Non-disclosure agreements in M&A & PE transactions


During complex bidding processes and likewise during bilateral negotiations, it is common market practice to enter into non-disclosure agreements (NDAs) when preparing for a transaction. This applies equally to strategic M&A and private equity (PE). However, certain special features should be taken into account during processes involving PE investors.

Besides this, limitations existing under competition and data protection law may require additional safeguards to be taken by adopting what is known as a “clean team approach” or may at least make them desirable from the perspective of the seller and target company. We will look at the basic features of the clean team approach in a follow-up article.

1. General

At the beginning of every transaction process there is an information gap between the parties involved (this may potentially exist on both sides in a planned joint venture). An NDA can be used to take into account the differing interests of the parties with regard to the disclosure and handling of confidential information. Although individual jurisdictions provide a certain minimum level of protection for confidential information (as in Germany, for example, under the German Protection of Secrets Act (Geheimnisschutzgesetz, GeschGehG)), the boundaries are difficult to determine. In addition to this, the parties involved are expressly made aware of their duties when handling confidential information. This means that it is always advisable to enter into an NDA.

The legal consequences of any infringements (but at the same time exemptions from any obligations of the parties already existing) are set out in an NDA. In practice, the provisions of an NDA will mostly play a role if the transaction is not carried out or individual bidders are not successful in a bidding process and confidential information is misappropriated by an unsuccessful party.

The buyer and seller have to comply with the fundamental prohibition of agreements restricting competition (section 1 of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB) (“ARC”) and Article 101 of the TFEU) and any relevant merger control clearances (the prohibition of “gun-jumping”; for Germany and the EU: section 41 ARC and Articles 4 (1) and (7) of the EU Merger Regulation, for instance). Other jurisdictions have similar restrictions. In the light of this, an NDA ensures that confidential information only reaches a specific group of recipients who can only use this information for the purpose of preparing and (where appropriate following clearance) carrying out the intended transaction.

Typically, the initial draft of the NDA comes from the seller or target company, since it wishes to safeguard itself against the disclosure of confidential information.

NDAs are often underrated as standard documentation before the parties start exchanging information. However, during a bidding process an NDA procedure can already provide an initial indication of how the individual bidders behave.

2. Key topics of an NDA

Certain standards have been established for the contents of an NDA, although these focus on individual aspects depending on the market players involved. Obviously, the interests of sellers and buyers sometimes vary.

In order for an NDA process to run efficiently during a bidding process often involving a large number of interested parties, it may be advisable to draft an NDA that tends to be seller-friendly but does not contain any extreme positions. This should make it acceptable to most bidders in the context of general market practice without having to make any major adjustments.

a) Standard terms

An NDA usually contains the following standard terms :

  • Parties: In principle, the seller, possibly also its (direct or indirect) parent company, and the potential buyer are parties to the NDA. In some cases, M&A advisors/investment banks and the target are included as parties as well. From the seller’s point of view, it should be ensured that the party signing the NDA on the buyer’s side has sufficient financial substance.

    Special feature of PE transactions: In order to avoid a permanent establishment of a PE buyer being set up in Germany that is harmful for tax purposes, it may be considered to only include local consultancy or advisory firms and/or independent companies in Germany as parties and to expressly clarify their independence from their foreign funds.
  • Subject of the transaction: The subject of the transaction and the target company (group) or business should be precisely defined. In contentious cases, this limitation of scope can be significant when it comes to interpreting the NDA. As far as the seller is concerned, a broader definition tends to be advantageous.
  • Definition of confidential information and exceptions: Generally, a broad definition is chosen covering all information (in any form) relating to the transaction (including the fact that negotiations are being held), the business, the target company or companies and their shareholders. The exceptions from information to be treated as confidential are defined in this context, such as any information that is in the public domain, is subject to a legal obligation to disclose (see below) or that (for the avoidance of doubt) has been obtained or developed independently.
  • Confidentiality obligation: This obligation requires parties to treat confidential information as strictly confidential and only allows them to disclose it to authorised recipients. In addition, it should be laid down that the confidential information can only be used for a limited period of time exclusively in connection with the preparation of the transaction (“need-to-know basis”) and that sufficient steps must be taken to protect the confidential information. The seller should be informed immediately if there is a suspicion that a third party has gained unauthorised access and should take steps to counter this. Finally, it may make sense to refer to any restrictions on the use of a data room for conducting a due diligence at this stage and to include them in the scope of the NDA.
  • Transfer to authorised recipients: While a seller intends to limit the group of persons receiving information, a buyer is interested in having the greatest possible flexibility and the least possible effort when transferring information. As a rule, this includes all bodies and employees of the buyer and companies it is affiliated or partially affiliated to as well as any of their advisors who need access to confidential information in order to prepare the transaction. Besides this, it is of course always possible to pass on information with the seller’s consent, although the seller will have to be involved beforehand. This means administrative work for the buyer and some uncertainty as to whether approval will actually be granted.

