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).
Key provisions of non-disclosure agreements, and common negotiation points
Purpose
First, you will need to set out the purpose of the NDA. This will usually include brief details of the potential acquisition, for instance an explanation that the potential bidder (or “Interested Party”) has expressed an interest in potentially acquiring all of the shares or assets of Company X. An NDA will also typically state that it contains undertakings that are being given by the potential bidder in exchange for access to the target’s confidential information.
Undertakings
In this section, potential bidders will have to agree to keep the information they are provided confidential and only use it in connection with the transaction.
Definition of “Confidential Information”
Sellers will want a broad definition, as this will afford them greater protection. The greater the scope of the information that is covered by the definition, the greater the likelihood that a bidder’s use of the information to the detriment of the seller/target will constitute a breach of the NDA. Sellers will typically want the definition to include: any commercially sensitive information; any information that is not publicly available; oral and written (including hardcopy and electronic) information; and information/documents that contain, reflect or are derived from the confidential information provided. Sellers will also usually want the existence of the proposed transaction to remain confidential.
In contrast, bidders will want a narrower definition, with the inclusion of appropriate “carve-outs” (i.e. caveats or exceptions). For instance, bidders will not want the definition to include information which is already in (or later comes into) the public domain or the bidder’s possession (other than pursuant to the NDA), including information which is obtained from a third party that does not already owe the seller a duty of confidentiality. Bidders will also usually want to exclude from the definition any information they create whilst considering the proposed transaction (e.g. financial models), to the extent that such information does not itself contain any confidential information.
Negotiation point: the bidder may want to insert an “awareness” (or “knowledge”) qualifier to ensure that it will not be liable if it receives from a third party – and uses to its advantage – what later transpires to be the seller’s confidential information, if the bidder was not aware that the third party had breached an obligation of confidentiality owed to the seller. However, to ensure that there is at least some onus on the bidder to check how potentially confidential information has been obtained, a seller may want to impose an obligation upon the bidder to make, for example, “reasonable enquiries” before proceeding to use information disclosed about a seller by a third party.
“Awareness” or “knowledge” qualifier: in the context of legal drafting, an “awareness” (or “knowledge”) qualifier is a caveat to a contractual statement which means a party will only be liable if it was actually aware of the pre-existing circumstances that led to, caused or constituted a breach of that contractual statement. This serves to limit a party’s liability to matters which are within that party’s actual knowledge.
Use of confidential information
Bidders will typically want explicit permission to use the seller’s confidential information to evaluate, negotiate, finance and implement the transaction. Sellers will want to strictly limit bidders’ use of confidential information to purposes relating directly to the transaction. This is to ensure that a seller’s information cannot be used or exploited for any other commercial purposes, for instance to enable potential bidders to solicit the seller’s existing customers/suppliers. This is especially important where prospective bidders are the seller’s/target’s existing competitors.
Each party might also explicitly state that it will retain ownership over any intellectual property rights in the information it shares, and that it is not licensing or granting any rights in such information to the other party.
Disclosure of confidential information
Bidders will usually want permission to disclose the seller’s confidential information to affiliates, advisers, finance providers and (sometimes) specialists who are advising on the transaction. Without such permission, it will be difficult for a bidder’s advisers to provide fully informed advice on whether/how to proceed with the transaction. It would also likely prevent the bidder from being able to obtain external finance to fund the transaction, as potential lenders will probably require detailed information about the target when considering whether to offer financing (and if so, on which terms).
Sellers will usually agree to such disclosure, but will want to ensure that bidders are prohibited from disclosing confidential information in other circumstances. However, there will usually be a carve out for bidders’ disclosure of a seller’s confidential information where such disclosure is required by law or a court or regulator (otherwise bidders could find themselves in a position where they either have to refuse a legally binding request or breach the NDA). Nevertheless, sellers will typically try to include restrictions on this concession, for instance by imposing an obligation upon a bidder to first obtain the seller’s consent and consult with or notify the seller before making such a disclosure.
Negotiation points: there could be a carve-out allowing disclosure if this is requested (rather than required) under any applicable law, regulation or legal or regulatory process, or by a supervisory body or regulator. There could also be a carve out that permits the bidder to avoid consulting with the seller in respect of the disclosure of the seller’s confidential information where that disclosure is required as part of a routine regulatory examination or audit, so long as the information does not specifically reference the seller or its group.
Further protection
Sellers will want bidders to ensure that those to whom the bidders disclose confidential information (e.g. a bidder’s advisers) will also comply with the terms of the NDA. Bidders can try to fulfil such an obligation by entering into “back-to-back” NDAs with the parties to whom they disclose the seller’s confidential information. However, bidders will usually want to limit this obligation to specific recipients who do not already owe them a duty of confidentiality, and if possible, further limit the obligation so that it need only be upheld to “the extent reasonably practicable and legally permissible”. Bidders may also seek the flexibility to impose “similar” rather than “identical” confidentiality obligations on their advisers, in case there are certain clauses that their advisers simply can’t agree to.
