contractual provisions, albeit proving and quantifying damages may pose challenges.
OTHER PROVISIONS
Additional provisions commonly found in NDAs include rules governing sensitive information to prevent antitrust violations, exclusivity terms, protocols for returning and destroying confidential information, non-solicitation clauses, contact restrictions, NDA duration (typically two to three years), and choice of law and jurisdiction.
CONCLUSION
In the interest of all parties involved in an M&A transaction, it is advisable to execute an NDA early in the process and prior to extensive information exchange. Given the diverse nature of transactions and information involved, customizing the NDA to suit individual circumstances is recommended.