NDAs set the rules of engagement for private equity investors during the due diligence process. What does your NDA process say about the firm?
Download GuideNon-disclosure agreements (NDAs), also known as confidentiality agreements, continue to be an important first step in the private equity investment process. Although they may appear simple on the surface, NDAs perform the critical function of protecting a target company’s confidential information and setting the rules of engagement for private equity investors during the due diligence process.
Every transaction, every investor, and every target company is different, and signing “as-is” rarely cuts it. Whether you’re a seasoned general counsel, an investment banking or private equity analyst, or a law firm associate, it’s important to be familiar with key terms and considerations for private equity NDAs as we expect deal volume — and therefore NDA volume — to ramp up in 2025.
Ontra launched Contract Automation a decade ago, and since then, the solution has evolved to leverage AI and large language models to augment and streamline repetitive contract negotiations. We’ve processed more than 1 million documents across numerous contract types, with an emphasis on buy-side and sell-side NDAs, joinders, and non-reliance letters. On average, from the date our customer’s lawyer opens a new request email to the date of completion, it takes just under three days to finalize a contract.
We also offer Accord, our cutting-edge AI contract negotiation software, to in-house teams. Whether your firm uses one of our solutions or not, we’ve leveraged our in-depth NDA expertise to put together this guide to help you navigate NDAs quickly and efficiently.
Fundamentally, NDAs exist to protect confidential information. But to do so adequately, you need to define what confidential information is. Generally, “Confidential Information” is defined as covering all sensitive business information shared by a target company in connection with a potential transaction, subject to certain carve-outs.
Sellers and target companies often push to define confidential information as broadly as possible to reduce the likelihood of sensitive information being used or disclosed outside of the diligence process. Buyers, on the other hand, may want to limit the scope to exclude information that is publicly available, is already in their possession, or was previously disclosed in a context unrelated to a potential investment transaction.
Both parties, for a variety of reasons, may want to include the existence of the NDA and transaction as part of the definition. Ultimately, it can be important for PE firms that review hundreds (or thousands) of deals every year to avoid overly broad definitions that could restrict ordinary course investment activities.
The definition of “Representatives” identifies the parties to whom the buyer may provide confidential information in connection with evaluating or financing a potential transaction. To adequately conduct due diligence, a buyer typically needs to share information with accountants, consultants, legal counsel, and other advisors.
If a buyer expects to obtain debt financing or co-investment commitments, it may seek to provide confidential information to sources of debt and equity financing, including investors in a buyer’s funds. Buy-side firms often have a specific set of representatives they need to be able to share confidential information with as part of their investment process or normal course of business.
Sellers generally want to limit the sharing of information to those with a “need to know” in connection with a transaction. Additionally, to control the auction process, sellers may impose notice or consent requirements for debt or equity financing sources. In most cases, a buyer will be responsible for any breaches of the agreement by representatives to whom it has provided information.
As noted above, sellers generally require buyers to assume responsibility for any breaches of an NDA by the buyers’ representatives. Accordingly, it’s become fairly common for buyers to require their representatives, particularly debt and equity financing sources, to sign a joinder in which the representative agrees to comply with the terms of the NDA between the buyer and seller.
In some cases, buyers may negotiate that they aren’t responsible for breaches of the NDA by representatives who signed a joinder. Many NDAs leave the decision to seek a joinder up to the buyer, but some sellers require buyers to ensure their representatives agree in writing (i.e. sign a joinder) to be bound by the underlying NDA.
To maintain a level playing field in a competitive auction process, sellers may permit buyers to contact debt or equity financing sources but restrict a buyer’s ability to enter into exclusive arrangements or “lock-ups” that could limit the ability of those financing sources to provide financing to another buyer.
Buyers often accept lock-up restrictions in order to evaluate a transaction, but they may negotiate an exception for “tree” arrangements that permit them to lock up a particular deal team at a financing source without limiting other deal teams at that financing source from working with other buyers. This exception provides comfort to the buyer that they can obtain a competitive financing indication while assuring the seller that financing sources, particularly large banks and direct lenders, are available to provide financing to other buyers that might submit more attractive bids.
To minimize disruption to a target company’s business, sellers may restrict buyers’ ability to contact parties that have a relationship with the target company, including the target company’s employees, officers, directors, customers, suppliers, contractors, lenders, or other business relationships. Buyers often negotiate to narrow the list of restricted parties or include certain carve-outs.
Common exceptions include contact in the ordinary course of business that is unrelated to a potential transaction or contact on a “no-names” basis through expert networks, during which buyers agree not to disclose the existence of a transaction or any Confidential Information.
