NDA Legal Definition:

“A non-disclosure agreement (NDA) is an agreement in contract law that certain information will remain confidential. As such, an NDA binds a person who has signed it and prevents them from discussing any information included in the contract with any non-authorized party. NDAs are commonly used to protect trade secrets, client information, and other sensitive or valuable information. Sharing information in spite of an NDA qualifies as a breach of contract and can open the breaching party up to a lawsuit. An NDA can continue indefinitely or can include a duration clause that stipulates an end date of the agreement. Additionally, as stated in the South Dakota case of 1st American Systems, Inc. v. Rezatto, NDAs are usually enforced to the extent necessary to protect an employer’s interests and no further.”‍

[Source: Cornell Law School]

Understanding NDA's & Confidentiality in M&A Deals?

There is, by nature, sensitive information shared between multiple parties in an M&A transaction.

When one party is about to disclose something they want kept private, they can ask the other party to sign an NDA, legally limiting them from speaking about the protected information. Different information is typically disclosed at different stages in the M&A process. To learn more about the M&A process, read our guide: The M&A Process Explained.

Confidentiality is a big issue in M&A transactions. Often the seller will want to keep the fact that they are looking to sell a secret. Typically, the seller is more concerned with confidentiality, than the buyer. There are a number of reasons why the seller would want to keep the deal a secret. These reasons often include the fear of blowback from their community or from their existing customer base. Would key accounts have a problem with the founder(s) leaving? If contracts were nearing an end date, would they try and renegotiate? Additionally, the seller will need key employees to stay on with the company through the transition in ownership. If key employees heard about a potential sale, would they panic and start looking for other jobs? Often sellers are also concerned that their financial information (or information about key accounts) will be discovered by competitors.

Normally, there are a number of measures undertaken to preserve the seller's anonymity in M&A deals. The NDA is only part of the consideration.

For the seller, the M&A process typically starts with the teaser. The teaser is a short document containing a summary about the business that’s potentially looking to be sold. This document is short and contains general information, but deliberately leaves out the company name and takes precautions to protect its identity.

So the seller's identity is kept anonymous from the beginning with the teaser.

The potential seller may give this teaser to an investment bank or an M&A firm as an intermediary between them and potential buyers. These intermediaries have connections, networks, and contacts they can use to get the seller’s teaser in front of potential buyers. Part of the decision on who the seller gives the teaser to is dependent on the aspirations of the seller, and on the size of the business they’re looking to potentially sell. When a potential buyer comes across this teaser—and the company appears to meet the buyer’s acquisition criteria—then the potential buyer will ask the potential seller for more information.

Enter the NDA.

At this point in the process, there will typically be a formal NDA that needs to be signed by both parties. The purpose of this NDA is to prevent sensitive information from being discussed or made available to outsiders.

Both the buyer and seller may draft the NDA as they both have potential interests at stake that they may want to safeguard—although in M&A the potential buyer typically drafts the initial NDA when they request more information. There can be multiple drafts of the NDA, as both parties are looking for terms that will protect their best interests. This back-and-forth will continue until both parties are reasonably satisfied that the NDA protects their best interests.

It’s also important to note that there will be competition on the deal. Meaning, that there will be multiple potential buyers that see the teaser, and multiple potential buyers that request more information and sign an NDA. Competition is a necessary part of the M&A process, particularly for the seller. This competition between buyers increases the offer price they are willing to potentially pay the seller for the acquisition. However, more potential buyers also brings the risk that word will get out that the seller's business is for sale. Sellers will want to keep this potential risk in mind as well as the benefits of competition for the deal.

Additionally, NDA’s may be required to protect trade secrets, other proprietary knowledge, and R&D—so the NDA isn’t just used to protect the dissemination of financial information or the seller's identity, it’s necessary to protect other things as well.

What Information Is Protected With An NDA?

This section examines what information is typically protected with an NDA. These documents by necessity need to include what information can and cannot be discussed publicly. Additionally, NDAs can’t protect any information that’s already common knowledge, or information that’s already in the public domain. While this list is certainly not exhaustive, NDAs are commonly used to protect:

• Financial Information—As this guide has already discussed, a primary motivator for using the NDA is the desire to keep financial information confidential. In an M&A transaction that has progressed to this point, the potential buyer will be looking for detailed financial information from the seller. They will now be looking to do detailed financial modeling/analysis of the seller as a potential acquisition target (for more on this see our guide: The M&A Process Explained) and they will need to see in-depth financials. In the case of a privately held company, the seller’s interest here is to prevent dissemination of their financials to the public.

• Intellectual property—As the M&A process progresses, the potential buyer will want to see proof of any intellectual property the company has, such as patents, copyrights, and any kind of trade secrets that give it a sustainable competitive advantage.

• Customer Information—Customer lists and large accounts are also typically protected under an NDA. The seller has obvious reasons for wanting to keep this information confidential. The buyer has obvious reasons for wanting to vet and verify this information. What if the seller gets a large portion of their revenue from five or six large customers? Are any major contracts about to expire? They may want insight into conversion rates as well.

• Marketing Information—Brand strategies, price strategy, and how advertising dollars are spent are important pieces of information. Does the company get all of its traffic from one source? What if that source were to disappear? Does this company have any strategies that set it apart from competitors?

• Operations Information—The potential buyer will want to gain as much insight into internal cost structures, cost of goods sold, working capital, cash conversion cycles, and supplier information. Financial information is extremely important, but there is also a qualitative side to the data. This is why there are footnotes included in 10(k) reports for publicly traded companies. Some insight into management is necessary.

What Are The Contents Of An NDA?

This section details some of the necessary elements of an NDA. There are a wide array of uses for an NDA in life, outside of business. A celebrity may require their chef to sign an NDA, for example. Generally speaking, though, there are several major elements to a non-disclosure agreement:

• Participants in the Agreement—The document must specify who is involved in the agreement. Every party must specifically be named. This can be trickier for businesses than for individuals. Companies need to define themselves in an NDA and some companies have complex legal structures including holding companies. In M&A usually the buyer is described as the “receiving party” and the seller is described as the “disclosing party.”

• Definition of Confidential Information—This section deals with what information is to be kept confidential. It’s the company’s responsibility to define what can and cannot be shared.

• Confidentiality Exclusions— This section defines what’s not confidential. In some cases, companies structure the NDA to state that all documents exchanged are confidential. In some cases, with this strategy, it may be easier to define what isn’t confidential, specifically.

• Time Period—Generally speaking, in M&A the time frame for an NDA is about two years. Although NDA’s can be structured to have an indefinite life, prospective buyers will often try and steer away from such limiting terms. Big factors to consider in this section include research and development which may have less of an indefinite life, but may be extremely important to keep confidential in the short term.

Next Steps (After The NDA):

Normally, in exchange for signing the NDA the prospective buyer will receive a Confidential Information Memorandum (CIM). This document is prepared by the seller and the intermediary they go through to facilitate the sale of their business. These intermediaries are often investment banks or M&A firms. The CIM is a pre-prepared document containing more detailed information about the business for sale than was available in the teaser. The prospective buyer will use this information to conduct their valuation and assessment of the seller's business.

Recommended Resources:

• M&A Process Terminology List
• The M&A Process Explained
• What is a Teaser in M&A?
• Non-Disclosure Agreements in M&A