    Special features of PE transactions:
    • Unless an all-equity deal is planned, the “bankability” of the transaction documentation has to be borne in mind. This starts with the NDA, which should also allow the disclosure of confidential information by the buyer to potential financiers. From the seller’s point of view, however, it may be advisable to restrict such disclosure so that in the case of a possibly large bidding field potential lenders will not be “conflicted” because they have already been approached by another bidder. Yet this is often difficult to enforce, and finance providers are usually also able to handle several bidders by establishing different “trees” with Chinese wall agreements. For this reason, the obligation to only approach financers in separate trees with corresponding Chinese wall agreements should already be provided for in the NDA.
    • The situation is similar if a seller requires W&I insurance and the bidding field is large. In this scenario, the seller also has an interest in ensuring that bidders do not approach insurance companies without its knowledge and in this way potentially block them for other bidders. This can also be managed indirectly by allowing bidders to only pass on limited information to insurers after obtaining the seller’s approval. In practice, however, the W&I process (including what is known as “flipping” the process from the seller’s side to the buyer’s side) is mostly only addressed at a later stage, for example in the process letters.
    • Lastly, financial investors on the buy side generally want the flexibility to pass information on to their portfolio companies, where they are involved in the transaction. Whether a seller can accept this often also depends on whether there is also a financial investor on the seller’s side (for example in the context of secondaries, tertiaries, etc.) or whether a strategic seller may have to pay particular attention to avoiding arrangements that can be contested under competition law (see also the clean team approach in our subsequent article).
  • Statutory disclosure requirements: Disclosing confidential information is generally permitted where statutory, official or judicial disclosure obligations exist. The parties sometimes also negotiate restrictions in this context. It is customary to inform the seller immediately and to limit disclosures to need-to-know matters only. The parties often differ in their assessment of the need and intensity with which the buyer is required to take action against such obligations to disclosure. From the seller’s point of view, it may also be advisable to include a clause obligating the buyer to initially delay such disclosure (to the extent this is possible) and to confer with the seller beforehand.
  • Prohibition on buyer from contacting anyone outside the deal team: It can be made clear in the NDA at an early stage that the buyer and all parties associated with it may not contact anyone on the side of the seller and the target company/companies unless these contact persons have been expressly approved as points of contact. In this way, the seller retains control over the flow of information, including within its own company.
  • Returning confidential information:
    • As a rule, NDAs provide for an all-encompassing duty to return and an alternative duty to destroy or delete all confidential information. From the seller’s point of view, this should happen unsolicited when the negotiations with the bidder have ended and always after an explicit request is made. It is sometimes disputed whether the buyer has to prove to the seller that it has fulfilled its duties in this respect without being asked to do so.
    • It is common practice to include an exception for automated IT back-up systems, since deleting information from such systems can be virtually impossible or at least entail a great deal of effort and expense. Similarly, a time-limited carve-out from the obligation to return information is often included to the extent the buyer (or its advisors) is temporarily required by law to retain such information. From the seller’s point of view, it must then be ensured that the NDA continues to apply to such information (where appropriate for an unlimited period of time).
    • Retention obligations resulting solely from the buyer’s internal rules and regulations are often required by buyers, but are critical for sellers because the requirements are insufficiently specified.
  • Liability of the buyer: From the seller’s perspective, comprehensive liability of the buyer/the parties to the NDA (including their shareholders and affiliates) is also desirable for acts of infringement committed by their employees, advisors, banks and other authorised and unauthorised recipients of confidential information. Points to be discussed from the buyer’s perspective are often strict liability for all information recipients in the buyer’s camp and the inclusion of target companies and other parties in the seller’s camp in the scope of protection (contract for the benefit of third parties, i.e. direct claim against the buyer under the NDA). Depending on the applicable legal situation, from the seller’s point of view it may be advisable not to include any conclusive provisions on the liability regime apart from specific legal provisions regarding attribution of liability. For NDAs under German law, the law in the German Civil Code (Bürgerliches Gesetzbuch, BGB) regarding damage, which tends to favour sellers, would apply in this respect (including claims for consequential damage). On the other hand, buyers should work towards establishing a conclusive liability regime incorporating limits on liability.
  • Exclusion of liability of the seller: Conversely, the seller should exclude any liability for itself, its affiliates, shareholders and their advisors and other auxiliary persons as far as possible. An exemption from liability for intentional and grossly negligent behaviour by agents acting on behalf of the seller (i.e. usually its lawyers and consultants) is also possible, although it is not always accepted. It can also be made clear that the NDA does not constitute an obligation to execute the transaction and that the information is disclosed solely at the discretion of the seller.
  • Term, choice of law, etc.: NDA terms of between two and three years have become established in the market. It should also be set down that changes to the NDA can only be made by written agreement in order to ensure that documentary evidence exists. The parties should explicitly agree on the law applicable to the NDA. German law should be agreed for transactions in Germany or involving a German seller. Otherwise, a local counsel from the jurisdiction concerned would have to be brought in to assess the terms and legal consequences of the NDA. The ordinary courts of law (in Germany) or arbitration tribunals (e.g. German Arbitration Institute (DIS)) are equally customary forums for disputes under an NDA. However, if an international bidding field is to be expected, agreeing on arbitration (in English) will be an appropriate option.

