Selling a Privately-Held Business Part 4 – Nondisclosure Agreement

Posted by Thomas E. Sowers on

It is very important for sellers to require potential purchasers to execute a nondisclosure agreement (“NDA”), often referred to as a confidentiality agreement, before engaging in acquisition discussions or providing the potential purchasers with any due diligence materials.  The primary purpose of the NDA is to protect the confidentiality, and limit the use, of the seller’s confidential and proprietary information that is shared by the seller during the due diligence process.  In situations where the potential purchaser will also be disclosing certain of its confidential information to the seller (as commonly occurs when part of the consideration being contemplated by the parties is the potential purchaser’s stock), then a mutual NDA is warranted.

Many clients view NDAs as cookie-cutter documents, but they should not be treated as such. It is money well spent for a seller to have its attorney prepare an NDA for the seller to use in the transaction.  If a potential purchaser presents the seller with the potential purchaser’s form of NDA to use for the transaction, the seller should have the NDA reviewed by its own attorney to be sure the NDA adequately covers the seller’s issues and that it is specifically tailored to the potential acquisition being explored.

Below is a list of items that should be covered in just about all NDA’s being used with a potential purchaser:

  1.  Definition of Confidential Information.  The definition should sufficiently cover the information to be disclosed (and, if applicable, any information previously provided to the potential purchaser prior to the signing of the NDA).  Also, the seller should remove any requirement that confidential information only includes documents that have been marked “confidential.”
  2. Use of Confidential Information. The NDA should contain language limiting the use of confidential information to evaluating the specific transaction at hand and no other purpose.
  3. Non-disclosure of Discussions.  The NDA should contain language that the fact the parties are holding discussions relating to a potential transaction cannot be disclosed.
  4. Disclaimer of Warranties.  The NDA should contain language that the seller is not making any representation or warranty as to the accuracy or completeness of information being provided to the potential purchaser.
  5. No Rights Being Granted.  The NDA should contain language stating that all confidential information being disclosed by the seller remains the property of the seller and that the seller is not conferring any rights by license or otherwise with respect to the confidential information being disclosed.
  6. Limitation on Obligations.  The NDA should contain language that the sharing of confidential information does not obligate either party to enter into further discussions or negotiations with the other party or to keep from entering into any agreement or negotiation with another party.
  7. Return of Materials.  The NDA should contain language obligating the potential purchaser to return tangible copies of any items of seller containing confidential information upon the request of seller (or at the very least obligating the potential purchaser to certify that all tangible copies have been destroyed).
  8. Remedies.  The NDA should contain language stating that money damages would be an insufficient remedy for the seller if the potential purchaser breaches the NDA and that the seller would be entitled to injunctive relief if a breach were to occur.
  9. Legally Required Disclosures.  The NDA should contain language obligating the potential purchaser to cooperate with seller in obtaining a protective order if the potential purchaser is legally required to disclose any of seller’s confidential information.

Below is a list of other issues that a seller should consider relating to its form NDA for potential purchasers:

  1. Representatives.  The seller should consider requiring each of the potential purchaser’s representatives to sign an NDA (i.e., officers or employees of the potential purchaser would sign).  If this is not agreeable, the NDA should specifically state that the potential purchaser is responsible for any breach of the agreement by its representatives.
  2. Non-Solicitation.  The seller should consider a covenant prohibiting the potential purchaser from soliciting for employment and employee of seller with whom the potential purchaser comes into contact in analyzing the transaction.