This section of the NDA may also include a requirement for buyers to channel any diligence requests through a seller or its advisors to ensure diligence processes are conducted in an orderly fashion and to limit interference with a target company’s day-to-day operations.
Employees are often one of a target company’s most valuable assets. Accordingly, many sellers include non-solicitation provisions that limit the buyers’ (and, in some cases, their portfolio companies’ or affiliates’) ability to solicit or hire a target company’s employees.
Generally, private equity buyers aren’t interested in hiring a target company’s employees into their investment business, so a non-solicit presents no significant challenges. However, buyers often want to ensure that managing non-solicits across their NDAs doesn’t create unnecessary administrative burdens for the firm, so they may look to limit the scope of covered employees or the duration of a non-solicit. Private equity buyers might also reject language that purports to bind their underlying portfolio companies as long as those companies aren’t involved in the present transaction.
Additionally, private equity buyers usually negotiate common exceptions from the non-solicit for employees who are identified through recruiters or who initiate contact with buyers. When buyers are operating companies — or when private equity firms are exploring transactions that may involve an existing portfolio company — both sellers and buyers need to approach non-solicits carefully.
When a target company issues public debt or equity, sellers may include a standstill provision that restricts potential buyers from trading in an issuer’s securities for some period of time. Sellers may include these provisions to avoid issues around insider trading and to avoid potential buyers interfering with a seller’s ability to conduct an orderly auction process or complicating a seller’s fiduciary duties.
Private equity buyers that don’t routinely engage in public securities transactions often agree to standstills, as they present little operational risk if a buyer would otherwise be restricted from trading by compliance policies or under law (if the buyer is in possession of material nonpublic information about the issuer). However, buyers often seek to limit the duration or scope of standstills and applicability to representatives and include fallaways or exceptions for de minimis transactions.
Sellers often want buyers to return or destroy confidential information once a buyer determines it won’t pursue a potential transaction. Buyers, particularly registered investment advisers, often need to retain confidential information as part of their ordinary books and records and archival processes. Given the ubiquity of electronic communications, a blanket requirement to return or destroy confidential information could cause substantial operational challenges for a buyer, particularly if it executes hundreds (or thousands) of NDAs every year.
Accordingly, buyers often agree to destroy information subject to exceptions for complying with their retention policies, retain information on a confidential basis, and limit the use and access of information only to those involved in legal, compliance, or IT processes. In some cases, sellers may require, and buyers may accept, a limited “tail” period extending beyond the term of the NDA that applies to the use and protection of retained information.
Sometimes, sellers propose a provision requiring a buyer to indemnify the target company, the seller, the target company’s advisors, and/or third parties against any losses or costs resulting from the buyer’s or its representatives’ breach of an NDA. In the U.S., it’s uncommon for NDAs to contain indemnification clauses because of a seller’s ability to bring a breach of contract claim against a buyer or seek injunctive relief to remedy the unauthorized use or disclosure of confidential information.
Sellers can draft NDAs to make the target company the primary party to the agreement or, in some cases, an explicit third-party beneficiary rather than introduce an indemnity clause. U.S.-based buyers may accept indemnification clauses in limited circumstances, such as in NDAs governed by non-U.S. law or subject to explicit carve-outs, caps, or other limitations.
However, parties in the U.S. generally view indemnification provisions as “off-market,” and their introduction without a clear and compelling purpose may prolong negotiations and unnecessarily delay execution of an NDA.
Most NDAs for private equity-backed deals automatically terminate after one to three years without any requirement for notice or further action. After a certain period of time, confidential information becomes stale, and managing confidentiality obligations and other restrictions for dead deals can become an administrative burden for potential buyers.
However, sellers typically want NDAs to remain in force long enough to close a transaction successfully and to mitigate any potential harm to a target company during — and for a reasonable period after — the negotiation, signing, and closing of a sale. Buyers usually want a reasonable, fixed end date, particularly private equity buyers that evaluate hundreds (or thousands) of companies every year.
By adopting an end-to-end, AI-enabled contract negotiation solution, your firm can streamline and optimize repetitive negotiations. Leverage AI to automatically surface suggested markups, drive consistency in contract terms, and reduce costs. With Ontra’s human-in-the-loop system, you can be confident that AI suggestions are highlighted for human review, balancing the efficiency of AI with human intelligence.
Ontra is not a law firm and does not provide any legal services, legal advice, or referral services and, as a result, we do not provide any legal representation to clients, nor do we participate in any legal representation of clients. The contents of this article are for informational purposes only, and are not intended to constitute or be relied upon as legal, tax, accounting, regulatory, or other professional advice, opinion, or recommendation by Ontra or its affiliates. For assistance or guidance regarding the impact or applicability of the topics discussed in this article to your business, please consult your legal or other professional advisers.