b) Optional provisions

Apart from the above, the following optional provisions may also be useful in an NDA depending on the interests involved:

  • Acting on one’s own account: An initial confirmation from the buyer that it is not acting as an intermediary or nominee of a third party and wants to carry out the transaction itself can already be included in an NDA.

    Special feature of PE transactions: Often a PE buyer only wants to include a local consultancy or advisory firm of the fund or a local company (SPV) of the fund as a party to the NDA. In such a situation, from a buy-side perspective it is important to ensure that funds advised or managed by the party or by companies affiliated with the party are not to be regarded as third parties in this sense.
  • Non-solicitation, non-disparagement and contractual penalty clauses:
    • It is customary to agree a non-solicitation covenant in favour of the disclosing party, or sometimes on both sides. Often, periods of two to three years are agreed. Unsolicited job applications from employees and general bona fide job advertisements are normally excluded.
    • From a sell-side perspective, it may also be advisable to expressly prohibit any discrediting of the seller and the target companies towards contractual partners and in public.
    • In addition, a reasonable no-fault contractual penalty may be provided for in the event of breaches and the right to claim further damages may be reserved.
  • Data protection principles: Especially where cross-border transaction processes are anticipated, it may make sense to explicitly require compliance with the EU’s data protection regulations (GDPR) and to agree “standard data protection clauses” for flows of information outside the EU/EEA in advance, unless the EU Commission has adopted an adequacy decision for such jurisdictions.
  • Treatment of inside information and standstill agreements: If listed target companies or listed companies that are otherwise included in the scope of protection of the NDA are involved, the seller should check whether the provisions of the Market Abuse Regulation apply (notably the prohibition of insider trading and unauthorised disclosure of inside information). In order to prevent parties from “sneaking up” on listed companies through public trading venues, a standstill agreement for acquisitions on a stock exchange can also be agreed for a certain period of time.
  • Supplementary clean team approach (see also the follow-up article): It may make sense to already provide in the NDA that a separate clean team approach is required for particularly confidential information from a commercial, competition or data protection law perspective. A separate clean team agreement setting out rules for handling particularly confidential information and supplementing the NDA then has to be concluded for this purpose. As a rule, this is done at a later stage in the process and only with selected bidders. This means that provisions for the clean team are mostly not found in the NDA yet. However, where exclusive negotiations take place between just two parties, an additional clean team approach can also be implemented in an extended NDA. The additional provisions for a clean team approach can then also be integrated into the NDA directly (see details in our follow-up article).

3. Closing comments

NDA processes can be finalised quickly and economically on the sell side by being well prepared. During bidding processes with PE bidders in particular, the process can be speeded up if a seller has already looked at the specific features of a financial investor on the buy side and has taken these into account in a draft NDA.

Although the NDA has now become a standard product with templates used by both sides, in the light of what has been explained above it makes sense to customise the NDA to fit the specific transaction and the interests of the parties. This is true especially in complex and cross-border situations.

Private Equity
Mergers & Acquisitions
Antitrust & Competition