M&A NDA: Benefits, Types, and Negotiation Strategies Explained

Keeping sensitive information classified when selling your business or company is crucial, which is why you need an M&A NDA to protect your best interests.

In this guide, we explore the key components and types of a business sale NDA and some negotiation strategies for keeping your information safe before, during, and after the transaction.

It can be tempting to rush into making an M&A confidentiality agreement yourself. Instead, it would be ideal to hire a qualified and experienced M&A attorney to help you draft an effective agreement that will best protect your business interests.

When you connect with us at Exitwise, we can help you find and collaborate with the best M&A attorneys. Set up a no-obligation consultation with our team today to find the best attorney to help you make a custom NDA.

‍

What is an NDA in M&A?

An NDA, or Non-disclosure Agreement, is a legal document that you ask the buyer to sign, agreeing not to disclose sensitive information you receive before, during, and typically even after the M&A transaction.

Also called a confidentiality agreement (CA), the document is typically prepared by an M&A attorney as part of the sell-side M&A process.

The agreement is one of the key components in the early sale process. Both the seller and the buyer sign it, and it may include the signatures of third parties offering services in the deal.

‍

Types of NDAs in M&A Transactions

You can categorize NDAs by their term or duration. For example, you may have a terminating NDA that typically expires after an agreed-upon period, and the buyer becomes free of the obligation.

Alternatively, you may have a perpetual or non-terminating NDA that usually doesn't expire, and the buyer is bound to keep the information secret until or unless you make it public.  

Note that depending on the transaction you enter with the buyer, your confidentiality agreement can be:

• A terminating NDA
• A non-terminating NDA
• A terminating mutual NDA
• A non-terminating mutual NDA

Additionally, non-disclosure agreements for business sales generally fall into two categories: unilateral NDAs and Mutual NDAs (MNDAs).

Now, let’s compare NDA vs. MNDA.

MNDA vs. NDA  

Despite their striking similarities, here is the difference between NDA and MNDA:

Aspect

MNDA (Mutual Non-Disclosure Agreement)

NDA (Non-Disclosure Agreement)

Purpose

To try to protect sensitive information that both you and the buyer share with each other during the negotiations.

To try to protect sensitive information you share with the buyer during the negotiations.

Reciprocity

Both you and the buyer are responsible for keeping the shared sensitive information confidential.

The buyer is typically required to maintain secrecy of the sensitive information shared with them. As the seller, you are typically unbound by the agreement.

Scope of Confidential Information

Besides your confidential information, it may also feature the buyer's sensitive information, such as financial records, to prove the buyer's ability to purchase the business.

Typically includes the ongoing transaction itself and any information related to the sale, the target business, your details as the seller, business models, and even the terms of the NDA.

Liability for Breach

Either party may face consequences, such as litigation, monetary penalties or fines, and even criminal charges in some cases, for a breach.

In some cases, the seller may pursue the buyer for a breach through litigation, monetary fines, and even criminal charges.

Applicability

Usually used in investments and joint ventures but also in M&A transactions where you and the seller mutually share crucial information.

Usually applies largely to M&A business sales.

‍

Why an NDA Matters in M&A

Here's why a business sale confidentiality agreement is beneficial:

• Showing Professionalism and Building Trust: When you ask potential buyers to sign an NDA, you may set expectations and show them you are serious, professional, and well-represented. Buyers may trust you more and become less likely to use negotiation tactics they would try with an unrepresented or poorly represented seller.
• NDAs Protect Your Competitive Advantage: The document may help prevent your competitors from using your valuable information to innovate and thus gain market leadership.
• You Can Seek Legal Recourse: If the buyer or their team breaches the contract, you may sue and claim damages caused to your business interests.
• Addressing Other Issues: Although the document is called a confidentiality agreement, you may use it to address other critical issues, such as non-solicitation of employees.

‍

Key Provisions in an M&A NDA

The contents of a non-disclosure agreement for a business acquisition or merger differ from one transaction to another.

Here are some key components you may expect to include:

• Definition of “Confidential Information": An NDA typically defines what you mean by "Confidential Information” as per the agreement.

Generally, you could mean any information or data proprietary to you and not generally known to the public in tangible or intangible form, such as business plans and important financial information like quality of earnings.

• The Purpose of the Confidential Information: Typically, the purpose of the confidential information is restricted to evaluating and pursuing the M&A transaction.
• Restrictions on Using Confidential Information: The NDA may also include restrictions on the use and disclosure of confidential information.

• Restrictions on Disclosing the Identities of the Parties: An NDA typically includes the names and signatures of the buyer, seller, and any of their representatives helping with the deal process. NDAs typically restrict the participating parties from disclosing these identities.

• Obligations of the Recipient: M&A NDAs usually include the obligations of the recipient (the buyer), such as using the information only for purposes the agreement indicates.

