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M&A: Non Disclosure Agreements

Negotiating a non-disclosure agreement (NDA) is one of the first steps in the mergers and acquisitions (M&A) transactional process. In an M&A transaction, confidential and proprietary information (such as financial information, trade secrets, contracts and other sensitive and important information) often needs to be shared with the other party. The path to doing so safely requires that the other party be obligated to respect the confidential information provided and not use it to the disclosing party’s detriment and to the recipient’s benefit.[1]

Indeed, in this regard the importance of preparing an NDA that is carefully thought out, well-tailored, and drafted specifically for the purposes of the transaction in question cannot be overemphasized. For example, in a landmark Delaware case, a public company used confidential information acquired during “friendly” negotiations to launch a hostile takeover against the the target company. Even though there was no formal standstill agreement,[2] the confidential information was covered by two NDAs, and the court held that the recipient's use of the disclosures as part of its hostile bid for the company violated those NDAs. The court granted an injunction to prevent the bidder from proceeding with the takeover for four months.[3] This case is an excellent example of how a party can use confidential information for a purpose outside the intended transaction.

Mutual vs. Non-Mutual NDAs

NDAs essentially fall into two basic categories: a one-way agreement or a mutual agreement. The one-way agreement is used when only one side will be sharing confidential information with the other. A mutual NDA approach is for situations where each side may potentially share confidential information during the course of negotiations and in arriving at a deal.[4]

Although there is some appeal to using a mutual NDA, M&A sellers should avoid a mutual form if they are not expecting to receive confidential information from the other side. Indeed, sellers should be wary of creating an obligation to safeguard information they may receive during negotiations that they (i) neither asked for, want, or need, (ii) cannot reasonably distinguish as confidential or just merely transactional discourse, or (iii) any combination of these circumstances.[5]

A one-way agreement, on the other hand, is typically geared towards protecting the seller as the only disclosing party. Indeed, in practice most of the important points in an NDA are intended to benefit the seller. When an NDA is negotiated, the seller typically has considerable bargaining leverage, particularly when it is distributing numerous form NDAs as part of a sale process, and therefore most of the important issues will be decided in favor of the seller. Thus, buyers, as the recipients, are forced to be judicious and focus on the aspects of the NDA that matter the most to them.

Important NDA Attributes

NDAs do not have to be lengthy and complicated. In fact, well-drafted NDAs are direct and precise. The important elements common to NDAs include:

  • Identification of the parties
  • Definition of what is deemed to be confidential
  • The scope of the confidentiality obligation by the receiving party
  • The exclusions from confidential treatment
  • The obligation to return or destroy confidential information when requested by the disclosing party
  • The term of the agreement

Important NDA Provisions

Parties to the Agreement. Who is deemed to be a party to the NDA is a concept that should be considered carefully. If the NDA contemplates only one side providing confidential information, then that circumstance and agreement should be stated clearly and unambiguously in the NDA.[6]

However, it is important to be cognizant of any other people (such as employees, advisers, and consultants) or companies that should also be bound by the NDA. If the recipient expects to disclose the confidential information to an affiliated company, partner, agent, or adviser (whether legal, financial, or accounting) as part of the transaction, then the NDA should include and bind such third parties as they appear during the course of the transaction. These third parties would therefore be accounted for as "parties" to the NDA.

From the recipient’s perspective, especially as a potential buyer, the recipient may need to be able to freely share the disclosing party’s information with its employees, outside advisors, and both its equity and debt financing sources. Accordingly, the recipient and the disclosing party must ensure that the NDA captures such persons and clearly provides a method for such inclusive flexibility. If the parties cannot agree on the terms of a general disclosure, then at the very least, the NDA should allow the recipient to quickly obtain consent from the disclosing party to share confidential information with specified third parties as needed.

Regardless of whether these third parties become subject to the NDA, the disclosing party should insist that the NDA contain a clause clearly holding the receiving party ultimately legally responsible for any disclosure of confidential information made by one of these third parties or even by one of its own employees in violation of the NDA.

Confidentiality. Defining what is or is not confidential information should be treated with great care and foresight. On the one hand, the disclosing party wants this definition of confidential information to be as broad as possible to ensure that the recipient does not exploit some ambiguity and start using the confidential information to the disclosing party’s detriment. However, creating a definition that is too broad (e.g., all information sent to the opposing party) could have the effect of making the agreement unnecessarily onerous and too difficult for the recipient to reasonably manage and abide by.

Oral Information. Oral information in particular can be a challenging concept to account for in the NDA. Certain recipients insist that only information conveyed in writing should qualify as confidential. Of course, the party providing oral information typically takes the position that such a definition is too narrow. A usual compromise is that oral information can be deemed confidential if the disclosing party confirms the information to the recipient in writing shortly after it has been disclosed. This way the recipient is put on notice as to what oral statements are deemed confidential and covered by the NDA.

