Many times, I am brought into the very beginning of an opportunity to help a seller negotiate a transaction to sell their company. At this point, the seller has already identified one or two buyers that expressed interest in pursuing an M&A transaction. Of course, the first thing I ask for is a copy of the NDA or Non-Disclosure Agreement. And, oh my word, do I see a lot missing in those agreements, which is really what has prompted me to write this post. I especially get nervous when there is no language around the solicitation of employees or customers!
Call me a “security kind of girl,” but I really want you to be fully protected before you engage in this type of conversation, and so I am going to share with you 6 things that must be in your NDA with a prospective buyer.
You buyers out there can also take a lot from this post, so please continue reading so you know what should be in your NDA as well.
An M&A transaction Non-Disclosure Agreement is unlike the normal NDA used to run your business. Therefore, if you are re-using the NDA you’ve used all these years to cover yourself and handle the day-to-day confidentiality, you are probably missing some key components.
An NDA or CA (Confidentiality Agreement) is an arrangement where both parties agree to share information with each other but refrain from sharing the information with outsiders. This means they promise not to divulge the fact that discussions are ongoing. This is a serious document that covers not only you, but members of your company (entity). Entity, in this case, means any individual, firm, corporation, partnership, association, LLC, joint venture, etc. So, if you are signing this as a representative of the company, it means everyone in the company must abide by the NDA.
I have seen one-page NDAs and 5-page NDAs. In this case, I would opt for the longer, more detailed version, because if this information gets out, it can be very detrimental to your business, your shareholders, and your management team. Ideally, I like to use my own, because I know it covers all the essential components. Still, there are times when the buyer pushes their version, in which case you should absolutely make sure it covers all the topics below.
Here are some of the key aspects to an NDA:
1. Identification of Confidential Information
Not just Confidentiality: Confidentiality in general is a given, but identifying what information is deemed “confidential” takes it to another level. To give you an idea, here is a small excerpt from my agreement that I use to cover this section:
“Confidential Information” means any and all information which is or should be reasonably understood by the party receiving such information (the “Recipient”) to be confidential or proprietary to the Party disclosing such information (the “Discloser”), whether or not reduced to writing, including, but not limited to, the following types of information and other information of a similar nature: financial, investor, or credit data and information; business processes and know-how; industry analysis and interpretation; prospects; appraisals; customer, vendor, and/or client names and contacts; business contacts and contact lists; contracts or negotiations; information about any of Discloser’s business, products, or services, including all copyrighted material, trademarks, service marks, and patents; all technical and/or scientific information; software and course code; test results and data; and proprietary technology and samples thereof, whether patented or not, including all trade secrets, any patents pending, including but not limited to, current information used in any patent applications; and any other information of a similar nature, or other subject matter pertaining to the business or technology of the Discloser or any of that Party’s affiliates, clients, consultants, or licensees, any of which as may be disclosed, received or observed in writing, visually, orally, digitally or electronically.”
Yes, that is one long sentence, but it leaves very little for debate.
2. Use of Materials
The NDA should specify that any materials exchanged during the M&A process are for evaluation purposes only. In other words, don’t use this information to create your own new business plan. Again, here is how I handle this:
“Each Party, as Recipient, agrees that all Confidential Information of each Party, as Discloser, shall remain the property of the Discloser, and that Recipient shall not create any derivative works or incorporate any of Discloser’s Confidential Information into any work product of Recipient. In the event Recipient does create any derivative works or works incorporating Discloser Confidential Information, such derivative or other works shall belong to Discloser.”
Especially if you are in conversations with a competitor, you don’t want to see your quote formats being used by them should the transaction not move forward.
3. Secrecy of Confidential Information
The NDA specifies the identity of the buyer and usually includes language stating that the Buyer can inform employees and advisors (accountants, attorney, M&A advisors, investment bankers, etc.) of the transaction and share information with these advisors. Buyers must inform these other employees or advisors about the NDA and be held responsible for any breach of confidentiality by these employees or advisors. Here is how I handle this:
“Each Party agrees to protect the Confidential Information, or any part thereof, from disclosure to any person or entity for any reason whatsoever, other than the intended Recipient Party’s senior employees and other individuals and entities that the Parties engage to assist in their business operations, who (a) need to know the Confidential Information in connection with the Recipient’s authorized use thereof, and (b) are required to protect the Confidential Information by enforceable confidentiality agreements or requirements no less restrictive than those in this NDA.”
Sometimes there is a separate paragraph that specifically calls out who this will bind:
“Each Party to this NDA agrees that the terms and conditions of this NDA are fully applicable and binding upon it, as well as all of its employees, shareholders, officers, directors, associates, partners, agents, personal or legal representatives, affiliates, subsidiaries, agents, associates, assigns, trustees, heirs, executors, and/or successors and assigns.”
4. Return and Destruction of Confidential Information
Here, we need to make sure that all materials given to them will either be returned or destroyed. Now, one addition I have recently made to my NDA is focused on them NOT having to destroy any data that is on backup media or other media made for archival purposes. Meaning emails with data files attached. This is one reason why you NEVER want to email files. Use a VDR like Dropbox or SharePoint to exchange documents.
This is really meant to cover your employees, because even if you do not divulge who they are, they can probably ascertain who they are via LinkedIn. And I would suggest NEVER giving customer data out (that is not aliased), so you don’t have to worry about them as much. But regardless, you should have a two-year non-solicitation period – either in total or after the agreement ends. This is the section that will most likely garner the most redlines by buyers because they want to cover themselves in case they advertise a position or hire a search firm. Make sure you have your attorney review any redlines of this section.
6. Effective Period and Termination
An NDA needs to have a definite shelf life. I usually see two years. I don’t feel that one year is enough, especially if the process drags a little in the beginning, which it may. However, each party has the opportunity to terminate the NDA – usually upon thirty days written notice, in which case they should still be required to abide by the confidentiality and non-solicitation clauses. Read your NDA carefully to make sure it covers this upon early termination.
One last item to consider is the governing law. Most people like to use the state in which the company resides. But if the buyer is in another state, they may not like that idea because they obviously don’t know the laws in your state. A good compromise, and the state most likely being used for the Definitive Agreements, will be Delaware. It’s a neutral state which isn’t overly zealous in ridiculous laws.
Finally, if you already have an NDA in place with a prospective buyer, and after reading this article you realize you are missing an important component (like the 2-year non-solicit part), it is totally okay to go back and ask them to sign a new one. If they are unwilling, well that tells you a little about them (and not in a good way). But remember, even if they do sign a new NDA or an amended one, if they didn’t comply with the new language prior to signing it, there is not a whole lot you can do. So be sure to consult with counsel before making any changes or before signing any NDA in the future.
Remember, my language that I shared above from my own agreements should be used for illustration purposes only; I am not giving legal counsel. Make sure you have your M&A NDA or CA reviewed by counsel in advance of searching for your ideal buyer.
Want to learn more about all the other agreements that you will encounter in an M&A transaction? Be sure to get on the list for my course Ready…Set…SELL, where I cover all the major agreements in a typical transaction and the nuances of each.