… an exec told me, after he’d signed a letter of intent for the sale of the company without review, and he’d already begun to share confidential information with the proposed buyer. To be fair, something is better than nothing, but in these circumstances not by much. Most everyday confidentiality or non-disclosure agreements (NDAs) for vendors, suppliers, partners and the like have some big holes in them if used for the sale of the company. The usual NDA defines confidential information as whatever you give the other party about the company that isn’t publicly available, requires the signer not to disclose any of that confidential information, and if the signer does, it gives you permission to (try to) get an injunction to stop disclosure. That’s it … and that’s usually okay for everyday disclosures between companies. But it’s not good enough in the context of a sale.
Here’s what’s missing from most ordinary NDAs that you’d want a buyer to sign:
Prohibition on use of the information. This seems obvious, but go look at your form NDA … it’s probably not there. Nondisclosure is critically important, but you also want the buyer not to use your information in any way detrimental to your business. If the deal breaks up, and that can happen for any of a thousand reasons, the buyer can hurt your business without disclosing your confidential information. Without a prohibition on use, the former buyer can now market to your customer list, employ your pricing data and strategies, etc. so long as it does not publicly disclose your information.
Data Compilations are Included. Buyers usually compile the information presented to them in their own way: spreadsheets, summaries, financial analyses, etc. If the deal blows up and the NDA only requires the buyer to return or destroy all the information supplied, it does not capture any of the buyer’s internally-prepared compilations, spreadsheets, analyses, etc., so the buyer gets to keep its own compilations of your information.
No Reps and Warranties. If you’ve ever seen a purchase agreement for a company, you know that a significant portion of the document is made up of the seller’s representations and warranties. These are affirmative statements the seller is making about the business to assure the buyer about the nature of the organization, the business, customers, litigation, etc. That section of the agreement can go on for 20 pages. The buyer is relying on those statements, and if they’re wrong, there will be a claim against the seller. At the letter-of-intent-stage of a deal, the last thing you want to do is to make, or be deemed to have made, reps and warranties about the information you’ve supplied to the buyer, so make sure to exclude them in the NDA.
No Disclosure of Proposed Transaction. Both sides of the deal should be prohibited from disclosing not only of the fact of discussions taking place about a deal, but also any terms of the proposed deal.
Nonsolicitation of Employees. This is a prohibition on the buyer trying to entice your officers, directors, and employees to come work for them for a certain period, usually a year. A well drafted provision would exclude advertising to the public, employee-initiated contact that results in employment by the buyer, and incidental hires who have no knowledge of the prospective deal.
On a related note, NDAs are often signed with just an indecipherable scribble; no name of the company, no name of the signing individual, and no title, so it’s not clear who signed the agreement, whether it was on behalf of the company, or whether the individual was even an authorized officer. That’s a great way to make the whole thing unenforceable.