Non-Disclosure Agreements for Mergers and Acquisitions

By Richard D. Harroch, David A. Lipkin, and Richard V. Smith

In merger and acquisition (“M&A”) transactions, confidential and proprietary information (such as financial information and important contracts) often needs to be shared with the other party. But the path to doing so safely is making sure that the other party is bound to respect the confidential information provided and not use it to the disclosing party’s detriment.

One common way to protect the secrecy of confidential information given to another party is through the use of a Non-Disclosure Agreement, which is sometimes also referred to as a “Confidentiality Agreement” or “NDA.” In this article, the key terms of such agreements are discussed.

It should be noted at the outset that although NDA forms are abundant, and it seems like every buyer and seller has a “standard form,” NDAs, like all contracts, contain critical terms that should not be accepted as boilerplate.

The following discussion highlights a number of terms that require attention and should not simply be accepted by the parties without careful consideration. Indeed, since an NDA—unlike a letter of intent or a term sheet—universally is a binding contract, the parties need to be alert for nonstandard provisions and traps for the unwary.

Further, the parties need to make sure that the NDA that they negotiate is suitable for an M&A transaction. “Standard” business NDAs usually omit significant terms that are common in M&A NDAs.

Mutual vs. Non-Mutual NDAs

Non-Disclosure Agreements come in two basic formats: a one-way agreement or a mutual agreement. The one-way agreement is used when only one side will be sharing confidential information with the other side. The mutual NDA form is for situations where each side may potentially share confidential information. Many times, a mutual NDA form that has been proffered by the other party is based on a business-oriented NDA that has not been tailored to the M&A context.

Although there is always some appeal to using a mutual form of NDA, M&A sellers shy away from the mutual form if they are not planning to receive confidential information from the other side. Also, a creditworthy buyer who will pay cash to acquire a seller typically will not share any of its confidential information with the seller. Sellers thus often let prospective buyers know that they don’t want to receive any of the buyer’s confidential information, and there isn’t a need for a mutual form if they are asked for one.

A one-way agreement is geared to protecting the seller (as the disclosing party). As the following discussion indicates, most of the important points in an NDA are intended to benefit the seller.

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