NDA Key Terms: A Guide for Asset Managers

Signing a non-disclosure agreement (NDA) is an essential step in any transaction. Without this agreement signed, deal teams are unable to access data rooms and therefore the essential information they need to review and evaluate investment opportunities.

Given the highly competitive nature of the market, speed to signing is key. However, the increasing complexity of NDAs and prevalence of broader commercial restrictions can often make this much harder than it needs to be.

While this is a legal document, and key terms need to be agreed, in our experience there is also a level of pragmatism required. Taking a hard negotiating position might not be the best approach, especially when you consider how it could impact any future relationship or business partnership.

With that in mind, we asked our GC, Stuart Swift, to walk us through a few of the key clauses that you should focus on when negotiating an NDA, the standard positions we tend to see and his advice on what to look out for.

Understanding Confidential Information

The Confidential Information term defines what is covered by the NDA and what information you’re obligated to protect.

In an ideal world, this definition would clearly identify the information to be provided and protected, but in reality a seller will look to define Confidential Information as broadly as they possibly can.

You can manage this though by placing guardrails around the definition. Examples could be to only include information disclosed after the NDA date relevant to the Transaction and excluding information already public or independently developed by you.

Permitted Recipients (Who can you share confidential information with?)

Next up is the Permitted Recipients list. These are the people that you can share confidential information with.

In our experience, it is unlikely this will cover all the various entities and individuals that will need access to the information to allow you to fully analyse and execute the transaction.

Because of this, the most common negotiation point is whether you can freely discuss the transaction with potential debt or equity sources. Unfortunately, in competitive bidding, sellers may impose restrictions here.

Hard negotiation here is unlikely to get you very far, but you may get assurances that the restriction will be relaxed at a later stage of negotiations, which should help ensure there is a level playing field for all bidders.

Another point we often see negotiated is ensuring your representatives also adhere to the NDA. Sellers may want your parties to sign similarly restrictive NDAs, but this can be impractical. Given the restrictive covenants in most NDAs (such as non-solicits, standstills and no-contact provisions etc) its unlikely third parties will agree to this. Instead, we advise clients to agree to inform their reps about the confidential nature and get their compliance on key points.

Limiting your liability is also important. NDAs often make you responsible for any breaches by the third parties you are working with. Here we always push back by adding that our clients will only be responsible to the extent that our representatives haven’t signed a confidentiality agreement with the seller. Joinders, “back-to-back” confidentiality agreements or separate NDAs with the seller are options to shield yourself from unforeseen breaches.

Managing non-solicitation clauses

Non-solicitation clauses protect sellers from losing employees, customers, and suppliers to you post-transaction. This is totally understandable from a seller’s perspective, but it can be tough for asset managers to monitor, especially with if you have an extensive network of affiliates in your portfolio that might be captured by this restriction.

To manage this in a commercially sensible way, we try to negotiate limits to this clause. Examples of this could be to restrict the clause to cover ‘senior employees’, or employees above a certain paygrade, or those with whom you have been directly interacting on the transaction.

Another route is to limit the customers and suppliers to a particular geographic location, and by stating that “you will not use the Confidential Information” to solicit such parties.

Most importantly, put a time limit on the restriction (12 – 18 months) and make sure it won’t apply to any third party Permitted Recipients. You cannot control the people your advisors might hire and, practically, this will make it harder to agree back-to-back confidentiality agreements with them if they also have non-solicitation restrictions to contend with.

Finally, always ensure that general solicitations and direct approaches are exempt. You can’t control who your advisors hire, and broad restrictions could hinder essential negotiations.

What is a non-circumvention clause?

A non-circumvent clause is another type of restrictive covenant. The goal is to protect intermediaries who introduce transactions. Without this clause, you could bypass these intermediaries and go straight to the seller.

This clause does impose obligations on you as a potential buyer and, instinctively, you would usually want to avoid any restriction of this nature. However, for a situation where this is relevant, the choice could be between accepting or not getting access to the confidential information.

However, there are ways to make this more reasonable:

1. Include a clear definition of the “Transaction” that you are prevented from circumventing,

2. Make the term as short as possible (no more than 12 months), and

3. Negotiate carve outs for legitimate interest. For instance, where another third party independently approaches you in relation to the same or a similar transaction, you don’t want to be locked out simply because you’ve already signed an NDA with someone else.

Handling standstill clauses

Standstill clauses come into play when dealing with public companies, protecting them from hostile takeovers and disruptive bidders. During the standstill period, you’re typically prohibited from dealing in the company’s public securities, buying its assets, or influencing its management.

It is unlikely that you will be successful in deleting a standstill from an NDA that contains one as it is usually included for good reason. Instead, take a pragmatic approach to secure the most flexible terms. This not only saves time but also sets a positive tone for your relationship with the seller.

How we can help

Managing, negotiating, and executing NDAs is typically a time-consuming exercise for in-house counsel. Your deal teams need the contract signed quickly, but you don’t want to accept an uncomfortable level of risk that might come from using tech only solutions or having junior paralegals or deal team members negotiating them themselves.

At Avantia, we’ve negotiated nearly 30,000 contracts for asset managers across the globe. Our team brings together expert lawyers and proprietary AI to streamline the negotiation process and get your deal teams into the data rooms faster, and more cost-effectively, than ever before.

Want to see how we do it? Download our free guide or chat with one of the team.