BY
In the previous two posts in our series on legal
considerations for selling an emerging growth company, we focused on providing
an overview of the M&A process as well as negotiating an engagement letter
with a financial adviser. In this third installment, we will take a look at
drafting a Non-Disclosure Agreement (NDA) with a potential acquirer.
What makes
the NDA particularly significant for an emerging growth company entering into
the acquisition process is that, unlike other aspects of the sales process such
as due diligence or executing a letter of intent, the NDA should be drafted
with a primary focus on the needs of the target company, and not the acquirer.
Thus the burden lies more with you and your company in drafting an NDA that
will protect your company’s intellectual property and strategies while at the
same time providing a sufficient window into a company to your potential
acquirer to entice them to move forward with the transaction. With those
oftentimes competing interests in mind, we will take a look at the four central
questions you will need to answer in drafting and finalizing a NDA.
What
Target Information Should the NDA Cover?
The impulse for a target
company in drafting an NDA might be to draft language that simply states all
information about the target is covered by the NDA, but, while comprehensive
protection is a worthy goal of an NDA, the more precise you are in describing
what is covered by the NDA, the better a case you will have at a later date
that the NDA was breached.
The language of the NDA
should refer specifically to the type of information the target has prepared or
intends to prepare for the potential acquirer, such as: forecasts, studies,
analyses, presentations, records and reports, and any underlying notes or
preparation materials created in anticipation of the transaction. Similarly, a
potential acquirer will likely request that the NDA make clear that information
not covered by the NDA includes publicly available information about the target
company or other information obtained about the target through legal,
non-confidential means.
How May the Potential Acquirer Use the Target’s
Information?
While the first question
goes to the ability of the potential acquirer to share information about the
target with others, this second question deals with how the potential acquirer
may use that same information about the target internally. In essence, the NDA
should make clear that the potential acquirer may use information about the
target solely for the purpose of evaluating the proposed transaction in
purchasing the target, and may not use any information about the target for its
own competitive purposes (and, of course, may not share that information).
For
example, a potential acquirer may review a target’s future sales strategies for
the purposes of valuing the target and determining whether the strategies might
create a conflict with the potential acquirer’s own strategies, but it may not
then use that information to better its own competitive position in the market.
Obviously, policing whether a breach of an NDA later occurs will present its
own challenges, but making the NDA as clear as possible will lay the groundwork
for resolving any future disputes in your favor.
When May the Potential Acquirer Share the Target’s
Information?
In some cases, a
potential acquirer may have to share information gleaned about the target
during the evaluation process, and, in other cases, doing so may be to the
target’s advantage. Thus, the NDA should spell out the circumstances under
which the covered information may be shared without liability, with the
understanding that it may be difficult to predict exactly what those
circumstances might be. A potential acquirer will likely want to see NDA
language giving it the right to respond to forced disclosure through
litigation, governmental request, or subpoena. If the target is sharing
internal correspondence with its attorneys to the potential acquirer, it is
important to include language which states that the target is not waiving any
rights to attorney-client privilege that might apply to such information by
sharing it with the potential acquirer.
What Protections Does the Target Have for Breach of
the NDA?
Many agreements with
more powerful entities often include language limiting the rights of the other
party to pursue avenues of litigation against the more powerful entity, but it
is important for a target to maintain its rights in taking action against the
potential acquirer for a breach of the NDA. Specifically, a target should
include language in the NDA giving it the right to pursue equitable remedies
such as injunctions and specific performance, in addition to money damages,
given that money damages could well be insufficient to cover the full losses
associated with a breach of the NDA, and an inability to pursue equitable
remedies may even put the target’s future at risk. A target should also
consider whether an arbitration clause improves or hinders its ability to
pursue relief should a potential acquirer breach the NDA.
Finally, a target might
consider any other provisions it deems necessary for sharing information with a
potential acquirer, such as a non-solicitation clause to protect its employees
from being poached by the potential acquirer (and vice versa). Keep in mind
that an NDA does not commit either party to proceed with the transaction, but
is critical to protecting the parties as they enter into the rest of the
acquisition process, which we will resume looking at next month.
© 2016 Alexander J.
Davie — This article is for general information only. The information presented
should not be construed to be formal legal advice nor the formation of a
lawyer/client relationship.
Original
Related post: Legal Considerations for Selling an Emerging Growth Company Part 2: Creating an Engagement Letter with a Financial Adviser
Related post: Legal Considerations for Selling an Emerging Growth Company Part 2: Creating an Engagement Letter with a Financial Adviser
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