Protecting Your Confidential Information: The Role of Non-Disclosure Agreements (NDAs) in M&A Transactions

In any merger and acquisition (M&A) transaction, safeguarding sensitive information is paramount. A Non-Disclosure Agreement (NDA) is often the first line of defense in ensuring that both buyers and sellers protect their confidential information. For CEOs or other business leaders steering their companies through the M&A process, understanding the strategic importance of an NDA is essential for minimizing risk and maintaining competitive advantage.

The Purpose of an NDA: Why It’s Non-Negotiable

In the M&A context, an NDA is a legally binding contract that establishes obligations of confidentiality on the parties involved in a proposed transaction. The primary purpose of an NDA is to ensure that proprietary information exchanged during the M&A due diligence process, such as financial information, business strategies, and customer, supplier and employee lists, remains confidential and is not disclosed to third parties. Further, an NDA protects a discloser of proprietary information from a recipient using such proprietary information for improper purposes, such as soliciting employees or interfering with customer or supplier relationships.

Having a well-drafted NDA in place before discussions about a potential transaction begin is not just advisable—it’s essential.

When to Use an NDA: Timing Is Everything

An NDA should be one of the first documents executed at the start of an M&A process—before any substantive discussions or data exchanges take place. Entering into NDAs is an extremely common practice, and this early implementation helps set the tone for the transaction, signaling that confidentiality is a priority for both parties. Upon the closing of an M&A transaction, the NDA will generally be terminated, and the confidentiality provisions set forth in the M&A sale document will take its place. Alternatively, if a transaction does not proceed to closing, the obligations under an NDA will typically last several years and may last indefinitely as to certain trade secrets that are disclosed.

Key Provisions to Include in Your NDA

An NDA should include several key provisions to ensure comprehensive protection:

1. Definition of Confidential Information: An expansive definition of what constitutes confidential information. This can include financial data, business plans, registered and unregistered intellectual property, customer and supplier lists, employee information, and much more.
2. Permitted Use: A narrow statement outlining for what purpose a receiving party can use confidential information, which purpose, in the M&A context, is oftentimes limited to the use of the confidential information in the evaluation of a potential M&A transaction.
3. Non-Disclosure Obligations: An explicit statement that the receiving party cannot disclose the information to third parties, except under specific circumstances, such as when required to disclose by law or when such disclosure is agreed to by the disclosing party.
4. Return or Destruction of Information: A clause that requires the return or destruction of confidential information upon request of the disclosing party or if the transaction does not proceed to closing.
5. Ownership.  A provision definitively stating that the confidential information will always be owned by the disclosing party.

Depending on the nature of the potential transaction and the parties to the NDA, an NDA may also include provisions whereby the recipient of confidential information agrees not to solicit employees and customers of the disclosing party and provisions describing in what limited circumstances a recipient can copy or keep copies of confidential information after termination of an NDA.

Conclusion

In the high-stakes world of M&A, a well-drafted NDA is more than just a formality—it’s a critical tool for protecting your company’s sensitive information. By ensuring that confidentiality is maintained throughout the negotiation process, an NDA helps to create a secure environment where both parties can explore the potential transaction with confidence.