Non-Disclosure Agreement (NDA)
February 24, 2025
What is a Non-Disclosure Agreement (NDA)?
A Non-Disclosure Agreement (NDA) is a legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another. This is typically used when a potential financial deal is being discussed so it is used to circulate information between the parties. It outlines the scope of what is allowed to be shared and forbids any of this information being passed on to third parties.
Key Learning Points
- A Non-Disclosure Agreement (NDA) is a legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes but wish to restrict access to by third parties
- NDAs place an obligation on both parties to refrain from sharing privileged information with external parties post-signing
- NDAs can be structured to protect a one-way or a mutual flow of information –it is usually one-way in transactions as the target company does not generally need to access privileged information about the investor
- Key points of negotiation for an NDA include term (how long it lasts), to whom it applies, what is considered confidential, exceptions to confidentiality, and the inclusion of indemnities to define monetary remedies in the event of a breach
How a Non-Disclosure Agreement (NDAs) Works
An NDA places an obligation on both parties to refrain from sharing privileged information with external parties post signing. It is designed to protect both parties, but typically there is one party (e.g. a Company) which insists on an NDA being in place before providing any detailed information to a potential buyer (e.g. a private equity company). This obligation does not apply to information that becomes publicly available through no fault of the parties.
Uses of NDAs
Let’s discuss the use of NDAs, keeping the example of a company seeking investment from a private equity company. At the beginning of any due diligence process, the PE fund and the target company execute an NDA to exchange confidential information and agree to make confidential the fact that discussions related to a transaction are ongoing. An NDA places an obligation on both parties to refrain from sharing privileged information with external parties post-signing; this obligation does not apply to information that becomes publicly available, through no fault of the parties, while the NDA is in force. This may include regular retail data released by third parties during this due diligence phase or other details about a company.
An NDA covers confidential information shared through the due diligence, negotiation, and closing processes. Some parts often continue to apply even if the business is not acquired. They are executed at the beginning of any due diligence process between the PE fund and the target company to allow the exchange of confidential information.
Download NDAs – When They Are Used and Invalid from the free resources section to read more about when a non-disclosure agreement may be used, and what would make an NDA invalid.
Types of NDAs
NDAs can be structured to protect a one-way or a mutual flow of information. They are usually one-way in private equity transactions as the target does not generally need to access privileged information about the PE fund.
There two different types of NDAs:
- One-way NDA: this type of NDA involves a one-way flow of information, where only one party discloses confidential information to the other party
- Mutual NDA: this type of NDA involves a mutual flow of information, where both parties disclose confidential information to each other
Requirements for an NDA
Key points of negotiation for an NDA include term (how long it lasts), to whom it applies, what is considered confidential, exceptions to confidentiality, and the inclusion of indemnities to define monetary remedies in the event of a breach.
Most NDAs are usually only 2-6 pages in length. Obligations established by an NDA may be replaced or amplified by other confidentiality agreements subsequently made during the investment process. Most often it is a target’s advisor, such as an investment bank, which will send and negotiate the NDA on behalf of a selling party.
Who Manages an NDA?
In the context of managing a Non-Disclosure Agreement (NDA), the document indicates that Associates handle NDAs, particularly the commercial clauses. They will typically use a legal advisor for a final sanity check.
Additionally, it is often the target’s advisor, such as an investment bank, that sends and negotiates the NDA on behalf of the selling party. From the perspective of a private equity (PE) firm, associates are usually expected to handle NDAs, especially regarding commercial clauses, and only use a legal advisor for a final sanity check.
How Long Does a Non-Disclosure Agreement Last?
The duration of an NDA is a key point of negotiation and can vary. This is laid out in the duration clause and sets how long the NDA will last. This typically ranges anywhere from 6 months to as long as 3 years. Some parts of the NDA often continue to apply even if the business is not acquired.
Conclusion
A Non-Disclosure Agreement (NDA) is a crucial legal tool that ensures the confidentiality of shared information between parties, protecting sensitive data from unauthorized disclosure. By clearly defining the terms, scope, and obligations, NDAs help maintain trust and security in business relationships.
Additional Resources
Private Equity Transaction Timeline