Just Another NDA? Why M&A Confidentiality Agreements Are Different

When it’s time to finally sell your company or if you’re exploring a potential acquisition target, one of the first documents you will encounter is the confidentiality agreement or non-disclosure agreement (“NDA”).  You say to yourself, I’ve seen hundreds of NDA’s (perhaps more) in my day-to-day business, so “I’m fine signing just another NDA!”  However, the buying and selling of a company (“M&A”) is not in the ordinary course of business, and the M&A NDA is not just another NDA. The M&A NDA establishes the legal framework for the handling of sensitive and valuable information, enabling the due diligence process in M&A transactions. This article outlines 9 key differences between the ordinary business NDA and the M&A NDA that you must be aware of in the M&A process.

1. 1. Mutual vs. Unilateral      

In the ordinary course of business, the NDA is typically entered into in connection with quoting for new work, new programs, or a defined project where one party is disclosing information to the other party in order to facilitate the submission of an accurate quote or proposal. These are often unilateral or “one-way” NDAs (i.e., only one of the parties’ disclosed types of information is protected).

In the M&A context, however, whether you have a mutual NDA (i.e., both parties’ information is protected) or a unilateral NDA (i.e., just one party’s information is protected) is one of the first issues to resolve and the determination of which is appropriate will depend on several factors.  First, are both parties sharing information or is just the seller?  If the seller is the only party disclosing information, then a unilateral NDA protecting the seller’s confidential information would be appropriate.  If, however, based on the contemplated transaction, both the potential buyer and seller will be exchanging confidential information (e.g., if all or part of buyer’s purchase price consideration is its stock, the seller will want appropriate information about the buyer), then the M&A NDA should mutually protect both the buyer’s and seller’s confidential information.  The point here is that, if only one party is disclosing information and a “mutual” NDA is used, then a party has taken on additional (and unnecessary) contractual obligations as to confidentiality for the benefit of the other party (i.e., needless exposure), which in any M&A transaction, such needless exposure is to be minimized.  When there is doubt as to who will be disclosing what, then parties may opt for a mutual NDA just to make sure the protections are in place should confidential information be inadvertently exchanged.

2. 2. Scope of Confidential Information

In M&A NDAs, the definition of confidential information is usually more expansive and all-encompassing.  Confidential information includes the seller’s business information, derivatives of that information, the fact that negotiations are taking place, the terms of the potential transaction, including structure and consideration, and sometimes even the identity of the parties. The agreement may require labeling information as confidential at the time of disclosure or include all disclosed information as confidential, regardless of how it is marked. This broad definition ensures that all relevant information is protected, including any previously disclosed information. The scope of M&A NDAs allows the parties to thoroughly investigate the legal, financial, and business aspects of a deal via the due diligence process without risking the appropriation of valuable information.

Standard NDAs typically focus on technical, commercial, or other private information, and may be tied to a specific or narrow aspect of the business relationship. For example, an employee may be required by its employer to sign an NDA to prevent the disclosure of company trade secrets, or a company may enter into an NDA in connection with soliciting services from vendors when the parties are exchanging technical, business, or pricing information.

3. 3. Permitted Use

The permitted use section of an M&A NDA clarifies how confidential information can be used and who may access it. M&A NDAs often specify that confidential information may be used only for evaluating a potential transaction and may also require specific safeguards for accessing it, such as password-protected data rooms. Additionally, M&A NDAs often apply not only to the confidential information itself, but also to reports, summaries, or analyses based on it, whether prepared by the buyer or its representatives. While the NDA may explicitly prohibit reverse engineering, it must allow the buyer to review and analyze the confidential information so that the buyer can make an offer via the letter of intent and conduct further due diligence to confirm its desire to move forward with the transaction. Standard transactional NDAs often restrict the use or disclosure of confidential information for any purpose. In these circumstances, the NDA’s sole purpose is to prevent the disclosure and use of confidential or private information. For example, in connection with a settlement agreement, a defendant may pay a sum of money to a plaintiff, and in exchange, the plaintiff dismisses the lawsuit and enters a unilateral NDA. The purpose of the NDA is solely to prevent the plaintiff from discussing matters related to the lawsuit, such as the alleged claims or the settlement amount. In this example, the plaintiff has no other use for confidential information and must simply refrain from disclosing it.

4. 4. Representatives

In M&A NDAs, representatives of the parties, such as attorneys, financial advisors, lenders, investors, accountants, directors, officers, and employees, may need to access confidential information during the due diligence process. The NDA will typically allow disclosure to representatives that have a legitimate use of confidential information and require that the recipient ensure confidential treatment by its representatives. The NDA also requires that representatives be bound to written agreements restricting the disclosure of confidential information. Some sellers may not be comfortable with a broad, non-specific list of potential representatives authorized to receive confidential information. For example, using terms like “financial advisors” and “investors” would essentially allow the recipient to share confidential information with many unknown third parties (even potential competitors). If that is a concern, a seller may seek to limit the term “representatives” to specifically named parties or use other qualifying language, such as “institutional investors” and “institutional advisors.”