“Back-to-back” NDA: an NDA provided by a seller will typically include an obligation on the prospective buyer to ensure that its employees and any third party advisers it engages also abide by some or all of the provisions contained within the NDA. A prospective buyer will therefore typically require those to whom it intends to grant access to the seller’s confidential information (e.g. its legal and financial advisers) to enter into “back-to-back” NDAs, which essentially involves those intended recipients agreeing to abide by the provisions of the original NDA between the seller and the bidder. This means that if one of the prospective buyer’s advisers discloses or improperly uses the seller’s confidential information and the seller subsequently sues the prospective buyer for failing to prevent this, the prospective buyer will have a contractual right to take recourse against that adviser.
Return/destruction of confidential information
Sellers will want bidders to agree to return or destroy confidential information within a specified period of time following such a demand, and may impose further obligations such as the requirement to evidence such destruction. Bidders will want the ability to decide whether to return or destroy confidential information (destruction can be less of an administrative burden and thus logistically easier). Bidders will also want to limit their evidential obligations and will want to include carve outs for information held by professional advisers and for information that they are required to retain by law, under internal compliance procedures and/or under insurance policies.
Bidders will also want to limit the obligation to include only “reasonably practicable” actions. By way of example, law firms are usually required by law to retain certain information, so their internal document management systems may therefore have been set up to prohibit the permanent deletion of certain centrally-saved documents. Adding this “reasonability qualifier” to the obligation would therefore enable law firms that have signed NDAs to retain such information without being in breach of those NDA.
Negotiation points: a bidder could request that the seller provides any return/destroy requests in writing and the parties could negotiate the number of days within which the information must be returned/destroyed following such a request from the seller. A bidder may also attempt to qualify the obligation by stating that documents will only be returned/destroyed “to the extent that they contain any Confidential Information”. In addition, carve outs could be added to enable third parties to retain confidential information to the extent that those parties are required to do so by law/regulation etc. and in accordance with bona fide internal compliance policies.
No warranties or duty of care
Sellers will want to exclude any duty of care to bidders in respect of the accuracy or completeness of the confidential information provided, and ensure that there is no obligation to correct or update the information at any time. Sellers may also want to specify that the NDA does not oblige them to subsequently enter into discussions/negotiations in respect of the proposed transaction.
Restrictive covenants: employees, customers and suppliers
Non-contact
If a bidder contacts the target’s employees, this can be disruptive for the target’s business, as it will likely distract those employees and may give rise to concerns around job security. This could also lead to a bidder accessing information and insights that the seller doesn’t intend to disclose. Sellers therefore typically place restrictions on the ability of bidders to contact and/or solicit the target’s officers (i.e. directors), employees or shareholders, and may also prohibit contact with officers, employees or shareholders who left the target within the previous 18-24 months.
If a bidder contacts the target’s suppliers or customers, this might alert those suppliers or customers to the fact that the target might be sold. This could create uncertainty that leads to those suppliers or customers trying to amend their terms (or even terminate their contracts). It could also result in the transaction becoming public knowledge, which the seller/target may initially want to avoid (e.g. for reputational reasons). For these reasons (among others), such contact is therefore usually restricted or prohibited in NDAs.
Non-solicitation
Sellers will also typically want non-solicitation obligations in place in respect of employees, customers and suppliers (i.e. restrictions that prohibit bidders from contracting with those stakeholders), especially where the bidders are also competitors of the seller/target. A seller may be less bothered about this if the bidders are private equity firms (rather than trade buyers) however, as private equity firms don’t trade as “normal” businesses, so are less likely to want to poach the seller’s/target’s employees.
Non-solicitation clause: this is a clause (or group of clauses) that sets out a contractual promise – usually given by a seller to a buyer (but also sometimes given, for example, by an employee to their employer) – not to approach and attempt to poach, for instance, certain key employees, suppliers, distributors or customers of the company for a given time period and/or in a particular jurisdiction.
Carve-outs and limitations
Bidders will usually want to include carve outs that enable them to: contact named personnel for the purposes of due diligence; employ people from the seller’s business that have been attracted using usual (i.e. general, non-targeted) recruitment activity; and continue working with existing customers and suppliers that also happen to be customers/suppliers of the seller/target. Bidders will also want to ensure that non-contact and non-solicitation clauses are suitably limited in time and apply to only named or senior employees (e.g. executive level employees).
