© 2021 Morgan, Lewis & Bockius LLP
THE INS AND OUTS OF NON-
DISCLOSURE AGREEMENTS
AND LETTERS OF INTENT
Greer Longer
Corey Mueller
January 23, 2024
NON-DISCLOSURE
AGREEMENTS
INITIAL CONSIDERATIONS
Non-Disclosure Agreements
Why Have a Written Confidentiality Agreement?
• Confidentiality agreements are standard and an expected part of most negotiated deals
• Protection of trade secrets under state law can be lost (deemed waived) if they are disclosed
without a written agreement
• Written contracts are typically easier to enforce
• Written confidentiality agreements are often required under prior agreements with third parties
• They avoid confusion over what the parties consider to be confidential
• The parties have more flexibility in defining what is confidential
• The parties can specify what they expect from each other
• Confidentiality agreements often cover issues unrelated to confidentiality, such as non-
solicitation, exclusivity and absence of binding commitments to complete a transaction
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Non-Disclosure Agreements
Are You More Likely to Receive or Disclose Information?
– A simple question with big implications
– Whether you are primarily disclosing confidential information or receiving confidential
information will drive some of your strategy for the structure of the confidentiality agreement
– A Buyer’s interest is different from a Seller’s interest
– Buyer’s Interest:
– A Buyer typically wants the exclusions from confidential information to be as broad as
possible and permission to disclose all confidential information to Buyer’s advisors and
representatives and any financing sources
– Seller’s Interest:
– A Seller typically wants the Buyer’s exclusions to be as narrow as possible and, to the
extent possible, to exert control over the sale process through confidentiality provisions and
limitations on disclosures to third parties
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Non-Disclosure Agreements
Unilateral vs.
Positive:
• Restricts the disclosing party only
Challenges:
• Does not protect confidential information of
the other party that may be disclosed later
• Does not protect nonbusiness information
(such as deal terms or deal process) that
both parties will likely want to keep
confidential
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Mutual
Positives:
• Protects confidential information of both
parties
• Protects nonbusiness information about the
actual deal
• Provides a more balanced form that typically
results in a faster review and signing process
Challenge:
• Imposes restrictions on both parties to the
transaction, regardless of which party has
more leverage in the deal
Should the NDA be unilateral or mutual?
Non-Disclosure Agreements
When Should We Sign an NDA?
• As soon as possible
• Prior to disclosure of any confidential information
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Practice Tip
• If disclosures of confidential information have been made prior to entering into a
confidentiality agreement, make sure that the confidentiality agreement specifically
covers all prior disclosures (written and oral)
Non-Disclosure Agreements
Should the NDA be separate or part of the Term Sheet?
Having a separate confidentiality agreement:
• Gives the parties the flexibility to conduct due diligence of certain nonpublic
information before negotiating a term sheet or letter of intent
• Is typically easier to negotiate
• Provides the parties with written protection in the event of disclosure of confidential
information prior to entering into a term sheet or letter of intent
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Practice Tips
• Confidentiality provisions included in a term sheet or letter of intent should be
made expressly binding on the parties
• A separate confidentiality agreement should be incorporated by reference in the
term sheet or letter of intent
Non-Disclosure Agreements
Is the Disclosing Party a Public Company?
If you answer “YES” to this question, then consider the following:
• Include a standstill agreement in the confidentiality agreement restricting Buyer’s
unsolicited bids for the Seller
• Obtain a representation that the recipient and its representatives are in compliance with
securities laws (or, at a minimum, are aware of their obligations under securities laws)
• Determine whether the terms of the confidentiality agreement qualify for Regulation FD
under the Securities Exchange Act of 1934, as amended – should qualify in most
circumstances
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Non-Disclosure Agreements
Limitations on Effectiveness
• The disclosing party cannot “undisclose” confidential information that has been wrongfully disclosed and has become
part of the public domain
• The disclosing party’s remedy for wrongful disclosure of confidential information is limited and damages for breach of
contract may be the only legal remedy
• The disclosing party has the burden of proof with respect to proving that a breach has occurred
• The disclosing party may not be able to effectively prevent the recipient of confidential information from inevitably
taking the confidential information into account in its own commercial plans
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Practice Tip
• To protect confidential information, the disclosing party should carefully manage the
disclosure process, consider additional confidentiality procedures (i.e., “clean teams”)
for extremely secretive information, and have a contingency plan for dealing with
leaks
NON-DISCLOSURE
AGREEMENTS
PROVISIONS OF NOTE
Non-Disclosure Agreements
• Parties:
– Buyer
– Seller
– Others
– Investment Banks
– Parent Companies
– Key Sellers
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Non-Disclosure Agreements
• Permitted Disclosures to Affiliates/Representatives:
– Disclosing party may require Affiliates/Representatives to sign a separate
acknowledgment agreement to be bound by the NDA
– Disclosing party may hold receiving party responsible for any breach of
Affiliates/Representatives.
