Mergers and acquisitions (“M&A”) often involve sensitive discussions, where public disclosure can disrupt operations, erode employee morale or affect market confidence. For publicly traded companies, these discussions may qualify as material nonpublic information subject to regulations such as Regulation FD, insider trading rules and Exchange Act Rule 10b-5. Additionally, untimely disclosure could impact stock value or invite competing bids. For private companies risks include employees jumping ship, competitors moving in to recruit key talent or impact customer relations.
To mitigate risks, parties typically initiate negotiations with a confidentiality agreement or non-disclosure agreement (“NDA”). These agreements restrict disclosure of sensitive information, ensuring discussions and deal terms remain private. Below is a guide addressing common questions and critical components of NDAs in M&A transactions:
1. Mutual vs. One-Way NDAs
Does it matter if the NDA is mutual or one-way? The choice between a mutual and one-way NDA depends on whether both parties share sensitive information. For instance:
- One-way NDA: Suitable when only one party discloses information, such as in a small business selling assets to a larger company.
- Mutual NDA: Appropriate for transactions where both parties exchange sensitive data, such as mergers or joint ventures.
Mutual NDAs tend to be more balanced since restrictions apply to both parties, often simplifying negotiations. However, they may provide less protection compared to a carefully tailored one-way NDA.
2. Defining “Confidential Information”
How should “Confidential Information” or “Evaluation Material” be defined?
The definition of “Confidential Information” can vary widely. A broader definition benefits the disclosing party, while a narrower one favors the recipient. Considerations for a comprehensive definition include:
- Covering information about affiliates, representatives, and subsidiaries.
- Including data provided both directly and indirectly (e.g., through a virtual data room).
- Protecting all information, regardless of format (physical, electronic, or derived).
- Specifying that the fact of discussions itself is confidential.
Exclusions may include:
- Publicly available information (not due to a breach).
- Independently developed data.
- Information lawfully obtained from third parties.
Ensure exclusions do not unintentionally allow misuse of disclosed information.
3. Restrictions on Use
What should the recipient be required to do—or refrain from doing?
NDAs typically mandate that the recipient use confidential information solely to evaluate the transaction. Additional provisions may dictate standards for safeguarding information, ranging from reasonable efforts to stringent controls. For example:
- Reasonable efforts clause: Recipients exercise standard precautions.
- Strict clause: Recipients use the same level of care as for their proprietary information, with added obligations like labeling documents as confidential.
The final terms often strike a balance between these extremes.
4. Exceptions to Disclosure Restrictions
Are there typical exceptions to disclosure restrictions?
Yes. NDAs usually allow disclosure of confidential information when legally required, such as under:
- Court orders.
- Regulatory obligations.
- Stock exchange requirements.
Such provisions often include safeguards like:
- Advance notice to the discloser.
- Limiting the scope of disclosure to what is strictly necessary.
- Seeking protective orders to maintain confidentiality.
5. Handling Information After Termination
What happens to confidential information after discussions end?
NDAs generally require recipients to return or destroy confidential materials upon termination of negotiations or at the discloser’s request. Exceptions may include:
- Retaining information for regulatory compliance.
- Backups stored on servers or third-party systems.
In such cases, NDAs often extend confidentiality obligations to retained materials, ensuring continued protection.
6. Enforcing Rights Under the NDA
How do you enforce your rights if the NDA is breached? Enforcement typically involves litigation or arbitration. Proving monetary damages can be challenging, so NDAs often include provisions for:
- Injunctive relief: Courts can order the recipient to cease unauthorized disclosures.
- Equitable remedies: Tailored relief without requiring proof of financial harm.
A robust enforcement clause might state that breaches cause “irreparable harm” and that the discloser is entitled to injunctive relief without needing to post a bond. Disclosers may also seek reimbursement for legal costs, though recipients often resist such terms.
7. Additional Protections
Non-solicitation clauses: Prevent recipients from poaching employees, clients, or vendors during or after negotiations.
Standstill provisions: Limit a recipient’s ability to acquire stakes or take over the disclosing party without consent, providing further safeguards during exploratory discussions.
How Long Should Restrictions Last in M&A NDAs?
