Key Provisions in NDAs in a Competitive M&A Sales Process
Despite the pandemic, many M&A practitioners have been quite busy since the latter part of 2020. There have been and will continue to be, competitive M&A sales processes for valuable and desirable companies, businesses and assets. In a highly competitive M&A sales process, the seller, the seller’s counsel and investments bankers must balance protecting the seller and their confidential information against maximising the number of buyers that participate in the process.
In any M&A sales process, the seller’s counsel will negotiate a non-disclosure agreement (NDA) with potential buyers and their legal counsel. The one-way NDA that each buyer executes protects the seller’s confidential information. There could be 30, 40, 50 or more potential buyers in a highly competitive M&A sales process, which means an NDA for each potential buyer. Scott Rissmiller has counselled sellers in two different sales processes in the last nine months that involved over 30 and over 50 NDAs, respectively. While some buyers sign the NDA as provided, many buyers negotiate it. Comments on an NDA from the two types of buyers (i.e., strategic and financial sponsors) will vary, especially regarding certain NDA provisions.
The seller’s counsel will not get every point they want in the final NDA from each potential buyer, and thus their counsel must identify the areas to focus on when encountering comments from a potential buyer. Scott lists the three particular areas that often generate comments from any buyer (though their specific comments may vary) as follows:
Access to and distribution of confidential information
The NDA defines the scope of confidential information (which is broad but often non-controversial) and will specify to whom the potential buyer can share confidential information. To start, the seller should only permit a buyer to share confidential information with their representatives (e.g., officers, directors, accountants, attorneys, bankers, etc.) who need to know such information. A financial sponsor will also want to share confidential information with other parties, including their lenders, partners, operating partners, and perhaps even portfolio companies. The seller will want to avoid the sharing of confidential information with a portfolio company, especially if it competes with the seller (or any part of their business). However, the seller may be willing to permit a financial sponsor with only a few portfolio companies (none of which compete with the seller) to permit disclosure to portfolio companies. A financial sponsor may want to also specify that a portfolio company is not deemed to be a “representative” and thus subject to the NDA unless that portfolio company receives confidential information. In that case, the seller should specify that a portfolio company is deemed to be a representative if it receives or is given access to confidential information—the key factor being whether a portfolio company can access confidential information, not whether it actually receives confidential information. A strategic buyer may want to share confidential information with subsidiaries and/or a subsidiary’s officers, directors and employees. In that situation, the seller is also focused on limiting disclosure, especially because a strategic (or its subsidiary) likely operates in the same industry and may directly compete. The seller and their advisers should evaluate these types of comments on a case-by-case basis and consult with their business representatives and bankers to determine the nature and history of the particular buyer and whether it presents a legitimate opportunity and justifiable risk.
In order to receive confidential information (including information regarding key executives and employees) and potentially meeting with key executives, a buyer is often required to agree to a non-solicitation provision so that it cannot poach the seller’s employees. This is of greater importance with strategics who compete with the seller or a financial sponsor with competing portfolio companies, especially if the seller is selling only certain assets or a line of business. For some buyers, the seller may be willing to limit the non-solicit to senior executives. Aside from customary non-solicit carve-outs (such as public advertisements), sellers prefer including “direct or indirect” language with respect to solicitations so that a buyer cannot have a representative circumvent the non-solicit. Some financial sponsors may want express language stating that the non-solicit does not apply to any portfolio company that has not received confidential information. Most NDAs specify that it applies only to the representatives who receive or are given access to confidential information, thus eliminating the need for any such express language, which could otherwise be interpreted as a blanket waiver in favour of the buyer.
Retention of confidential information
Buyers typically want language expressly permitting a buyer to retain confidential information in electronic archives pursuant to normal course computer backup operations or to comply with applicable legal and regulatory requirements and record retention policies. An issue arises when the NDA has a relatively short set term because the seller will want any confidential information retained by the buyer after the term to be protected by the NDA’s confidentiality and non-use terms beyond such term, as certain confidential information will not go stale or may be trade secrets. For example, say a strategic buyer drops out of the sales process where the seller is selling a line of business; in that case, the seller is still operating following the transaction, and yet a competitor now has the seller’s confidential information. The seller has a few options, including (i) specifying that confidential information retained for archival purposes or compliance reasons is subject to the NDA for as long as it is retained or (ii) setting a tail period beyond expiration or termination, and/or requiring the buyer to limit access to such retained information to only legal and compliance personnel who need to access it. Financial sponsors with extensive portfolios or who investigate hundreds of potential deals may object to long-standing obligations due to the administrative burden. The seller’s counsel should, as with any other sensitive part of the NDA, consult with the business representatives and bankers to determine what may or may not be acceptable in the circumstances.
- Evaluate comments on sensitive parts of the NDA on a case-by-case basis and gather input from the business representatives and bankers regarding that particular buyer.
- After receiving comments from a few buyers, the seller and their counsel and bankers should discuss and agree on “ground rules” for comments on the NDA to help streamline the process.
- Recognise that each buyer and their portfolio of companies or subsidiaries will vary—changes from one buyer may be acceptable but similar changes from another buyer may not be.
- Specifically draft the non-solicitation provisions to make clear what is permitted so that it is also clear what is not permitted.
- Include tail language so that confidential information that is necessarily retained remains protected.
Nick Collevecchio, Counsel in Venable’s corporate group, contributed to this article.