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When Two Become One: Legal Considerations in the Mergers & Acquisitions Process – Part III: Drafting Nondisclosure Agreements
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When Two Become One: Legal Considerations in the Mergers & Acquisitions Process – Part III: Drafting Nondisclosure Agreements

August 1, 2017 Professional Services Industry Legal Blog

Reading Time: 5 minutes

Part III: Drafting Nondisclosure Agreements in the M&A Process

In June, I began a series of blogs regarding the most important legal considerations in the mergers and acquisition process.   The first blog discussed the mergers and acquisition process at a global level generally laying out the six most important legal considerations in the process.  In the second blog of the series, I dove deeper into the first step of the process, engaging a financial advisor and drafting the engagement letter.

This third installment of the series will focus on the drafting of the non-disclosure agreement.  What makes the nondisclosure agreement significant in the M&A process is that, unlike other aspects of the process such as due diligence and executing a letter of intent, the nondisclosure agreement should be drafted with a primary focus on the needs of the target company and not the acquirer or buyer.  Thus, the burden lies with the target company or seller in drafting the nondisclosure agreement that will protect the target’s intellectual property and strategies while at the same time providing a sufficient window into the target company to the potential buyer or acquirer to entice them to move forward with the transaction.  With this in mind, here are the four most important questions that need to be answered in drafting and finalizing a nondisclosure agreement.

What Information Should the Nondisclosure Agreement Cover?

The instinct for a target company in drafting the nondisclosure agreement may be to draft it to state that all information about the target is covered.  While comprehensive protection is a worthy goal, the more precise the target company is in describing what is covered by the nondisclosure agreement, the better a case the target will have if/when the nondisclosure agreement is breached by the acquirer.

The language of the nondisclosure agreement should specifically refer to the type of information the target has prepared or intends to prepare for the potential acquirer; for example, forecasts, studies, analyses, presentations, records, reports, and any underlying notes or preparation materials created in anticipation of the transaction.  Likewise, the potential acquirer will likely request the target company to include a provision that clearly states information not covered by the nondisclosure agreement includes publicly available information about the target 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 relates to the ability of the potential acquirer to share and disclose information about the target with others, this second question relates to how the potential acquirer may use that same information internally.  Essentially, the nondisclosure must make clear that the potential acquirer may use the 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.

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.  However, it may not use that information to better its own competitive position in the market.  Certainly, policing whether a breach later occurs will present its own challenges, but making the nondisclosure agreement as clear as possible will lay the groundwork for resolving any future disputes in the target’s favor.

When may the Potential Acquirer Share the Target’s Information?

Occasionally, a potential acquirer may have to share information gathered about the target during the evaluation process, and, in some cases, doing so may be to the target’s advantage.  Therefore, the nondisclosure agreement 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 the nondisclosure language granting it the right to respond to forced disclosure though 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 Nondisclosure Agreement?

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 nondisclosure agreement.

Specifically, a target should include language in the nondisclosure agreement granting 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 nondisclosure agreement.  The 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 if a potential acquirer breaches the nondisclosure agreement.


There are other provisions that a target should consider including in the nondisclosure agreement, such as a non-solicitation clause to protect its employees from being poached by the potential acquirer.  Important to note is that the nondisclosure agreement does not commit either party to proceed with the transaction, but it is crucial to protecting the parties as they enter into the rest of the acquisition process.  To ensure your deal stays amicable, occurs smoothly, and results in the best deal possible for all parties involved, make sure to follow the rest of this series of blogs on the M&A process.  The next blog in this series will delve deeper into the letter of intent, which provides the preliminary framework for the potential transaction.

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