Customarily, the seller is the party who insists on a non-disclosure agreement prior to M&A talks heating up.
But what should you do, if you’re the buyer and the seller has not produced a Non-Disclosure Agreement (NDA) for signature, whether for lack of sophistication, carelessness, or being rushed? You should insist on an NDA yourself.
While parties assume that the NDA serves only the target company, a sophisticated buyer should be equally—if not more—insistent on executing a robust, properly drafted NDA.
Why? Because, if the target company’s proprietary technology, source code, customer lists, or manufacturing processes lose their legal status as “trade secrets” during due diligence, then the buyer ends up purchasing compromised assets. Most trade secrets law (state and federal) protects proprietary information only if the owner takes “reasonable measures under the circumstances” to maintain its secrecy. If a target company shares its most sensitive operational secrets with a prospective buyer (as well as the buyer’s advisors, accountants, and lenders) without a binding NDA in place, that disclosure can be treated in court as a failure to maintain reasonable secrecy.
How does this play out? Assume the buyer acquires a technology firm. Six months after closing, an employee leaves, steals a key algorithm, and launches a competing product. The buyer files suit under the DTSA. The defense demonstrates that, during the pre-closing M&A process, the target company disclosed the algorithm to your deal team without a strict NDA. The court could rule that the secret lost its legal protection prior to the acquisition due to unprotected disclosure—leaving you without a trade-secrets remedy.
Of course, this is not to say that the buyer should draft a seller-friendly NDA. Rather, the NDA should do the bare minimum to retain trade-secrets protection, without going overboard on remedies to the seller—particularly where the buyer and seller compete in the same market. In fact, the buyer’s counsel should insist upon notice and cure periods, heightened standards of proof of misappropriation, and clear-cut freedom-to-operate clauses within the NDA, with venue clauses and fee-shifting to deter a litigious and potentially angry seller if the buyer needs to walk.
The NDA operates as an essential structural tool that preserves the underlying legal value of trade secrets being acquired. Without it, the deal process itself risks destroying the trade secrets that generated the company’s value in the first place.
To discuss your M&A strategy or protect your rights in an upcoming transaction, contact Michael R. Rasor and the attorneys at Cavitch Familo & Durkin Co., L.P.A. today.