• Remedies and Dispute Resolution: Most effective NDAs usually show how the deal can be remedied in case of a breach or dispute. Such methods may include monetary damages, arbitration, or legal recourse.

• Permitted Disclosures: The NDA may show what may be counted as public knowledge and, therefore, not classified.

• Disclosure Period: NDAs usually provide a specific duration during which the buyer may not disclose sensitive information. The duration is typically one to five years for terminating NDAs and indefinite for non-terminating NDAs.

• Law and Jurisdiction: NDAs usually indicate the jurisdiction under which they apply and are governed by the existing laws. The jurisdiction may be state, national, or both.

• Return or Destruction of Confidential Information: An M&A confidentiality agreement usually indicates whether the buyer should return or destroy the confidential information after the deal fails or sails through.

• Employee Poaching: When selling your business to a competitor, the NDA may include a clause restricting the buyer from poaching or soliciting your employees. You may specify the duration of this restriction.

• No Obligation to Proceed: Most NDAs usually indicate that neither you nor the buyer is legally obligated to proceed with the transaction. Both parties may reserve the right to reject or terminate the negotiations at any time.

• Residual Memory: Residual memory typically refers to the general skillsets and frameworks with the understanding that when you see or learn something, it's humanly challenging to unsee or unlearn it.

Once your buyer or their team sees or learns your frameworks or skillsets, they may even come up with new approaches while trying to solve a problem. The new solution would be derived from your out-of-the-box thinking.

As a seller, you may add a clause making residue memory confidential information to protect your business in case the deal flops.

Note: The buyer may ceaselessly negotiate the residual memory clause because they can't unsee or unlearn something, and they may walk away from the transaction if you can't agree on a compromise.

Given the many provisions, drafting an effective NDA can be challenging. You would be better off working with a business attorney to help you draft and understand these provisions.

Consult with us at Exitwise today so we can help you hire the best M&A attorney.

‍

How to Negotiate NDA for M&A

When negotiating a non-disclosure agreement for the sale of a business with your buyer, it's ideal to be accommodating and use a problem-solving mode.

Here are some negotiation tips that may come in handy:

1. Allow Residual Memory with Restrictions

When negotiating residual memory, you may allow it, but with some restrictions.

For example, you may ask the buyer and their team or representatives not to deliberately try to memorize, take notes, document, report, or take pictures of your general frameworks or skillsets.

You may have to clearly define what you mean by “a deliberate attempt to memorize".

2. Settle for a Mutually Agreeable Duration

Since the buyer may not wish to assume indefinite liability or obligation, they are likely to ask for a shorter disclosure period.

You may settle for the typical three years if it proves critical to saving the ongoing negotiations.

3. Agree to Protect the Buyer's Information

The buyer usually discloses a lot of information about what they plan to do with your business and its technology or processes. As such, they may ask for protection.

You might want to agree to a mutual NDA to assure them of your professionalism and win their confidence.

4. Use Effective Version Control

As the buyer negotiates the NDA, it may go through several rounds of revision.

You'll want to use a document version control system so that everyone works from the most recent version and avoids misunderstandings.

‍

Common Challenges with M&A NDAs

You may face the following challenges with M&A NDAs:

• Litigation may reveal your trade secrets in open court, and the third parties who pledge secrecy may not honor that pledge.
• You may define confidential information poorly, making it practically impossible to explain what it covers and whether that information is truly sensitive.
• Using multiple NDAs for different potential buyers may distort the consistency of the language and pass conflicting messages.
• Using incorrect names of the stakeholders may leave you vulnerable if you need to enforce the agreement.
• Enforcing the NDA poorly, as you may not always be alert for breaches or address them quickly.

‍

Frequently Asked Questions (FAQs)

Here are common questions about M&A NDAs:

What Happens if Confidential Information is Disclosed Despite Having an NDA in Place?

If the receiving party discloses confidential information while the NDA is in place, the consequences may include lawsuits, loss of reputation, financial penalties, and even criminal charges in some cases.

Can NDAs be Amended or Modified After they Are Initially Signed?

Amending or modifying an NDA after it has been signed initially depends on you, the buyer, and the type of modification or amendment needed.

We can help you hire an attorney to advise you in such situations.

Can the Buyer Disclose Specific Terms of the Negotiation After the NDA Has Expired?

The buyer may disclose information about the transaction after the NDA expires because the agreement no longer binds them.

‍

Conclusion

Drafting an effective M&A NDA may set the tone for selling your business successfully. You can work with a business attorney to help you draft an industry-specific NDA and negotiate it well with potential buyers.

At Exitwise, we can help you find qualified experts to help you secure the exit of your dreams. Reach out to us today so we can help you find the best attorney to represent your best interests in negotiations.