NDAs are essential for M&A deals. They protect confidential information and often include non-solicitation clauses. The specific terms of NDAs can vary greatly between deals.
Standard practice in any M&A deal is to enter into a confidentiality agreement (also known as a non-disclosure agreement or NDA) to protect proprietary information disclosed during the due diligence process, and sometimes, beyond. From the legal perspective, the NDA is typically the first step in any M&A transaction.
In the private equity sector, it is customary for the seller (or its advisor) to draft the NDA; and in most cases, the agreement will provide “one-way” or “unilateral” protections for the seller’s information only. Typically, such unilateral protections are sufficient since the seller is the only party disclosing confidential information; plus, in many instances, the seller’s NDA will include several “two-way” provisions, such as protecting the identity of both parties and the very fact that they are even discussing a possible deal, and granting both sides the right to walk away from the potential transaction at any time.
NDAs are usually drafted as standalone agreements, which helps to ensure optimal clarity around the enforceability of their provisions. Otherwise, if the NDA is attached to or included as part of another document (such as a term sheet), there could be uncertainty around which parts of the documentation are binding and which are not.
Despite these standard drafting conventions, NDAs can (and often do) vary greatly from deal to deal.
Sellers often want to ensure that many provisions are drafted in very broad terms, such as the definition of confidentiality, the term of the scope of the NDA, while buyers seek to narrow the scope of such provisions in order to give them maximum flexibility.
Below are five key examples of highly negotiated provisions from a Seller’s and Buyer’s perspective:
Permitted Recipients of Confidential Information
Seller – Narrow
Sellers will attempt to limit who is permitted to receive their proprietary information in an effort to keep it out of the hands of their competitors. For example, they may insist that confidential information be shared only with those representatives having a “need to know,” and then, only with those who have signed either a separate confidentiality agreement or an addendum to the NDA, as evidenced by a signed copy delivered to the seller. Additionally, sellers will seek to hold a buyer responsible for breach of the NDA by any of its representatives.
Buyer – Broad
Buyers often enlist the support and advice of many different advisors when evaluating a target, including affiliates, partners, members, employees, agents, representatives, consultants, attorneys, accountants, and especially, financing sources. To assuage the seller, a buyer may offer to give the seller written notice, or even agree to seek the seller’s consent, before disclosing confidential information to certain recipients, while limiting the need to secure separate NDAs for each representative. Finally, buyers may attempt to expand the purpose of the NDA - beyond the due diligence phase - in order to utilize it throughout the M&A process.
Non-Solicitation Clauses
Seller – Broad
Sellers favor broad non-solicitation clauses in order to prevent prospective buyers from pilfering talent, including the sellers’ employees, affiliates, and employees of their affiliates, with limited exclusions, if any.
Buyer – Narrow
The typical private equity buyer has a vast network of affiliates, including a multitude of employers within its own portfolio. Therefore, a buyer will seek to limit the scope of the non-solicitation clause (i.e., applicable only to the seller’s senior-level or executive management-level employees who are involved in the transaction and/or who have no pre-existing relationship to buyer) so as to protect its ability to comply with this obligation.
Consortium Bidding and Lock-Ups
Seller – Prohibit
A seller wants to prevent a buyer from forming a group of bidders to participate in a deal, a/k/a “club deals” or “consortium bidders,” which can have a negative impact on the seller by reducing bid competition and consequently, the potential price point for the transaction. Similarly, a seller may ask the buyer to confirm that it does not have an exclusive or “locked up” arrangement with financing sources, which could limit the pool of available capital and keep other bidders from being cut off from receiving financing.
Buyer – Allow
Consortium bidding enables some buyers to participate in a transaction that they otherwise could not afford to finance on their own. That said, most PE firms have various sources of capital, so it is usually not an issue to agree to a seller’s general prohibition. However, in doing so, a buyer will usually seek an exception to allow for participation in what is known as a “tree system,” whereby separate working groups (or “trees”) of individuals are formed by a financing source and exclusively dedicated to the seller and each prospective bidder in connection with the transaction.
Access to Parties Affiliated with Seller
Seller – Limit
Sellers usually seek to limit who is included within the transaction’s proverbial “cone of silence.” This provision is a means to that end; and sellers may use it to require buyers to direct all requests and communication to a designated person or advisor. Moreover, sellers may specifically seek to prohibit any contact with its employees, officers and directors, and even go so far as to forbid any contact with its customers, suppliers or vendors.
Buyer – Allow
Buyers may seek to minimize this restriction by excluding third parties entirely, or at least, by narrowing its applicability to only those parties that the buyer actually knows about and/or who are still in relationship with the seller.
Clarifying Provisions/Addenda
Seller – Reluctant
Although sellers are generally reluctant to limit the buyer’s confidentiality obligation in any way or to include additional language proposed by the buyer, they will usually agree to some clarifying provisions and/or addenda proposed by the buyer. In this situation, sellers are likely to include their own clarifying language to make clear that any additional language does not inadvertently permit the buyer to breach its confidentiality obligations under the NDA.
Buyer – Preferred
For PE buyers, M&A is their business; therefore, they will want to make sure that the NDA neither limits or restricts their ability to evaluate, make or manage other investments or acquisitions. For this reason, they often seek to include an addendum clarifying their right to continue conducting business as usual, which will govern in the event of a conflict between the NDA and such addendum.
As you can see, negotiating an NDA involves a great deal of push and pull between the parties. Although there may be other issues on which the seller and buyer disagree (e.g., choice of law), those noted above tend to be the most highly negotiated. PE firms sign thousands of these agreements each year, while most sellers are often newcomers to the M&A scene. At the end of the day, the party with the greatest negotiating power tends to prevail; and if that is not the PE firm, many will frequently move on to the next opportunity, leaving the seller with one less bidder.
For questions about Non-Disclosure Agreements and Private Equity Deals, please contact Client Success at clientsuccess@outsidegc.com.