5 Highly Negotiated Provisions in Private Equity Non-Disclosure Agreements
Standard practice in any M&A deal is to enter into a confidentiality agreement (also known as a non-disclosure agreement or NDA) to protect proprietary information disclosed during the due diligence process, and sometimes, beyond. From the legal perspective, the NDA is typically the first step in any M&A transaction.
In the private equity sector, it is customary for the seller (or its advisor) to draft the NDA; and in most cases, the agreement will provide “one-way” or “unilateral” protections for the seller’s information only. Typically, such unilateral protections are sufficient since the seller is the only party disclosing confidential information; plus, in many instances, the seller’s NDA will include several “two-way” provisions, such as protecting the identity of both parties and the very fact that they are even discussing a possible deal, and granting both sides the right to walk away from the potential transaction at any time.
NDAs are usually drafted as standalone agreements, which helps to ensure optimal clarity around the enforceability of their provisions. Otherwise, if the NDA is attached to or included as part of another document (such as a term sheet), there could be uncertainty around which parts of the documentation are binding and which are not.
Putting aside these standard drafting conventions, NDAs can (and often do) vary greatly from deal to deal. While sellers typically prefer broadly drafted provisions, such as the definition of confidentiality and the term of the confidentiality obligation, buyers often seek to narrow the scope of such provisions in order to preserve maximum flexibility. To help illustrate these opposing positions, below are five highly negotiated NDA provisions reviewed from both perspectives:
1. Permitted Recipients of Confidential Information
Sellers will attempt to limit who is permitted to receive their proprietary information in order to keep it out of the hands of their competitors. For example, they may insist that confidential information be shared only with those representatives of the buyer who have a “need to know,” and then, only with those who sign either a separate confidentiality agreement or an addendum to the NDA, as evidenced by a signed copy delivered to the seller. Additionally, sellers will seek to hold a buyer responsible for breach of the NDA by any of its representatives.
Buyers often enlist the support and advice of many different advisors when evaluating a target, including affiliates, partners, members, employees, agents, representatives, consultants, attorneys, accountants, and especially, financing sources. To assuage the seller, a buyer may offer to give the seller written notice, or even agree to seek the seller’s consent, before disclosing confidential information to certain recipients, but will try to limit the need to secure separate NDAs for each representative.
2. Non-Solicitation Clauses
Sellers favor broad non-solicitation clauses in order to prevent prospective buyers from pilfering talent, including the sellers’ employees, affiliates, and employees of their affiliates, with limited exclusions, if any.
Buyers in the private equity space typically have a vast network of affiliates, including a multitude of employers within its own portfolio. It is in their best interest, therefore, to limit the scope of the non-solicitation clause in order to ensure their ability to comply with this obligation. For instance, a buyer may try to limit the applicability of a non-solicitation provision to only the seller’s senior-level or executive management-level employees who are involved in the transaction and/or who have no pre-existing relationship to buyer.
3. Consortium Bidding and Lock-Ups
Sellers want to prevent their buyers from forming groups of bidders to participate in a deal, a/k/a “club deals” or “consortium bidders,” which can negatively impact their position by reducing bid competition, and consequently, the potential price point for the transaction. Similarly, a seller may ask the buyer to confirm that it does not have an exclusive or “locked up” arrangement with financing sources, which could limit the pool of available capital and keep other potential buyers from receiving financing and submitting bids.
Buyers sometimes rely on consortium bidding as a means of enabling their participation in a transaction that they otherwise could not afford to finance on their own. Since most PE firms have access to various sources of capital, it is usually not an issue for them to agree to a seller’s general prohibition on such bidding. However, in doing so, most buyers will seek an exception that allows their participation in what is known as a “tree system” (separate working groups or “trees” of individuals that are formed by a financing source and exclusively dedicated to the seller and each bidder in a prospective transaction).
4. Access to Parties Affiliated with the Seller
Sellers usually seek to limit who is included within the transaction’s proverbial “cone of silence.” This provision is a means to that end; and sellers may use it to require buyers to direct all requests and communication to a designated person or advisor. Going a step further, sellers also may seek to specifically prohibit any contact with its employees, officers and directors, and in some case, with its customers, suppliers or vendors.
Buyers typically try to minimize this restriction by excluding third parties entirely, or, at a minimum, narrowing the applicability of this provision to only those parties that the buyer actually knows about and/or who are still in relationship with the seller.
5. Clarifying Provisions/Addenda
Sellers are generally reluctant to limit the buyer’s confidentiality obligation in any way or to include additional language proposed by the buyer. However, in the event they agree to some clarifying provisions and/or addenda proposed by the buyer, sellers are likely to include their own clarifying language to reinforce the fact that the inclusion of any additional language does not in any way permit the buyer to breach its confidentiality obligations under the NDA.
Buyers in PE transactions are in the business of M&A; therefore, they need to ensure that the NDA neither limits or restricts their ability to evaluate, make, or manage other investments or acquisitions. For this reason, they are likely to seek the inclusion of an addendum clarifying their right to continue conducting business as usual, which will govern in the event of a conflict between the NDA and such addendum.
Negotiating NDAs clearly involves a considerable amount of push and pull by the parties. While PE firms sign thousands of these agreements each year, most sellers are often newcomers to the M&A scene. At the end of the day, the party with the greatest negotiating power tends to prevail; and if that is not the PE firm, many will frequently move on to the next opportunity, leaving the seller with one less bidder. If you would like help with a NDA, or for general questions about these agreements, please contact Kristin Kreuder at email@example.com.
Kristin Kreuder is a Partner on our NY-area team with over 23 years of legal and business experience in both public and private corporations and in major NYC law firms. Kristin handles a wide range of legal matters, including mergers and acquisitions; commercial transactions; technology, media, licensing and sponsorship; capital markets, venture capital and private equity transactions; and a variety of general corporate and governance matters.
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