Critical Terms to Consider in an M&A-Related Nondisclosure Agreement

When a business shares confidential information with another party during an M&A process, it is necessary to ensure that the receiving party will keep the information confidential. A business should never share information without first signing a non-disclosure agreement (NDA).

An NDA is a contract between at least two parties that creates an obligation to maintain information that is confidential. The materials, knowledge, and information covered by the NDA are shared by the disclosing party with the receiving party for certain purposes, and the NDA creates a contractual duty not to share the information with other parties. An NDA should be signed as early in the process as possible and certainly prior to negotiating the letter of intent and starting the diligence process.

Image of Hand Signing a Document

NDAs are intended to protect sensitive information from one’s competition and the wider public. Since it is a binding agreement, an NDA will provide greater assurance than informal understandings that the confidential information to be shared will remain protected.

Provisions a Standard NDA Should Include

Identify the Specified Business Purpose of the Agreement

The specified business purpose is included to limit the use of the confidential information for the stated business purpose, such as “regarding the acquisition of Party X by Party Y.”

The Persons or Entities That are to be Bound by the Agreement

The parties to the agreement shall include the persons or business entities intended to exchange confidential information and be subjected to the nondisclosure obligations. It may also capture affiliates, subsidiaries of the business, and third-party advisors such as attorneys, investment bankers, accountants, and brokers.

A Definition of Confidential Information

This may include business plans, intellectual property, customer information, employee lists, financial budgets, and/or operating procedures. The definition should be broad enough to cover all the confidential information, proprietary information, and trade secrets that the disclosing party may reveal. Often, an NDA will also include a clause that includes any information that a reasonable person would assume is confidential.

Typical Exclusions from the Definition of Confidential Information

NDAs often include carve out provisions that clarify what information is not required to be held in confidence. For example, information that is already public, was already in the receiving party’s possession before the NDA was signed, or was received from a third party that was not bound by separate confidentiality obligations to the disclosing party are often excluded.

All Non-Disclosure Obligations

The nondisclosure obligations of the receiving party to keep the information confidential should be defined in the agreement. The NDA should include a provision making clear that the receiving party should not disclose the information to any third parties, except as specifically permitted by the agreement.

The Duration of the Nondisclosure Obligations

An NDA’s term can be either indefinite or have a termination date. The typical NDA has a survival rate of one to five years. However, the length can depend on a host of facts, including the nature of the transaction or the conditions of the market.

The disclosing party, as an employer or business owner, should aim to enforce an NDA for as long as possible. The main benefit to an indefinite term is that confidential information will remain protected for an unlimited amount of time. However, an indefinite term could unfairly prejudice the receiving party. Having a reasonable time frame for an NDA is important because in the event of a dispute, courts will look to the NDA’s reasonableness in interpreting the agreement and determining whether an actionable breach occurred. An indefinite term could potentially be viewed as unreasonable to the receiving party.

The receiving party typically wants a definite expiration term inserted into the agreement. Ideally, an NDA will cover an appropriate amount of time to protect the interests of the disclosing party. A short term is beneficial for the receiving party because the information will not need to be kept confidential for numerous years. Ideally, NDAs will cover an appropriate amount of time to protect the disclosing party’s interests.

NDAs are important, particularly if a potential merger or acquisition does not occur. Drafting an appropriate and enforceable agreement is, therefore, critical. Please contact a member of our Mergers & Acquisitions team at Barrett McNagny with any questions on how to draft and implement NDAs to protect your business. 

About the Author: Jacqueline R. Caserio works with the transaction group which serves business clients of all sizes from sole proprietorships to Fortune 500 companies. 

- Posted September 12, 2023

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