Confidentiality Agreement For Due Diligence Purpose
A confidentiality agreement for due diligence purpose is an agreement by two or more parties to keep something confidential for the purpose of due diligence.3 min read
2. Mutual Versus Nonmutual NDAs
3. The Important Elements of NDAs
4. The Parties to the Agreement
A confidentiality agreement for due diligence purpose is an agreement between two or more parties to keep something confidential for the purpose of due diligence.
A Guide to Nondisclosure Agreements For Mergers And Acquisitions
During a merger and acquisition transaction, proprietary and confidential information typically must be shared with the party that is acquiring or merging with the other company. Examples of this information include important contracts and financial details. However, sharing this information is risky. In order to do so safely, it's important to be sure that the other party involved in the transaction is bound to certain terms before receiving the confidential information. They should agree to respect the information provided and not use it to the detriment of the party disclosing it.
One of the most common ways to protect confidential information is to require all involved parties to sign a nondisclosure agreement, also referred to as an NDA or confidentiality agreement. Although NDA agreements are used frequently, and many people who enter into legal agreements regularly have standard forms, these agreements include critical wording and terms that shouldn't be considered to be boilerplate. An NDA is a universally binding contract, which sets it apart from a term sheet or a letter of intent. Therefore, all parties need to be on alert for potential traps or nonstandard provisions that may be included.
Additionally, all involved parties must make sure that the negotiated NDA is suitable for the type of transaction in which they are engaging. An NDA that is part of a merger and acquisition transaction may contain different language than what would be included in a standard business NDA.
Mutual Versus Nonmutual NDAs
There are two main types of non-disclosure agreements:
- One-way agreements.
- Mutual agreements.
A one-way agreement would be used if Party A will share confidential information with Party B, but Party B won't share any confidential information with Party A. A mutual NDA is used in situations when all involved parties may be sharing confidential information with one another.
In many cases, a mutual DNA form offer by one party is based on a standard NDA that may not be tailored to the context of a merger or acquisition. Although the idea of using a mutual NDA form is appealing, sellers involved in mergers and acquisitions tend to shy away from using this form if they won't receive any confidential information from the other involved party.
A one-way NDA is designed to offer protection to the disclosing party, often the seller in a merger and acquisition transaction. Most of the critical components included in an NDA exist to benefit the seller in the transaction. During the negotiation process of an NDA, the seller often has more bargaining leverage. This is especially true when a seller sends out multiple NDAs during the sales process. Many of the important issues end up being decided in a way the benefits the seller. Buyers must focus on the aspects of the NDA that are most important when negotiating these terms.
The Important Elements of NDAs
The most important elements an NDA include:
- A definition if what is considered to be confidential.
- A description of all involved parties.
- An obligation to destroy or return any confidential information provided when the party disclosing the information requests it.
- What is excluded from being treated as confidential.
- The agreement term.
- The scope of the obligation for confidentiality by the party receiving the confidential information.
The Parties to the Agreement
When drafting an NDA, it's best to start by including a detailed description at the beginning that establishes the involved parties. If only one party is providing confidential information to another party, you can refer to the disclosing party and the receiving party, or the recipient.
One complex aspect of an NDA is whether any other individuals or businesses should be included in the agreement to keep information confidential. As you determine who should be included, consider if the recipient of the confidential information expects to show the information to:
- Affiliated companies.
- Financing sources.
- Advisors, such as accountants or counsel.
If any of these apply, consider including the third parties in the NDA or include a mechanism that binds the third parties to the NDA.
If you need help with a confidentiality agreement for due diligence purposes, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.