Residual Information. Sometimes a recipient of confidential information will seek to add a residuals clause to the NDA. This provides that information that the recipient learns during the transaction and retains in "unaided" memories will not be treated as confidential. Usually, the recipient is concerned about general concepts learned during diligence or information that a team member remembers without reference to documents or oral disclosures. A disclosing party will strongly argue against such a clause, or at least seek to make it very narrow. From the disclosing party’s perspective, a broad residuals clause could allow a receiving party to freely develop and extrapolate upon the intellectual property or other ideas of the disclosing party based on what its team learns from what is disclosed.

On-Going M&A Activity. The parties to the NDA should also address the issues of M&A discussions the seller may be undertaking. Even in a one-way NDA, the parties should address this topic early and thoroughly. From the buyer’s perspective, it will not want the seller to disclose to third parties its interest in the seller. In contrast, if the seller is in the process of soliciting indications of interest from multiple parties, it will want the flexibility to make some disclosures to those third parties (exclusive of the name of the buyer).

Confidentiality Breadth and Non-Use

As discussed, the core of the NDA is a two-part obligation on the recipient of the information: (i) to keep the confidential information protected and (ii) not use the confidential information itself for any purpose other than to evaluate and negotiate the intended M&A transaction.[7]

The first obligation is that the recipient of the confidential information has to keep the information confidential. This typically means that the recipient must take reasonable steps to not let others have access to the information. For example, reasonable steps could include that only a few people within the recipient’s company have access to the information, and they are all informed of the nature of the confidentiality restrictions and agree to be bound by them. Occasionally, an NDA will, in fact, specify a standard to which the recipient must adhere when handling the disclosing party’s confidential information.

The second obligation is also crucial. The recipients must not use the information for themselves or for any purpose other than to evaluate and negotiate the transaction. The disclosing party will want the right to sue for damages or to stop the recipient if it breaches either its confidentiality obligations or their non-use agreement.

Exclusions: Confidentiality and Non-Use

Every NDA has certain exclusions from the obligations set forth in it. These exclusions are intended to address situations where it would be unfair or too burdensome for the recipient to keep the information confidential, or where confidentiality is simply inappropriate.

The common NDA exclusions include information that is:

  • Already known to the recipient and not subject to any confidentiality obligation
  • Already publicly known (as long as the recipient did not release it to the public)
  • Independently developed by the recipient without reference to or use of the confidential information of the disclosing party
  • Disclosed to the recipient by some other party who had no duty of confidentiality to the disclosing party

Third Party Information. These exclusions noted above are just examples of boilerplate language that a recipient party might accept without much consideration and reflection, but that course of inaction would not be prudent. For example, the recipient should consider how it would be able to distinguish information it received from a third party that was provided in violation of the that third party’s duty of confidentiality. As with other portions of the NDA, the recipient and its counsel need to closely examine the exceptions to the definition of “confidential information” in the NDA in order to ensure that the recipient can accept them.

Legal Compliance. The NDA should also address situations in which the recipient of the information is forced to disclose the information through a legal process. If forced by a court order, for example, the recipient should be allowed to disclose without breaching the NDA, as long as the recipient has warned the disclosing party in advance of the legal proceeding so that it can seek a protective order if possible.

Public Company Buyers. Sellers (as disclosing parties) also need to be aware that a public company buyer may have an obligation to disclose some of the seller’s confidential information, either due to securities law or stock exchange requirements. Nevertheless, a disclosing party should carefully consider the drafting of any NDA exception to be sure that the recipient only discloses what it absolutely must disclose without violating applicable law or its listing requirements.

Return or Destroy Confidential Information

Invariably, NDAs include a provision requiring the recipient of confidential information either to return the information or destroy it. Usually, this obligations is triggered if either party terminates acquisition discussions or the buyer informs the seller that it does not wish to continue.

Recipients often negotiate for an unqualified right to destroy information, rather than return information that has been downloaded, printed, or received in paper form.[8] Recipients also will likely insist that they not be required to delete electronic files from servers and back-up systems. A disclosing party will often agree to this exception so long as the recipient agrees that only its information technology personnel will have access to such files.

Lastly, it is becoming more common for NDAs to include a clause allowing a recipient to retain a copy of confidential information for regulatory purposes or for its outside counsel. The disclosing party should, of course, make it clear in the NDA that the NDA’s confidentiality and non-use provisions remain in place with respect to such retained information.

Term of the Agreement

The length of the agreed upon obligations should be a thoughtfully negotiated topic. Recipients of confidential information will want a finite term relating to when their obligations under the NDA end. Recipients typically take the position that after a certain number of years, most information becomes stale or useless and the cost of policing these confidentiality obligations is unnecessarily burdensome. In practice, most NDAs have a time limit of two to five years. That said, an NDA should still provide that, even if the term of the NDA has ended, the disclosing party does not give up any other rights that it may have under copyright, patent, or other intellectual property laws.

Provisions Particular to M&A

An NDA often includes several other provisions, some being particularly relevant in M&A transactions.