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Practice Tips
• Even when not required by agreement to do so, Buyers and Sellers often have their
Representatives enter into separate confidentiality agreements or acknowledge the
terms of the confidentiality agreements as a matter of practice
• Note that certain Representatives (such as lenders, investment bankers, and law
firms) may not wish to be bound by certain sections of the Buyer’s or Seller’s
confidentiality agreement, such as the standstill or nonhire provisions
Non-Disclosure Agreements
Definition of “Confidential Information”
– Defining what is confidential is central to any confidentiality agreement
– Types of Matters:
– Business information (including trade secrets)
– Derivatives of business information
– The contemplated transaction itself, including any terms
– Labeling disclosed information as “Confidential”
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Practice Tips
• The confidentiality agreement should make it clear when confidential information is being disclosed.
• If the confidentiality agreement requires certain steps to be taken for information to be protected,
such as marking the information as confidential, the disclosing party must be very careful that this
process is followed. In general, providers of confidential information should resist this requirement.
• Disclosing parties must also be careful not to disclose information that is restricted by other
confidentiality agreements.
Non-Disclosure Agreements
Exceptions to Confidentiality
• Is or becomes public other than through a breach of the confidentiality agreement by the
recipient
• Was already in the recipient's possession
• Becomes available through a third party not bound by a confidentiality agreement or
obligation
• Is independently developed by the recipient without using the confidential information
• Buyers usually require that all of these exclusions apply to the ”Confidential Information”
definition generally and not just to the “nondisclosure” provisions
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Non-Disclosure Agreements
Other Common Exceptions to Confidentiality
• Disclosing the existence and terms of the deal to a bank or other lending source to secure
financing
• Disclosures required by law
• Confidentiality agreements usually allow the recipient to disclose confidential information
if required to do so by court order or other legal process
• The recipient usually has to notify the disclosing party of any such order and cooperate
(at the disclosing party’s cost) with the disclosing party to obtain a protective order
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Non-Disclosure Agreements
Permitted Use and Restrictions on Disclosures
– Making clear what the information can be used for
– Mutually acceptable or agreed form of transaction
– Financing commitments
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Non-Disclosure Agreements
Issues with Direct Competitors
• What level of information should the parties disclose if they are direct competitors?
– Consider business and legal (antitrust) risks
• Direct competitors should consider the following when contemplating the terms of a
confidentiality agreement:
– Disclosures may be limited to aggregated information, or sensitive information may otherwise
be masked
– For sensitive information, consider signing a separate nondisclosure agreement (NDA) and a
“clean team” approach with much more specific provisions and controls regarding the
disclosure of such information
– Avoid reviewing any documents that may lead to a claim of misappropriation of information
– Be sure to check whether sharing certain information with a competitor violates any antitrust
laws; a violation could kill the deal or result in regulatory action
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Non-Disclosure Agreements
Term
• Indefinite or termination upon a certain date or event
• Depends on the type of information involved and how fast such information changes
• Disclosing parties typically prefer an indefinite period
• Recipients typically prefer a set term
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Practice Tip
• Be sure to set specific expiration dates for those provisions that are not related to
confidentiality obligations (for example, standstill agreements or non-solicitation
clauses)
Non-Disclosure Agreements
Return of Confidential Information
• Confidentiality agreements typically provide for the return of confidential information in the following
circumstances:
– On the termination of negotiations between the parties
– At the end of the term of the agreement
– At any time upon the disclosing party's request
• Recipients often want:
– The option to destroy the confidential information instead of returning it to the disclosing party
– To include language that allows them to keep copies of the confidential information for archival or
evidentiary purposes or if required to do so under law or professional standards
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Practice Tip:
• Disclosing parties should make sure they have rights to the return of their confidential
information or an adequate process to confirm destruction or archival under
satisfactory procedures
Non-Disclosure Agreements
Remedies
• Injunctive relief in addition to monetary damages
• Indemnification provision holding the recipient responsible for all costs relating to the
enforcement of the agreement
– Recipients will resist including the indemnification provision
– A typical compromise is to have the losing side to a dispute pay the fees and expenses
(including legal fees)
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No-Disclosure Agreements
Other Covenants/Provisions
• No Representations or Warranties
– The disclosing party may clarify that it makes no representations or warranties with
respect to any of the disclosed information. If the recipient claims that the information is
incomplete or inaccurate in any way, the disclosing party points to this clause to avoid
liability.
