Balancing risk and reward while processing nondisclosure agreements in a M&A process
NDA documents are legal contracts that came take time to execute. Educated buyers and sellers can avoid some of these typical issues that challenge efficient processing and enable a smoother transaction.
Non-Disclosure Agreements (NDA) are used between two parties to help protect against revealing confidential information that may be disclosed during the exploration of a business transaction. Although NDA’s are meant to be simple legal documents, processing them can be a complex and time consuming affair in the context or a M&A process with multiple bidders. Buyers and sellers typically have varying company policies and harmonizing all of this in the context of a M&A process is an endeavor that can rack up legal bills and consume time.
Juxtapose all of this against the relative low frequency of actual disputes arising from NDAs and it is clear that it is important to optimize NDA processing to balance both legal protection and cost effectiveness.
Interestingly, NDA execution often sets the tone for buyer and seller, and this can be more valuable and revealing than the actual terms of the NDA. If buyer or seller is difficult to deal with or insists on out-of-market terms at the NDA level, fly the red flags — it may not get any easier!
Some consistent issues arising during NDA processing from a buyer/seller perspective include:
1. Non-Solicitation clauses
This is usually the concern of the seller, especially if the buyer is a large company. Most buyers carefully scrutinize non-solicit clauses, which drives some back and forth while trying to come to an agreement that is suitable for both buyer and seller.
2. Standard NDA template from buyers
In some cases, especially with publicly traded companies, the buyers may prefer to use their NDA form because they believe that their version is more of a mutual agreement as opposed to a one-sided agreement that the sellers may propose — and it has been vetted internally for mass processing. If the seller refuses and the prospective buyer decides to use the seller’s NDA, it sometimes takes a while for the prospective buyer to return the NDA, which typically comes back thickly redlined. There are also instances in which the seller will not budge at viewing any NDA other than theirs which may result in either parties not moving forward.
3. Buyer or seller does not want any changes to NDA
In some cases, the prospective buyer or seller would prefer no changes to be made to the NDA. Some prospective buyers are even prepared to leave the process if changes are made to their NDA. When the prospective buyer is a reputable one, the seller may accept this approach. When sellers do not want changes to their own NDA, it usually takes a longer time to process because the seller will likely need to challenge the prospective buyer to sign without changes.
Buyers and sellers typically have a preferred location(s) for court worthy disputes due to breach of NDA terms. Jurisdictional issues are usually solved when parties agree to a mutual location of home state or neutral pro-business states like Delaware.
Some sellers appoint an attorney to review any NDA edits. If the assigned attorney is unable to respond quickly, some prospective buyers will lose interest in further participating in the process. A similar issue arises if an executive is responsible for managing NDA edits but cannot respond promptly. Sellers should consider expertise and bandwidth when making such a selection.
6. Disclosure before executing NDAs
There are instances in which a prospective buyer refuses to sign a blind NDA first and requires the name of the seller so that they can do internal checks to qualify a potential conflict. The reputation of the buyer will heavily influence the seller’s decision in such cases.
7. Termination period
A normal NDA term is 1–3 years. Indefinite terms are difficult to manage.
NDA documents are legal contracts that can take time to execute. Educated buyers and sellers can avoid some of these typical issues that challenge efficient processing and enable a smoother transaction. Please take the time to familiarize yourself with these issues as you embark on such a process.
Chevonese Dacres is analyst at 7 Mile Advisors. This article originally appeared on 7 Mile Advisors blog. 7 Mile Advisors is a CFE Media content partner.
Original content can be found at blog.7mileadvisors.com.