Merger and Acquisitions: Key Issues in Buyer Non-Disclosure Agreements

One of the first steps to the process of mergers and acquisitions (M&A) is introducing confidentiality and non-disclosure agreements (NDAs). This step is crucial in the beginning as it details exactly what information within the buyer and seller exchange should be protected as confidential, thus limiting how the buyer can utilize that confidential information.

NDAs can be mutually or non-mutual, and are typically initiated by the seller in collaboration with their investment bank or business broker and legal representative from seller to buyer. Numerous variables such as industry and the relationship between buyer and seller are considered with the construction of the NDA. Notably, the buyer may decide to implement a mutual NDA based on their own confidential information and what they choose to share with the seller, although the buyer sharing information is not a common practice.

There are several issues that can arise in any NDA, but there are a few common issues that require consideration from both parties. 

Mergers & Acquisitions Non-Disclosure Agreements: Defining What is Considered “Confidential Information”

First, the seller must decide what they would consider confidential information. The seller often will attempt to cast a wide net to protect as much as possible with the broadest of terms, that could cause problems if too vague. This information will include trade secrets and other mission critical (crown jewel) type confidential information that the seller may want to withhold until a signed purchase agreement is in place, or another milestone is met.

An important consideration is clearly defining the scope of confidential information such as emails, verbal conversations, memos, etc…. This is to avoid any loopholes or misinterpretation on the signer’s part. 

In addition to defining what is confidential, sellers can specify how they would like the confidential information returned or disposed of at a specific time, point in the transaction, or if the M&A is not completed. 

Defining What is Not “Confidential Information”

Just as important as what information is protected, is what is not protected by the NDA. This will include information that is public knowledge, already known by the buyer, and obtainable through another non-confidential source. This provision is not used to exclude other confidential information that is protected by a previous NDA or confidentiality agreement. 

What Can and Can’t be Openly Discussed About the Transaction

Another benefit of an NDA can be maintaining confidentiality of the transaction itself. While a Letter of Intent will often include an exclusive dealing provision along with confidentiality obligations that should be binding on the parties, the NDA can prepare the way forward, include, and reinforce such obligations. This protection will restrict the buyer from providing information such as terms of a proposed transaction, any drafted purchase agreement, as well as the potential for a sale of the business.

Specifying Who Can Represent the Buyer

Another function of the NDA is to define exactly who is considered a representative of the buyer, and who is authorized to receive any confidential information laid out in the NDA. From the buyer’s perspective, it is important to consider who is essential in the process. This is where the “need to know” basis becomes important. Sellers may want to limit who in their organization is aware of the potential transaction. Seller will sometimes have the obligation to require each third party seller representative to sign a joinder to the NDA for additional protections. 

Access Control: Employee’s Vendors, Suppliers, etc….

With the sale of a business the disclosure of pertinent information to employees varies based on their involvement in the merger and acquisitions process. Factors include the stage of the process, their level of clearance, and their involvement in the process.  It is common practice for the seller to limit a buyer’s access to said employees to avoid any complications to the deal or decrease the value of a business. With that in mind, restricting access too strictly can hinder a buyer’s due diligence. These restrictions should be carefully crafted and involve only principal employees providing the company’s relevant information to the buyer.

This practice should be applied to suppliers, customers, and any others with a relationship with the business.

Solicitation and Hiring Stipulations

Another reason a seller will limit a buyer’s access to employees is to prevent the buyer from hiring the employees and starting a competing business. This can be restricted with limitations on the use of the employee information obtained in the NDA, or through the use of a non-solicitation or non-compete agreement. The use of an NDA to restrict use of disclosed information for the purpose of competing can be more effective or enforceable than covenants-not-to-compete.

A buyer may request that a seller sign a non-solicitation/non-compete agreement to prevent the seller from starting a competing business and/or poaching employees, but this is generally not an issue unless the buyer is required to share such sensitive information before a transaction is completed. Normally, such restrictions on the buyer only occur in the transaction itself when the buyer takes over the business.

Covenants-not-to-compete are common but will often limit the restriction to a specific period of time negotiated by both sides. The law related to covenants-not-to-compete is in substantial transition in various jurisdictions, including Colorado, and the parties will need to carefully review the applicable laws and regulations. Penalties for not complying with applicable law can include invalidation of the agreement which could leave a disclosing party at risk. 

How Long Should the NDA Last?

The two parties often have a difference of opinion on the length of time that an NDA should be in place and thus enforceable. The seller will want a much longer length of time than the buyer. Common limitations are two to five years; however, indefinitely is also an option – although it may not be practical in all situations for monitoring and enforcement. The parties need to consider the useful life of the information at issue, the risks of misuse of the information over time, and the method for return or destruction of confidential information at the termination of the NDA. If the information is returned or destroyed by the receiving party, the time limitation may be less of a concern.

How to Handle a Dispute

If a dispute arises the NDA should include language that defines the process of how a dispute is handled. This will include information such as meditation, arbitration, or court, venue, choice of law, and the use of equitable powers to control conduct of a breaching party.

Other Clauses to Consider

Each NDA is uniquely tailored to the situation to which it is applied based on a number of factors involved. These factors can vary depending on the relationship between parties, characteristics of the deal, industry, and a multitude of other circumstances. In the Mergers and Acquisitions process, additional clauses such as a statement that there’s no obligation to make a deal, and a disclaimer about the accuracy or completeness of any information disclosed should be considered.

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Hackstaff, Snow, Atkinson & Griess is highly experienced in M&A transactions and NDAs, and can help ensure your interests are protected, whether you are the seller or buyer in a transaction. Our attorneys bring a deep understanding of corporate law and can devise strategies for a successful transaction. Contact us today for a free consultation.