A company should secure its confidential information during a sale process by entering into a non-disclosure agreement (NDA) with the potential buyers. Companies commonly use NDAs in a variety of ongoing business agreements, including with customers, suppliers and vendors (See What Is an NDA and When Do You Need One?). However, companies may not realize that the NDAs they use for day-to-day purposes are typically insufficient for a potential sale. 

Sellers should familiarize themselves with specific words and phrases that appear in M&A-related NDAs. In particular, they should confirm that an NDA contains the following terms before commencing the sale process:

Protects all information the company may disclose to a potential buyer, whether written or oral, as well as transaction information (existence of transaction, status of negotiations, etc.).

Limits the use of confidential information for the purpose of the transaction. Resist any request from a buyer to include a “residuals” clause, which provides that “residual information” (information retained in a recipient’s memory after reviewing the company’s confidential information) is not subject to the confidentiality provisions of the NDA.

Limits the persons who can access the information to representatives of the parties on an as-needed basis (e.g., directors, employees and outside advisors).  If the representatives are not parties to an NDA directly with the company, the potential buyer should agree that it is liable for any misuse or unauthorized disclosure of the company’s confidential information by any representative.

Permits disclosure of confidential information only when required by law and requires  that notice is provided to the company and disclosure is limited to the extent legally necessary.

Restricts any solicitation of company employees (or at least key employees) for a specified period of time, subject to an exception for someone who responds to a general advertisement.  

Entitles the company to request the return or destruction of confidential information if either party determines not to proceed with the transaction.

Provides that the NDA survives indefinitely or for a specified period of time (at least 2–5 years), depending on the sensitivity of the information to be shared and/or whether the recipient is a competitor. Confidentiality obligations should not expire with respect to trade secrets disclosed under the agreement.

Entitles the company to obtain equitable relief (e.g., a court injunction) if the other party breaches the NDA.

While well-crafted, tailored NDAs can go a long way in helping secure a company’s confidential information in a sale process, they are not foolproof. Even the best NDAs cannot protect a company if the recipient ultimately breaches the agreement, either by disclosing the company’s confidential information or using it for a competitive purpose. Therefore, the best protection for any piece of confidential information is to disclose it on a limited basis, or not at all.

A company should always carefully consider the circumstances under which it needs to disclose confidential information. For example, any confidential information disclosed to another party in an initial informational meeting should be very limited, particularly if an investment banker is bringing in the potential buyer (and the buyer has not independently sought out the company).  Often, companies accept invitations for initial meetings with investment bankers in order to learn about other companies,  rather than to explore a transaction. In addition, companies should exhibit extreme caution when sharing sensitive information with a competitor and limit the audience to a select group of representatives that absolutely need to have the particular piece of information. A company should always ask itself, “If I do not ultimately enter into a transaction with this party, how harmful could it be that I shared this piece of information with this party?” 

In sum, companies should recognize both the benefits and limitations of NDAs. Although NDAs can effectively establish the parameters of disclosure and the use of confidential information, an NDA should never substitute for vigilance.

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