Bidders will usually refuse to take responsibility for ensuring that third parties to which they disclose the seller’s confidential information will abide by these restrictive covenants, as certain third parties (e.g. banks) will generally refuse to bind themselves to such restrictions in back-to-back NDAs. Otherwise, if a bidder agrees to procure that all recipients of the confidential information will not solicit employees and its bank then does so (having not signed a back-to-back NDA containing this restriction), the bidder will be in breach of the NDA and will have no recourse against that bank.
Bidders will also want the freedom to carry out general due diligence on the seller/its market (e.g. by engaging external consultants to assist with due diligence that is beyond the scope of the data room), but the seller will want to ensure that the bidder does not identify the seller/target by name or disclose any confidential information when doing so.
Negotiation points: the time periods for which the restrictions will last can usually be negotiated. A bidder could also try to limit the non-solicitation obligation to any “known” employees, customers or suppliers of the seller/target to reduce the risk of incurring liability for contacting/soliciting a party that it did not know was connected to the seller/target.
Exclusivity and consortiums
In the context of an auction process, sellers will want to ensure that potential bidders do not enter into exclusivity agreements with prospective lenders, as this can result in other potential bidders being unable to secure provisional finance from those lenders (thus “locking-up” the debt market). If the pool of potential bidders decreases, this can reduce competitive tension, which could potentially reduce the seller’s negotiating leverage and result in a lower purchase price than would otherwise have been agreed.
Sellers may also want to prevent bidders from joining together to form a “consortium” (i.e. a group through which those bidders join together to make a collective bid) as again, this could reduce competitive tension.
Negotiation point: bidders could insist on a carve out that entitles them to join together with other bidders to make a collective bid if the seller has provided prior written consent.
Remedies and enforcement
The parties will need to negotiate: who can enforce rights under the agreement, including any third parties (if applicable); whether the benefits/obligations can be assigned; the duration for which the rights and obligations will last; how parties can enforce their rights (e.g. whether an agent for service of process must be engaged); what remedies will be available; which law will govern the agreement; and which courts will have jurisdiction over any disputes that arise. The parties may also agree to pursue alternative methods of dispute resolution, such as arbitration.
Sellers will want to be indemnified against any losses arising as a result of a bidder’s breach of the NDA, but bidders are unlikely to agree to this (instead, bidders will usually try to limit the scope of the losses that would be covered by such indemnity). Sellers will also usually want the right to seek injunctive relief if they anticipate that an NDA is about to be breached. This is because damages are unlikely to provide an adequate remedy, as once confidential information has been disseminated, little can be done to prevent its continued disclosure to, and use by third parties.
The rights and obligations contained within an NDA usually subsist for 18 – 24 months after the date on which the NDA is signed or – for the successful bidder – the date on which the transaction completes. If the seller tries to enforce a far longer time period, a court may deem this to be void on the basis that such time period is not necessary to protect the seller’s legitimate interests.
Other boilerplate provisions
NDAs will typically include a variety of other “boilerplate” provisions (some of which are covered in the General boilerplate clauses section of the Core Commercial Law Principles chapter of this handbook), for example: variation clauses; non-assignment clauses; force majeure clauses; provisions governing the rights in and ownership of information that is exchanged between the parties (usually information will remain the property of the party providing such information); entire agreement clauses; provisions governing the rights of third parties; and governing law and jurisdiction clauses.
Boilerplate provisions: these are commonly used standard clauses that appear in a majority of contracts.
Other negotiation considerations
- Always keep in mind your client’s bargaining position (which may well be stronger if you are on the sell-side), although be mindful of your approach, especially if the other side on the deal is also a client of the firm (e.g. a client that has engaged the firm on other matters). In particular, before starting a negotiation, make sure you have points ready to concede and know which provisions you cannot under any circumstances depart from.
- During negotiations, don’t be afraid to go back to your client for their view on more commercial points. This is safer than conceding points that are important to your client without first receiving sign-off to do so.
- If you’re on the sell-side, you may need to impose more stringent restrictions if a bidder is a “strategic” bidder (e.g. a competitor that is trading in the same jurisdiction) or if you are dealing with private equity buyers with portfolio companies that operate in the same industry.
- During negotiations, keep a record of redlines and refer back to these to see how your NDA has evolved. Retaining a list of first and second-round concessions could help to provide a strong bargaining chip later on in the negotiation process, as you could try to “win” future points by highlighting that you have already been flexible where possible (a list of agreed concessions can also form the basis of negotiations for future NDAs).
- When taking part in negotiations, there are various strategies you can employ to help you determine which points truly matter to the other side. You could ask why the counterparty requires a certain amendment, which could kick off discussions that help you to reach a compromise that works for both parties. Asking the lawyer on the other side to refer a point back to their own client can also help to resolve certain issues, as the client may care less than their lawyer.
- Finally…make sure you execute the correct (i.e. final, agreed) version!