• Non-solicitation / Nonhire
– Restricts the recipient from soliciting and/or hiring the disclosing party’s employees for a
certain period of time (one year is common). Parties will negotiate whether this is non-
solicitation or nonhire, and whether it applies to all employees or just more senior
people.
– Sometimes will restrict the recipient from soliciting the disclosing party’s customers and
suppliers.
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No-Disclosure Agreements
Other Covenants/Provisions
• Standstill Agreement
– May be included in the confidentiality agreement when the Seller is a public company.
– Prevents the prospective Buyer from making a hostile takeover attempt after the parties fail to
complete a friendly deal when the Buyer has had access to the Seller’s confidential
information.
– Often limits the Buyer's ability to buy and sell the Seller's stock.
– Buyers often seek to limit the term of the standstill to a period typically ranging from 6
months to 18 months.
– Sometimes includes a “don’t ask, don’t waive” provision limiting a Buyer from requesting a
waiver of the standstill. This may raise issues about the adequacy of the sale process and the
Seller board’s fulfillment of its fiduciary duties and should be reviewed carefully.
– Buyers may also seek to have the standstill “fall away” in certain circumstances, such as once
the Seller signs up a deal with another party, or if the Seller becomes subject to a “hostile”
bid, to preserve Buyer’s options.
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Non-Disclosure Agreements
Other Covenants/Provisions
• Trading in Securities
– Use when the disclosing party is a public company.
– Reminds the parties of their obligations under securities laws.
• Keeping quiet about the deal
– Prohibits the parties from making a public announcement or other disclosure about the deal unless
agreed to in advance by both sides. Both sides can have an interest in keeping negotiations quiet.
• Exclusivity
– Sometimes referred to as a “no-shop” clause, this provision requires the Seller to deal exclusively
with the Buyer for a certain period of time.
– Exclusivity agreements are usually separate agreements or sometimes included in the term
sheets/letters of intent for deals.
– Can be problematic for a public Seller, depending on the length of the exclusivity period and size of
the deal.
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Non-Disclosure Agreements
Other Covenants/Provisions
• No license granted
• Obligation to inform of unauthorized disclosure
• No further obligations
• Residual rights
– Residual rights clauses allow the recipient's employees to use any confidential information
retained in their memories
– Sellers often strongly object to residual rights clauses and have concerns over abuse
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Practice Tip:
• To limit potential abuse, some residual rights provisions state that employees cannot
“intentionally” remember information to sidestep confidentiality obligations
Non-Disclosure Agreements
Miscellaneous Provisions
• Often viewed as “standard” or “boilerplate” but may have unintended consequences,
restricting the Buyer’s activities in the industry and the Buyer’s options as the negotiations
progress, even if a transaction never materializes
• Terms may prove very consequential in the event of a subsequent dispute between the
parties
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Non-Disclosure Agreements
Miscellaneous Provisions
• Topics include
– Entire agreement
– Assignment
– Choice of law and jurisdiction
– Waiver of jury trials
– Availability of equitable relief
– Notice provisions
– Amendments and waivers
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LETTERS OF INTENT
INITIAL CONSIDERATIONS
Letters of Intent
Initial Considerations
– Watch out for unintended binding contracts
– Auction process
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Practice Tips
• Prior to negotiating a Letter of Intent (LOI), think through and assess:
– Why are we negotiating an LOI? Is my side better off just signing an NDA and
(maybe) an exclusivity agreement, rather than an LOI?
