In this chapter, we will highlight some of the points that lawyers often negotiate in the context of non-disclosure agreements.
What is an NDA?
A non-disclosure agreement ("NDA") - also sometimes referred to as a confidentiality agreement - is designed to restrict and control access to and use of another party’s confidential information, including sensitive commercial information.
Unilateral (i.e. “one-way”) non-disclosure agreements are designed to restrict and control one party’s access to and use of another party’s confidential information, whereas bilateral non-disclosure agreements (also referred to as “two-way” or “mutual” NDAs) involve the parties agreeing a series of mutual obligations around keeping one another’s information confidential.
A seller will typically require a prospective buyer to sign a unilateral NDA before granting them access to the target company's confidential information. This is to ensure that the prospective buyer is deterred from using or disclosing sensitive, confidential information about the seller/target that it discovers during the due diligence process.
Note that unlike the common law rules around confidentiality – which only limit disclosure of confidential information – NDAs can contractually limit the purposes for which information may be used (e.g. the seller could prohibit the prospective buyer from using the information disclosed to try to steal suppliers or customers away from the seller).
During a transaction, trainees can play a key role in the process of drafting, negotiating and coordinating the signing of NDAs on behalf of clients. Note that we have used the term “bidder” (meaning potential buyer) throughout the below section, although the points would typically also apply to other types of counterparties.
Buy-side vs. sell-side
Buy-side
When acting on the buy-side (i.e. when acting for a prospective buyer), you will only negotiate one NDA, which will be sent to you by the seller’s advisers. In such circumstances, you are generally in a weaker negotiating position, as the seller can usually leverage the fact that it has multiple other bidders also looking to purchase the target company.
Practical tip: if other people in the firm are already acting for another potential bidder in the same auction, this could give rise to a potential conflict of interest that might need to be managed in a certain way. When you receive a seller’s NDA, you should therefore consider whether you should first send it to the firm’s internal conflicts team to check that no conflict will arise as a result of you working on the deal.
Sell-side
When acting on the sell-side (i.e. for a seller) during an auction process, you may have to review and negotiate dozens of NDAs (maybe more), as the seller will need to have an NDA in place with each prospective bidder before granting them access to the data room/confidential information.
In such circumstances, you must first agree the form and content of a template NDA with your client (the seller) to ensure that the first draft that you send to all potential bidders reflects – within reason – your client’s ideal position. This is important, as it could be far harder to subsequently negotiate more stringent terms than those included in the first draft.
Some (seller) clients may want to use their own template NDA as the starting point, in which case you will likely need to review this and consider whether you should propose to your client that their template NDA be supplemented to include any additional wording that exists in your firm’s standard form NDA (e.g. if your firm’s internal template NDA is more robust).
The negotiation process
Once you receive a “mark-up” of an NDA (i.e. a version containing the other side’s proposed amendments), you must review any proposed changes, accept or reject these, and if applicable, suggest alternative wording as a compromise. During this process, you might need to discuss any material changes with your client before accepting/rejecting/proposing them to the other side. Note that investment banks or the sellers’ other advisors may act as intermediaries, sending mark-ups of the NDA between the seller’s lawyers and the prospective bidders’ lawyers (meaning the seller’s/potential bidders’ law firms are not in direct contact).
Practical tip: some firms may have compiled client-specific NDA guides that set out certain existing clients’ requirements/general positions/potential areas of flexibility in respect of specific NDA provisions. When this is the case, these should initially be used as a guide when marking up an NDA.
Once you have discussed any material points with your client/supervisor and (if necessary) had your NDA mark-up approved, you would usually then email the new draft to the other side (or their representative). This email should attach both a “clean” version (i.e. a version with no track changes) and a “redline” against the original version you received (to highlight your proposed amendments), along with a summary of the changes made and, where appropriate, the effect of such changes.
“Redline” / “blackline”: these terms can be used interchangeably to describe the process of creating a comparison between two versions of a document. A “redline” (or “blackline”) highlights any additions/deletions/ amendments to a document in a different colour, whilst also highlighting passages of text that have been moved to new locations within the document. A redline looks similar to a document containing track changes, the main difference being that the comparison is generated after you have finished making your amendments.
You may need to repeat this process a number of times for each NDA, negotiating your client’s position with the other side throughout the process. The final amendments are then typically negotiated over the phone, especially if there are material points outstanding. Once the parties are in agreement, they will all then sign the NDA, at which point the bidder may be given access to the data room and questions/further commercial information can start to flow between the parties.
Practical tip: creating an “NDA tracker” can help you to keep track of the status of NDAs. This can be especially useful if you are acting on the sell-side and managing dozens of NDAs at once. An NDA tracker could simply be a spreadsheet in which you record details of each bidder, the current status of each NDA (e.g. has it been sent to your client for comments, sent to the other side for comments, agreed etc.), any deadlines, and whether each NDA has been signed (including the signing date where applicable).