Determining the appropriate duration for confidentiality restrictions in M&A confidentiality agreements can be complex, as it involves various legal and practical considerations. Here are some key factors to keep in mind:
- Duration vs. NDA Termination
Confidentiality restrictions don’t always align with the overall term of the agreement. For instance, you might want the restrictions to end on a specific date (e.g., two years after signing), while other provisions, such as dispute resolution clauses, could remain effective beyond that period. - Impact of Remaining Silent
The governing law significantly influences the consequences of omitting a specified duration for confidentiality restrictions. In some jurisdictions, silence may not result in perpetual confidentiality. Instead, courts may impose a “reasonable” timeframe, which might not align with what the parties intended. Understanding the default rules in the applicable jurisdiction is essential before deciding not to specify a duration. - Trade Secret Considerations
Trade secrets disclosed during M&A due diligence require special attention. Trade secrets enjoy legal protection as long as they remain secret and the owner takes reasonable measures to preserve their confidentiality. If an NDA includes a finite expiration date for confidentiality, any disclosed trade secrets may lose their status after the restrictions lapse, leaving them unprotected. Therefore, NDAs should distinguish trade secrets from other confidential information and apply indefinite or longer-term restrictions to them. - Retention of Confidential Information
When “return or destroy” provisions include exceptions—such as for legal retention requirements—the receiving party may need to maintain confidentiality for retained information longer than the baseline restriction period. This ensures ongoing protection for sensitive data that cannot be destroyed or returned.
Drafting Recommendations
A well-crafted confidentiality agreement should:
- Specify a clear confidentiality period for general information (e.g., two to five years).
- Apply indefinite or extended protections for trade secrets or retained information.
- Explicitly identify which provisions survive the agreement’s termination.
Preventing Employee and Client Poaching
During M&A discussions, parties often gain significant access to each other’s employees, clients, and business relationships. To prevent poaching or solicitation, agreements typically include non-solicitation clauses. These provisions aim to safeguard employees, clients, and business relationships from exploitation, especially if the deal falls through.
Example Non-Solicitation Clause:
“The Receiving Party agrees that for _ years from the date of this Agreement, it will not directly or indirectly:
- Employ or solicit for employment any employee of the Disclosing Party or its affiliates, except (i) where the employee responds to a general public job posting not targeted at the Disclosing Party, or (ii) if the employee’s employment was terminated by the Disclosing Party.
- Encourage any customer, supplier, or partner to reduce or terminate its business relationship with the Disclosing Party.”
Challenges and Considerations:
- Large companies with overlapping markets may face difficulties monitoring compliance with non-solicitation provisions.
- Provisions must be narrowly tailored to avoid overreach and liability risks.
- Exceptions, such as general job postings, ensure fairness while maintaining protection.
Understanding Standstill Provisions
Standstill provisions are critical in public company M&A to prevent hostile takeovers or coercive tactics by potential buyers. These clauses prohibit certain activities, such as acquiring shares or influencing management, without the target’s consent.
Example Standstill Provision:
“For a period of _ years, neither the Receiving Party nor its affiliates will, without prior written consent:
- Acquire any voting securities or assets of the Company.
- Engage in proxy solicitation or influence voting.
- Propose or announce any merger, tender offer, or similar transaction.
- Form a group with others to seek control of the Company.
- Encourage or assist others in undertaking the above activities.”
Why Targets Use Standstill Provisions:
- Without a standstill provision, a bidder could use confidential information gained during due diligence to launch a hostile bid. Proving misuse of confidential information can be challenging, making the standstill provision a more effective deterrent.
- These provisions also protect the target from destabilizing campaigns and maintain fairness among bidders.
Bidder Concerns:
Some bidders may argue that confidentiality obligations are sufficient, but targets typically reject this. Standstill provisions provide stronger and more direct protection against hostile actions.
Target Companies’ Duties:
Targets must ensure that standstill provisions comply with fiduciary duties, such as the Revlon duty to maximize shareholder value, by not improperly favoring one bidder over another.
An NDA is a critical tool for preserving confidentiality and trust in M&A negotiations. While its complexity will vary depending on the transaction, tailoring provisions to the specific needs of the parties ensures effective protection without hindering the deal process. Always consult legal experts to draft or review NDAs, ensuring enforceability and alignment with your strategic objectives.