Due to the limited scope and lack of involvement of third parties, many traditional NDAs do not (and should not) extend to third parties and disclosure to these parties may be prohibited.

5. 5. Term and Survival

The confidentiality obligations under an NDA can run indefinitely or terminate on a specific date or upon a specified event. The term is often negotiated in M&A NDAs as disclosing parties typically prefer an indefinite period, while recipients favor a set a more limited term. Some provisions unrelated to confidentiality, such as standstill agreements, have set expiration dates, and the term of the confidentiality agreement will survive for longer periods. The term often depends on the type of information involved and how quickly it becomes obsolete. The term of an M&A NDA can be critical if no transaction is ultimately consummated between the parties. If the prospective buyer from a broken deal has reviewed valuable confidential information of a seller, the seller does not want that buyer to use that information at any point in the future. Depending on the substance of the confidential information, it may become outdated at some point such that the confidentiality obligations do not need to last indefinitely. For example, if the confidential information includes pricing data, it may not need to be protected indefinitely if the pricing changes in the future. The term of traditional NDAs can also be important for similar reasons and usually depends on the negotiated priorities of the disclosing and receiving parties.

6. 6. Return or Destruction

M&A NDAs typically provide for the return or destruction of confidential information upon termination of negotiations, at the end of the agreement term, or upon the disclosing party’s request. Recipients often want the option to destroy or delete confidential information instead of returning it, especially if they have inserted their own confidential information into the documents or if stored digitally. Sellers usually accept this option but may require certification of destruction. Recipients may also include language allowing them to keep copies for document retention or evidentiary purposes. Traditional NDAs may contain similar return or destruction provisions, but only in situations where the recipient is given access to confidential information to evaluate for a specific use.

7. 7. Artificial Intelligence

With the increasing prevalence of artificial intelligence (“AI”), M&A NDAs have begun to specifically address the use of AI tools. Parties may negotiate an NDA to allow or restrict the use of AI tools to review, summarize, or analyze confidential information, depending on the substance of confidential information or the specific AI tools. Open source or third-party access AI can create several issues under NDAs since these AI tools, among other things, retain input information, are granted licenses to input data under their terms and conditions, and do not allow the complete deletion of input data. The use of these unsecured AI tools can jeopardize trade secret protection and may inadvertently violate an NDA by impermissibly using confidential information for AI training or sharing it with unpermitted third parties, even if the breach is never realized. As negotiated by the parties, M&A NDAs can allow the use of secure, enterprise-grade or private AI tools that protect confidential information and allow full adherence to an NDA’s confidentiality and return or destruction requirements. While traditional NDAs may begin to address AI, M&A NDAs are at the forefront of AI issues, as buyers and their advisors may seek to leverage AI tools in the due diligence process.

8. 8. Non-Solicitation of Employees

No seller wants a prospective buyer to perform a deep dive due diligence review of its business and then elect not to do the deal, but shortly thereafter, hire away the seller’s key employees.  Accordingly, the M&A NDAs should contain appropriately drafted non-solicitation provisions. These provisions can prevent not only the unwanted poaching of each other’s employees but also the potentially harmful solicitation of each other’s customers and/or suppliers. Non-solicitation provisions are often heavily negotiated provisions, tailored to address the specific concerns of the parties. The non-solicitation obligations are sometimes tied to the term of an NDA or may expire after a specified period following its termination. The terms of any non-solicitation clause must be reasonable so that it is not deemed unenforceable by a court as being overly restrictive.

9. 9. Special Concerns with Competitors and Antitrust Considerations

When M&A transactions involve deals between companies that are competitors, the parties need to be aware of special considerations that must be addressed when exchanging competitively sensitive information, as additional compliance safeguards may be necessary to avoid violation of applicable antitrust and comparable laws.  Under such circumstances, the parties must recognize that compliance safeguards beyond the NDA (e.g., the use of a “clean team” and “clean team agreement”) may be required even if the Hart Scott-Rodino’s notice/filing thresholds are not triggered.  Prospective buyers and sellers that occupy the same or similar competitive space, particularly in international transactions where these regulations may be more stringent, need to carefully review the transaction with experienced legal counsel to understand whether or not additional compliance safeguards need to be put in place before the sharing of any competitively sensitive information so as to avoid potential civil and criminal liability that could arise from any wrongful disclosures.

The foregoing presents key factors to consider when negotiating the M&A NDA and why it should not be treated as just another NDA.  Whether you’re a buyer or seller, it is imperative that you fully appreciate the role a well-crafted NDA plays in ensuring that your M&A objectives are achieved.  It is recommended that you consult with experienced M&A counsel from the outset so the NDA you execute is appropriate for your M&A transaction.