– If an LOI will be prepared, is my side better off with a more detailed/less detailed LOI
or more binding/less binding LOI?
Letters of Intent
Why Sign a Letter of Intent?
• Get “buy-in” on the deal from the business teams
• Opportunity to confront certain issues up front before incurring substantial deal
expenses or devoting significant time dealing with the counterparty
• Develop a “roadmap” for the transaction
• The Seller sees a level of commitment before disclosing confidential information
• The Buyer can obtain exclusivity, break-up fee, expense reimbursement provisions
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Letters of Intent
Why Avoid Signing a Letter of Intent?
• Time to negotiate – could spend this time on negotiating definitive documents
• Obligation to negotiate in good faith
• Creates inflexibility on terms of proposed deal – may prematurely lock in parties to
terms they later don’t like
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Letters of Intent
Private vs. Public Company Issues
– Possible disclosure issues if a public company signs a letter of intent for a material
transaction
– As a way to address disclosure issues, parties may use an exclusivity letter with a
separate unexecuted term sheet
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LETTERS OF INTENT
CONTENTS OF AN LOI
Letters of Intent
Contents of a Letter of Intent
• Parties to letter of intent
– Buyer (perhaps Parent Company)
– Seller
• Description of transaction
– Stock/asset/merger
– Price
– Purchase price adjustments, Holdbacks, Earnouts
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Letters of Intent
Contents of a Letter of Intent
• Conditions to the transaction
– Escrow
– Financings (buyer or seller)
• Detailed versus Skeleton
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Letters of Intent
Contents of a Letter of Intent
• Binding LOI provisions
– Exclusivity
– Fiduciary Out
– Break Up Fee, Reverse Break Up Fee, Expense Reimbursement
– Conduct of business after execution of letter
– Access
– Expenses
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Practice Tip:
• Parties should be careful not to undo useful “nonbinding” language in the LOI
through conduct indicating a binding commitment.
Letters of Intent
Contents of a Letter of Intent Continued
• Termination
• Binding and nonbinding provisions
• Implied duty to negotiate in good faith
• Waiver of jury trial
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Practice Tip:
• Consider adding a provision eliminating any implied duty to negotiate in good faith. As
an alternative, minimize the impact of any implied duty by adding unilateral termination
provisions to the LOI or outside termination dates.
• Even though the LOI may be nonbinding, prepare for disputes – consider adding jury
trial waiver, governing law, forum selection clause.
Key Takeaways for NDAs and LOIs
• Focus on definition of “confidential information” and exclusions
• Esure that the NDA permits sharing of information to those representatives you need to
get the deal done
• Have a contingency plan for dealing with leaks and take appropriate measures to protect
extremely sensitive information.
• Be careful not to create binding contract when entering into an LOI– clarify which
provisions, if any, are binding, and which are not binding.
• Although deal terms set forth in an LOI are typically marked as not binding, deviating from
those terms in the definitive can cause negotiation disputes.
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QUESTIONS?
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Greer A. Longer
Pittsburgh, PA
T +1.412.560.7475
E greer.longer
@morganlewis.com
Greer Longer focuses on mergers and acquisitions with an
emphasis on advising middle market private equity firms and
financial sponsors on control investments, liquidity events, joint
ventures, and equityholder arrangements. She regularly counsels
private equity portfolio companies on a variety of issues, including
add-on transactions, management team incentives, and general
corporate matters. Greer assists private and public companies
across a wide range of industries, including specialty
manufacturing, consumer brands and products, food products,
healthcare, and telecom.
Biography
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Corey S. Mueller
San Francisco, CA
T +1.415.442.1186
E corey.mueller
@morganlewis.com
Corey S. Mueller advises clients in corporate and securities
matters. His practice centers on venture capital financing, private
equity transactions, mergers and acquisitions, and securities, with
an emphasis on investment in emerging companies. Prior to
joining Morgan Lewis, Corey interned at the SEC’s Enforcement
Division in San Francisco and at a boutique bankruptcy law firm in
Walnut Creek, California. In law school, he volunteered with the
Investor Justice Clinic, assisting clients who could not otherwise
afford legal representation in FINRA arbitration.
Biography
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