Non-Disclosure Agreement
A non-disclosure agreement is a contract under which a party receiving confidential information agrees to use it only for a stated purpose — evaluating a possible transaction — and not to disclose it. In a sale process it is signed before the information memorandum is sent, and it is the first binding document of the deal.
- Also known as
- NDA, Confidentiality agreement
- Used at
- before any confidential material changes hands, typically before the information memorandum
- Binding
- yes, from signature
- Typical term
- 2–3 years, longer for trade secrets and source code
- Usual extras
- non-solicitation of staff and customers for 12–24 months; a standstill in public deals
- Parties
- the seller (or its adviser) and each prospective buyer, one agreement each
How a non-disclosure agreement works in practice
When a fintech is for sale, the people most likely to want its numbers are the people it competes with. The non-disclosure agreement is what lets the seller show a competitor its revenue by merchant, its loss rates, its licence correspondence and, later in the process, its code — and still have a remedy if the information is used to poach a customer rather than to price a deal.
Three clauses do the work. The definition of confidential information decides whether the deal's existence is itself a secret (in most processes it is). The permitted purpose limits use to evaluating the transaction, which is the clause a seller relies on when a buyer walks away and hires the target's head of risk three months later — hence the non-solicitation clause that usually sits beside it. And the return-or-destroy clause governs what happens to the data room download when the process ends.
For regulated businesses two things are added: an acknowledgement that some material (regulator correspondence, personal data under GDPR) is shared under conditions the seller cannot waive, and a clean-team arrangement for the most sensitive commercial data, so that only named advisers see merchant-level pricing until the deal is signed.
One-way or mutual is the first question. In a sale process the seller discloses almost everything and the buyer almost nothing, so a one-way agreement in the seller's favour is the norm; a buyer that insists on a mutual form is usually protecting the fact of its interest rather than any information. Governing law is the second: a Lithuanian e-money institution selling to a US acquirer will want the agreement enforceable where the information will be used, not only where it was disclosed.
Example
A seller's adviser sends a teaser to fourteen potential buyers of a card-issuing platform. Nine sign the non-disclosure agreement — two-year term, twelve-month non-solicitation of employees, a clean team for merchant pricing — and receive the information memorandum; five do not, and receive nothing further. Four of the nine submit indicative offers; two enter the data room. When one of those two withdraws, its download is deleted and its counsel confirms destruction in writing, as the agreement requires.
Common mistakes
- Sending the information memorandum first and the agreement afterwards. - A definition of confidential information so broad that it covers public knowledge, which makes the whole agreement harder to enforce. - No non-solicitation clause, so the agreement protects the numbers but not the people. - Forgetting the deal itself is confidential: a buyer telling the target's customers it is in talks can be a breach. - Accepting a mutual agreement when the seller is disclosing everything and the buyer nothing.