Employee Non-Solicitation. If the recipient has significant access to the disclosing party’s employees, the disclosing party should obtain an affirmative obligation in the NDA that prevents the recipient from soliciting or, to the extent lawful, hiring these employees for an agreed period of time (e.g., 12 to 24 months). The recipient may sometimes agree to this, together with some carve-outs.[9]

Jurisdiction. Both parties have an interest in the governing law for the NDA and the forum for resolution of any dispute. Many NDAs will specify the courts in which the parties must litigate a dispute and also outline any other alternative dispute resolution options (e.g., arbitration).

Injunction. The disclosing party frequently insists that the NDA include a clause that mandates injunctive relief from a court to stop the recipient from breaching the agreement. The recipient will likely resist this clause and seek language leaving it to the court to decide whether the facts of a dispute warrant injunctive relief.

No Rights. A disclosing party may wish the NDA to have the receiving party explicitly state, acknowledge and agree that any confidential information that will be shared with the receiving party, does not provide it with any rights whatsoever to the disclosing party’s ideas or confidential information. The NDA should make it clear that the recipient has no right to use or license any technology, proprietary information, or similar information that the disclosing party shares with the recipient.

No Obligation to Consummate. The NDA should also clearly state that neither party has a contractual obligation to complete a transaction, except as provided in a future definitive agreement.

Disclaimer. The disclosing party should consider including in the NDA a clause stating that it is making no representations or warranties to the recipient as to the accuracy or completeness of the information it provides, except as set forth in a future definitive agreement. Further, the disclosing party might insist on a clause expressly disclaiming any liability to the recipient with respect to any of the disclosed information.

Access to Employees. The disclosing party may also wish to include in the NDA a provision preventing the recipient from contacting employees, except through specified contacts. Controlling the recipient’s access to information in this manner can afford the disclosing party an advantage in M&A negotiations (particularly for a seller). The NDA can be used as a strategic tool in this way by controlling the recipient’s access to information such that it bestows an advantage upon the disclosing party during the negotiations by allowing it to control what is disclosed by whom and when.


The NDA is an important and very valuable starting point in many transactions, and particularly in M&A transactions where (i) the parties involved in an active sale of a company are numerous, (ii) all of the intentions of the prospective buyer are not immediately clear, or (iii) the information sought is highly sensitive and competitively critical to the disclosing party’s business. Accordingly, the careful drafting and tailoring of the NDA to the specific transaction and parties involved cannot be overstated. Serious buyers and sellers should involve experienced legal counsel at the beginning of any transaction so that careful thought and experience is brought to bear upon an agreement which will assist in setting the tone and paving the road towards a successful transaction.

This memorandum is a summary of the topics discussed above and does not purport to provide legal advice. No legal or business action should be based upon the above summary. Questions concerning the topics or issues addressed in this memorandum should be directed to:

[1] A strategic buyer is a buyer that acquires another company in the same line of business to capture market share, industry know how, advantageous intellectual property or other types of synergies.

[2] A standstill agreement is an agreement that governs the way in which a bidder of a company can purchase, dispose of, or vote stock of a target company. It is designed to discourage the use of hostile methods in an acquisition.

[3] See Marietta Materials, Inc. v. Vulcan Materials Co. 56 A.3d 1072 (Del Ch. 2012); Martin Marietta Materials, Inc. v. Vulcan Materials Co. 68 A.3d 1208 (Del. 2012). We note that our Founding Attorney, Sonya Tien, was a member of the litigation team involved in this landmark corporate case.

[4] Many times, a mutual NDA form that has been proffered by the other party is based on a general business NDA that has not been tailored to an M&A format or to the transaction at hand. Furthermore, NDA forms are abundant, and it is not very uncommon for both buyers and sellers to have a standard form. But, NDAs, like all contracts, contain critical terms that should not be accepted as boilerplate.

[5] For example, a creditworthy buyer paying cash at closing typically will not want to share any of its confidential information and the seller may not wish to incur any obligation to keep such non-material information confidential. Accordingly, sellers often put prospective buyers on notice early on (and in the NDA) that they do not wish to receive any of the buyer’s confidential information. Therefore, in this circumstance there is no need for a mutual NDA.

[6] In this case, the disclosing party can be referred to as the disclosing party, and the recipient of the information can simply be referred to as the recipient.

[7] See supra Footnote 2.

[8] In addition, recipients who are potential buyers will not wish to turn over analyses that they have prepared which contain the seller’s confidential information or documents which might contain someone’s margin notes.

[9] For example, the recipient may want the limitation to apply only to those employees that they have come into contact with during their review of information or interviews (not with someone with whom they have never had any contact). Also, the recipient will want to be able to contact and hire employees who respond to general solicitations for employment made by the recipient.

[i] Although the main focus of this memorandum is non-disclosure agreements in business combination transactions, they are very common in a variety of other transactional situations as well, including capital markets and securities transactions and venture capital transactions.