Key Considerations for Confidentiality Agreements in M&A Deal

With over a decade of legal experience in complex business and real estate transactions, I’ve advised countless clients on the intricacies of confidentiality agreements (NDAs) in M&A deals. These agreements are essential in ensuring that highly sensitive corporate information remains protected while parties explore potential transactions.

One of the first steps in most mergers and acquisitions (M&A) transactions is signing a confidentiality agreement (often referred to as a nondisclosure agreement or NDA). By putting parameters around how information is shared, NDAs protect both buyers and sellers from unauthorized disclosure of trade secrets, financial data, and other proprietary details.

1. Determining Whether the NDA Should Be Unilateral or Mutual

NDAs can be unilateral (protecting one party’s information) or mutual (protecting both parties’ information). In most M&A contexts—especially where both parties share data—mutual NDAs are common. However, if your transaction is an all-cash deal, you may only need a unilateral NDA that primarily protects the seller’s information. Ultimately, the choice depends on whether both parties plan to disclose sensitive information.

2. Timing and Execution

NDAs should be executed before sharing any confidential information. If you sign the NDA too late, previously disclosed information might not be covered. Some parties integrate confidentiality provisions into a term sheet, but to expedite diligence or negotiations, it is often simpler to have a separate NDA in place beforehand.

3. Content Essentials

Although each deal is unique, most NDAs contain several key sections:

• Definition of Confidential Information: This clause spells out what is deemed confidential and often covers written, oral, or electronic information shared by the disclosing party.
• Exclusions: Commonly, information that is already public or independently developed is excluded.
• Permitted Uses: Typically restricts using the information solely to evaluate or negotiate the potential transaction.
• Representatives: Clarifies who may receive or handle the disclosed information (e.g., attorneys, accountants, and approved financing sources).
• Term: Establishes how long the NDA lasts. Some NDAs are indefinite, while others have a fixed expiration.
• Return or Destruction of Information: Ensures the receiving party will either return or destroy the confidential materials if the deal doesn’t go through or once the term ends.
• Remedies: Typically includes the right to seek injunctive relief, monetary damages, or both in case of breach.

4. Special Provisions in M&A NDAs

Standstill Agreements

If the seller (or target) is publicly traded, a standstill provision can prevent an unsolicited or hostile takeover bid if negotiations fail. The buyer generally agrees not to purchase stock or seek control during a specified timeframe.

Non-Solicitation

An NDA may include a non-solicitation clause preventing the buyer from poaching the seller’s employees, customers, or suppliers. Such clauses are particularly important if the seller discloses employee names, organizational structures, or key account information during due diligence.

Exclusivity

Sometimes called a no-shop clause, exclusivity provisions limit the seller from negotiating with other potential buyers for a set period. It provides the buyer with security while they spend time and resources conducting due diligence.

Residual Rights

Some NDAs include residual rights clauses, allowing the receiving party’s employees to use information retained in their unaided memory. Sellers often resist these clauses since they can lead to disputes over whether a buyer used inadvertently retained data for future projects.

5. Limitations of NDAs

Even the best-drafted NDA has its limits. Once a breach occurs and the information leaks into the public domain, it can’t be undisclosed. While you can pursue damages, proving the exact financial harm can be challenging. As a practical measure, thoroughly vet who has access to sensitive information and discuss contingency plans if a breach occurs.

6. Practical Takeaways

• Sign Early: Execute the NDA before exchanging any confidential data.
• Customize Provisions: Tailor NDAs to reflect whether the deal is unilateral or mutual, and ensure the definition of confidential information is sufficiently broad.
• Use Clear Exceptions: Balance legitimate exclusions (e.g., publicly known info) with robust protections for truly sensitive data.
• Include Remedies: Outline possible injunctive relief and indemnification in case of unauthorized disclosure.
• Watch Out for “Standstill” Clauses: Particularly relevant for public company targets to avoid surprise hostile takeovers.
• Keep It Practical: Overly cumbersome processes (e.g., labeling every single document “confidential”) can hinder efficient dealmaking.

“An NDA is not just a piece of paper; it’s a crucial roadmap that guides how confidential information is shared and protected throughout an M&A deal.”