What is a Non Disclosure Agreement (NDA)?
A Non Disclosure Agreement (NDA) is a document that is exchanged between a prospective buyer and a seller in the initial stages of an M&A transaction. The document is exchanged after the prospective buyer shows interest in a company after looking at the teaser of the target. The objective of the NDA is to make sure that the party receiving confidential information doesn’t use that information against the target company for its own benefit. The NDA is also referred to as “Confidentiality Agreement.”
An NDA is generally drafted and executed by the prospective buyer, but sometimes it is also drafted by the seller. There are usually multiple markups and reviews of the NDA draft as both parties look for terms and conditions that are favorable to them and try to safeguard their interests. A well-written NDA anticipates a possible M&A transaction and includes a covenant requiring the confidential information to be “used solely for the purpose of evaluation of a possible transaction” or words to that effect. This is one of the more important provisions of an NDA and is not normally subject to much negotiation or modification.
NDAs are also often required by a company when they outsource work, such as to a freelancer, when doing the work will require giving the freelancer access to information that the company wants to keep confidential.
Why use a Non Disclosure Agreement (NDA)?
An NDA is very important and useful for the seller (Disclosing Party) as the seller is the one who is disclosing every piece of confidential information about the company. It faces more risk from others finding out about the information, as it may not generate positive sentiments from customers and employees.
For buyers, on the other hand, it is absolutely fine and normal to look for acquisitions and growth.
Contents and Terms in a Non Disclosure Agreement (NDA)
- Parties – The parties to the confidentiality agreement will be the potential buyer and seller. It describes the buyer as the “Receiving Party” and the seller as the “Disclosing Party.” In case the buyer has few or no assets, then a guarantor may also be involved.
- Confidentiality – It defines the meaning of “confidentiality.” It includes data, information, or any other note shared electronically or physically, including meetings that can’t be obtained from public sources. A very important clause from a “Disclosing Party” perspective is that all documents exchanged will be considered as “confidential” rather than just the documents that are “specifically marked as confidential,” as there can be a situation wherein the seller misses marking a few documents as confidential.
- Exceptions to Confidentiality – Confidentiality agreements usually exclude certain information, which doesn’t amount to a breach of the confidentiality clause. Some of the exception clauses are:
- Information that is in the public domain.
- Information that the disclosing party disclosed before signing the agreement.
- Information received by the “receiving party” from a third party wherein the third party was not obliged to keep the information confidential.
- Information that was in the lawful possession of the receiving party before the date of signing of the NDA.
- Disclosure of Information – The NDA will usually define the objective of the agreement. It will include the purchaser and other parties whom the information can be disclosed to for assessment of a potential transaction. Generally, the receiving party is allowed to disclose the information to its employees, advisors, lawyers, and investment bankers.
- Destruction of Materials – The disclosing party would always want to include a provision that all information, including all physical and electronic data, should be destroyed if the parties terminate negotiations. However, the receiving party generally negotiates this clause with the disclosing party and reaches a conclusion that destruction of such records does not apply to their internal recordkeeping, any electronic backup storage, or professional recordkeeping.
- Period of Enforcement / Termination of Confidentiality – The NDA would definitely specify the length of time the agreement is in force. No potential buyer would like to get tied with an agreement for an indefinite period. Generally, an agreement is in force for a period of 1 or 2 years. Sometimes, parties also agree to terminate the agreement on completion of the transaction.
- Restraint Provisions – Confidentiality agreements also include non-solicit provisions. It restricts the receiving party and its subsidiary companies from approaching and soliciting any employee of the disclosing party. Sometimes, the disclosing party is also prevented from approaching any customer that the receiving party wouldn’t have in their ordinary course of business.
- Governing Law and Jurisdiction – It mentions that the agreement will be governed by a State body and the language of conduct for court proceedings in case of any dispute regarding the confidentiality.
- Binding Agreement – The receiving party makes sure that the language clearly distinguishes and differentiates it from an agreement to negotiate a transaction. The objective of the NDA agreement is to explore an opportunity and explore its feasibility in terms of business fit and rationale for investment, rather than a commitment to bid for the deal.
- Implications for Breach of Confidentiality – It is very common and obvious that there is never an adequate remedy for breach of confidentiality by the receiving party. The disclosing party keeps a provision to apply for an injunction and specific performance and other relief on actual basis.
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