M&A Vocabulary – Experts explain: Non-Disclosure Agreement

published on 10 November 2021 | reading time approx. 5 minutes

In the initial stages of an M&A transaction it is common for the parties to the transaction to conclude a Non-Disclosure Agreement (NDA). A Non-Disclosure agreement is also referred to as a “Confidentiality Agreement”. In the following, we would like to describe the objectives and the main contents of an NDA.

Introduction

The conclusion of an NDA is in the interest of the seller to secure the confidentiality of the target company's trade and business secrets. It is also in the interest of the target company’s executive bodies, which are themselves subject to confidentiality and secrecy obligations. The NDA regulates in particular which information is to be handed over to the prospective buyer and how the information is to be treated. Moreover, the legal consequences in the event of a breach of the NDA by the prospective buyer and/or its advisors are regulated. The form of the NDA also depends on who the prospective buyer is (e.g. investor, prospective strategic partner or competitor).

The prospective buyer may also be interested in concluding an NDA, as confidential information includes the circumstances and the status of the negotiations on the acquisition of the company. In these cases, a mutual NDA is required.

Confidential information

Confidential information is any information that is defined as such by the party concerned. The seller has an interest in including in the definition all information, regardless of type and form (written, oral, electronic), that is disclosed at all stages of the M&A transaction; also information that has been incorporated into documents by advisors (such as due diligence and board reports) should be made part of an NDA.

Non-confidential information is usually defined as follows:

• Information that is publicly known at the time of disclosure;
• Information that becomes publicly known after the conclusion of the NDA;
• Information disclosed by the seller to the prospective buyer on a non-confidential basis;
• Information disclosed to the prospective buyer by a third party and
  
• Information generated by the prospective buyer itself.

Confidentiality obligation

The heart of every NDA is the confidentiality obligation which specifies that confidential information may not be disclosed to third parties without prior consent of the seller. The information provided is to be treated confidentially, communicated only to a restricted group of persons and used only for the purpose of due diligence and the further implementation of the transaction. Recommended are exemptions that disclosure of confidential information is not a breach of the NDA if such disclosure is required by law, a court decision or a regulatory order. However, there should be regulated a right for the respective party to be informed and, if necessary, also to be involved.

Contracting parties

When concluding an NDA, care must be taken to ensure that it covers the correct contracting parties. Usually, an NDA is concluded by the seller as the shareholder in the target company. However, it also happens that the target company itself is a party to the agreement. In the case of transactions in which other parties are intermediately involved, it should be evaluated whether they should (also) be parties to the NDA. Finally, it is advisable to ensure that those persons who are not a party to the NDA, if necessary, are included in the scope of protection of the NDA. In case the target company and the seller are to remain initially anonymous, e.g. in the context of a bidding process, the NDA can be concluded with the seller's advisors in the seller's place.

Recipients

It is in the interest of the seller to keep the group of recipients of the confidential information as small as possible and to allow the information to be passed on only to those persons who need to know it in order to examine and evaluate the transaction.

The prospective buyer will usually have an interest in being allowed to forward the information to its employees within its own and affiliated companies as well as to its advisors. In addition, it may also be necessary to include outside investors in the group of recipients, possibly after separate consent from the seller.

Liability

Liability for misuse of confidential information and other breaches of the NDA should be expressly regulated, for example by means of liability and indemnity obligations, contractual penalties and/or the agreement of liquidated damages. The legal consequence arising from law may also lead to a claim for damages despite the absence of a specific contractual provision, but in most cases it will be difficult to prove and quantify the actual damages.

Other provisions

Other provisions of an NDA often include:

• Rules regarding sensitive information to prevent a breach of competition law (e.g. obligation of the buyer to form a team to review such sensitive information, the so called clean team);
• Exclusivity provisions;
• Return and destruction of the confidential information and exceptions thereto;
• Non-solicitation clauses to the detriment of the prospective buyer with respect to key employees;
• Prohibition of contact and exceptions thereto;
• Term of the NDA (up to two or three years common in practice);
• Applicable law and jurisdiction clause.

Conclusion

In the interest of the parties to an M&A transaction, an NDA should be signed at an early stage and before significant information is shared. Since the type and the scope of the transaction, the parties involved and the nature of the information to be disclosed have a considerable influence on the wording of an NDA, it is advisable to draft the agreement to suit the individual case.