What Is a Non-Disclosure Agreement? Non-Disclosure Terms Explained

Types of Non-Disclosure Agreements and Terms in Confidential Transactions

Confidentiality is necessary when it comes to profitable ideas, trade information, intellectual property and important deals. Transactions like mergers and acquisitions (M&A) typically begin with some form of confidentiality agreement, or non-disclosure agreement (NDA).

What is an NDA? An NDA offers protection for sensitive information that may come up during due diligence. The goal is to protect confidential information from a third party’s eyes.

Often, the NDA protects any discussion of the M&A negotiation itself. This means neither party may discuss the deal with anyone in the outside world. The seller traditionally drafts and presents the NDA to the buyer before sharing access to any other sensitive information.

However, there are different types of non-disclosure agreements, which give different protections based on party involvement and the nature of how information is used in the transaction. We will discuss these types of NDAs and other non-disclosure terms you may encounter in future agreements.

Types of Non-Disclosure Agreements

Mutual, or Bilateral, NDAs

This type of NDA is used when both parties intend on sharing confidential information. These sometimes create legal obligations and rights for each party (rights are not usually transferred in a non-mutual agreement). This is the less common type and is more suited for joint ventures or investments.

You may nonetheless end up with a mutual NDA in an M&A transaction. This may be necessary if there is a chance the buying party will have to share sensitive information along the way. In these cases, a mutual NDA relieves some risk for the buyer and may be viewed as a necessary gesture of good faith.

One-Sided NDAs

The most common type. Disclosing parties have more flexibility under a one-sided NDA, but be careful. Some recipients may walk away from a transaction if the terms are too demanding.

Non-Disclosure Terms to Include in Your Agreement

Your confidentiality agreement or NDA should be suited to fit your business and your transaction needs. Certain clauses broadly apply to virtually every agreement, but some do not. While it is tempting to think you can use any template NDA you can find, you should not. Each confidentiality agreement defines its own meaning of non-disclosure and the terms of the agreement.

Essential non-disclosure terms and concepts include:

• Confidential Information: Define what information can’t be shared. The party receiving the NDA (normally the buyer), upon whom an obligation is created, should prefer the definition to be very narrow and specific. The presenting party should prefer a broad and inclusive definition.
• Non-Disclosure of Discussions: Ensure the M&A discussions remain private. This prevents competitors, employees or shareholders from reacting to rumors before a deal is agreed upon.
• Exceptions: It is perhaps as important to define what is not included in the confidential information. This generally includes knowledge available to the public or information already disclosed prior to the NDA.
• Duration or Term: It is common for an NDA to have an end date for the period of enforcement. Sellers concerned about trade secrets may prefer a longer term, but many buyers are unwilling to tie their hands beyond a few years.
• Use of Materials: Define how confidential information may be used. A critical clause in every confidentiality agreement will include something to the effect of “used solely for the purpose of evaluation of a potential transaction.”
• Disclosure of Materials: Specify to which executives, advisers, employees, attorneys, accountants or other parties the buyer may disclose confidential information.
• Compelled Disclosure: Some confidential information may have to be disclosed. For example, a government regulator or court may require disclosure of materials from the buyer while the NDA is still in effect. This clause aims to protect the closing and receiving party during these rare occasions.
• Return of Materials: Instruct the recipient to either return or destroy all confidential information once the term ends (or sooner, if specified in the NDA).
• Remedies: Address what happens if the agreement is breached; sometimes, but not always, the nature of the breach also matters.

Present Your Non-Disclosure Agreement After the Teaser Sheet

Sellers must reveal some information about their company in order to attract potential buyers. The confidentiality agreement, therefore, needs to fall between first contact and opening up your books. This is why you need to know the difference between a teaser sheet, an NDA and the Confidential Information Memorandum (CIM)—even if you do not use documents with those exact titles.

A Teaser Sheet

Also called an information sheet, the teaser sheet starts the M&A courting process between a buyer and seller. Formal teaser sheets are often produced through a specialized transaction advisor or investment banker, but less formal marketing material can serve the same function. These must be carefully crafted so the seller’s identity is hidden and are sent to a targeted group of buyers.

The Confidential Information Memorandum

Abbreviated as CIM, this document is a detailed breakdown of the business, its assets, liabilities and other material information that a potential buyer may need to value the acquisition. In other words, a seller is showing the books to the buyer.

If the process is executed through an intermediary, such as a transaction adviser, there is no direct contact between buyer and seller. This means no customer lists or trade secrets until the due diligence phase.

Do You Need an Attorney for Your NDA?

You do not need a third-party professional for every single business transaction activity, but it is highly advisable to use an experienced attorney before drafting or signing a confidentiality agreement or NDA. There are many different types of NDAs, and these can be complex legal documents—even well-prepared business owners may end up in court over a confidentiality breach.

NDA Just as you should not blithely exchange confidential information with counterparties, you should not take the risk of creating an ineffective NDA or signing a document you do not fully understand. A lawyer will be able to draft or interpret the NDA terms and language more effectively.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: The M&A Process: Understanding the Lifecycle of a Deal & Basic Deal Documents and Key Provisions in M&A Agreements.]

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