M&A Vocabulary – Understanding Experts: “Non-Disclosure Agreement”

At the beginning of M&A transactions, it is common for the parties to the transaction to conclude a confidentiality agreement (English: Non-Disclosure Agreement – NDA for short – or Confidentiality Agreement). The objectives and essential contents of an NDA are presented below.

Introduction

Concluding an NDA is in the interest of the seller to secure the confidentiality of the target company’s trade and business secrets, but also in the interest of the target company’s organs, which are themselves subject to confidentiality and secrecy obligations. The NDA specifically regulates what information is to be handed over to the prospective buyer and how they are to handle it. Furthermore, the legal consequences for a breach of the NDA by the prospective buyer and/or their advisors are regulated. However, the design of the NDA also depends on who the prospective buyer is (e.g., investor, strategist, or competitor).

The prospective buyer may also be interested in concluding an NDA, as confidential information also includes the circumstances and status of negotiations regarding the company acquisition. In these cases, an NDA that obligates both parties is required.

Confidential Information

Confidential information is defined as information that the respective party designates as confidential. The seller has an interest in defining all information – regardless of type and form (written, oral, electronic) – that is disclosed in all phases of the M&A transaction; information processed by advisors in documents (such as due diligence and committee reports) should also be included in the NDA.

The following are regularly defined as non-confidential information:

• Information that is publicly known at the time of disclosure;
• Information that becomes publicly known after the conclusion of the NDA;
• Information that has been disclosed to the prospective buyer on a non-confidential basis by the seller;
• Information that has been made accessible to the prospective buyer by third parties, and
• Information that the prospective buyer has generated themselves.

Confidentiality Obligation

The core of every NDA is the confidentiality obligation, according to which confidential information may not be disclosed to third parties without the prior consent of the seller. The information provided must be treated confidentially, only transmitted to a restricted group of people, and used solely for the purpose of due diligence and the further execution of the transaction. Exceptions are advisable, according to which the obligation is not violated if the disclosure occurs due to legal provisions, court judgments, or supervisory orders. However, a duty to inform and, if applicable, an opportunity for the affected party to participate should be provided here.

Contracting Parties

When concluding an NDA, it is important to ensure that the correct contracting parties are included. Typically, an NDA is concluded by the seller as a shareholder of the target company. However, it also happens that the target company itself is a contracting party. In the case of transactions involving intermediaries, it must be considered whether these parties should also be contracting parties. Finally, it is advisable to ensure that those persons who are not contracting parties are included in the scope of protection of the NDA if necessary. For example, if the target company and the seller are to remain anonymous initially as part of a bidding process, the NDA can be concluded with the seller’s advisors instead.

Recipient Group

The seller’s interest is to keep the recipient group of confidential information as small as possible and to allow the forwarding of information only to those persons who need to review it for the examination and evaluation of the transaction.

The prospective buyer will regularly have an interest in being allowed to pass on the information to their employees within their own and affiliated companies, as well as to their advisors. In addition, the inclusion of external financiers in the recipient group may also be necessary, but possibly only with the seller’s separate consent.

Liability

Liability for the misuse of confidential information and other breaches of the NDA should be explicitly regulated, for example, through liability and indemnification obligations, contractual penalties, and/or the agreement of liquidated damages. While statutory legal consequences can lead to a claim for damages even without a separate contractual provision, it will be difficult in most cases to prove and quantify specific damages.

Other Provisions

Further provisions of an NDA often include:

• Regulations regarding competition-sensitive information to prevent a breach of competition law (e.g., obligation of the buyer to form a team to review competition-sensitive information, a so-called clean team);
• Exclusivity clauses;
• Return and destruction of confidential information and exceptions thereto;
• Non-solicitation clauses to the detriment of the prospective buyer regarding highly qualified employees, so-called key employees;

• No-contact clauses and exceptions thereto;
• Term (typically two to three years);
• Applicable law and jurisdiction.

Conclusion

In the interest of all parties to an M&A transaction, an NDA should be signed early, even before significant information is exchanged. Since the nature and scope of the transaction, the parties involved, and the nature of the information to be exchanged have a significant influence on the design of an NDA, it is advisable to draft the agreement appropriately for the individual case.

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