When negotiating Non-Disclosure Agreements (NDAs) in M&A deals, overlooking key issues can lead to serious risks like data breaches, legal disputes, and deal disruptions. Here are 8 common red flags to watch for:
- Overly Broad Exclusions: Loopholes in defining "Confidential Information" can weaken protections. Watch for clauses like "residuals" or vague exclusions without proof requirements.
- Biased Attorney Fee Provisions: Fee clauses favoring one party can discourage valid claims. Negotiate fair, mutual terms with clear limits on recoverable costs.
- Restrictions on Advisors: Excessive limits on sharing information with advisors or financiers can delay deals. Define "Representatives" broadly and allow disclosures on a need-to-know basis.
- Overreaching Non-Solicitation Clauses: Broad clauses restricting hiring or poaching can disrupt operations. Limit these to key personnel and reasonable timeframes.
- Refusal to Amend One-Sided Terms: Unwillingness to negotiate unfair terms signals potential future challenges. Opt for mutual NDAs to ensure balanced obligations.
- Non-Mutual NDA Templates: One-sided NDAs protecting only the buyer or seller create imbalances. Always insist on mutual agreements.
- Unreasonable Termination Periods: Terms that are too short or indefinite can expose sensitive data. Use clear timeframes based on the type of information.
- Missing Protections for Oral Disclosures: Verbal exchanges often lack coverage. Ensure NDAs explicitly protect oral and electronic communications.
Key takeaway: A poorly drafted NDA can jeopardize your deal and expose your business. Always review terms carefully, negotiate fair provisions, and work with experienced legal counsel to safeguard your interests.
8 NDA Red Flags to Watch for in M&A Deals
1. Overly Broad Exclusions for Confidential Information
NDAs often include standard exclusions to clarify what doesn’t qualify as protected information. These typically cover details that are already public, known to the recipient beforehand, obtained from a third party, or independently developed. However, when these exclusions are too broad or lack proper qualifications, they can create loopholes that weaken the agreement’s intent to safeguard sensitive information.
One significant issue is the inclusion of a "residuals clause." This clause allows the recipient to use any information retained in their employees’ memory after reviewing confidential materials. As Eric H. Wang of DLA Piper highlights:
"remove any ‘residual’ clause which allows the Recipient to use, in future products or services, all information retained in the memory of the Recipient’s employees which was obtained from reviewing the confidential information".
Such a clause could effectively grant the recipient free rein to exploit your trade secrets.
Another critical point comes from Erik Lopez, Partner at Jasso Lopez PLLC, who warns against confusing legally required disclosures with a loss of confidentiality:
"Do not make the mistake of conflating the permissible disclosure provisions… with exceptions to the definition of Confidential Information. From the discloser’s perspective, the fact that certain information may be disclosed under agreed-upon circumstances should not thereby cause the information to cease to qualify as Confidential Information".
It’s also essential to scrutinize exclusions that don’t require documentary proof. For instance, the "publicly available" clause should explicitly exclude cases where the recipient themselves makes the information public. Similarly, if the NDA allows for exclusions based on information already in the recipient’s possession, it should mandate documentary evidence to prevent misuse. Without such safeguards, the recipient could claim prior knowledge and misuse your confidential data.
2. Attorney Fee Provisions Favoring the Prevailing Party
Attorney fee provisions that favor the prevailing party can create a significant financial imbalance, often discouraging valid claims due to the threat of overwhelming litigation costs. These clauses, while seemingly straightforward, can have far-reaching implications.
One major concern arises when such provisions require one party to bear all legal fees if a deal falls through, regardless of who is at fault. For example, in February 2025, Vista Business Group flagged a Letter of Intent that placed the entire burden of legal fees on the seller if the deal failed – fault notwithstanding. This kind of arrangement unfairly shields the buyer from financial responsibility while leaving the seller to shoulder an undue financial burden.
Even provisions that are structured to be mutual can pose risks. The potential for massive legal fees – sometimes reaching hundreds of thousands of dollars – can deter parties from pursuing legitimate claims. A real-world example of this is the June 2012 case of Goodrich Capital, LLC v. Vector Capital Corporation. In this case, Judge Rakoff of the S.D.N.Y. noted that Goodrich plausibly alleged that Vector breached the NDA to avoid paying $3.5 million in advisory fees. The exposure to such costs led to a quick settlement.
To safeguard your position, it’s essential to negotiate mutual fee provisions with clearly defined triggers. You might consider capping recoverable fees or limiting them to specific types of disputes. As BetterLegal advises:
"Ensure that the NDA’s obligations and protections are symmetric, offering both parties fair and equal treatment".
Without these types of mutual safeguards, fee clauses can become tools of financial intimidation rather than equitable measures.
3. Excessive Restrictions on Sharing Information with Advisors
Overly strict limits on sharing information with advisors can seriously hinder the progress of a deal. In any M&A transaction, professionals like attorneys, accountants, and consultants are essential to properly evaluate the terms and risks. However, some NDAs make it almost impossible to involve these crucial advisors without first obtaining written consent. This requirement for prior written consent can create unnecessary delays that might derail the entire transaction.
For acquirers who need financing, these delays can be even more damaging. NDAs that demand written approval before contacting lenders or equity investors can jeopardize time-sensitive deals.
While it’s understandable that sellers want to safeguard sensitive information – especially given that 29% of data breaches involve third-party cyberattacks and 68% stem from human errors – overly restrictive clauses don’t effectively address these risks. Instead, they often create more problems than they solve.
To avoid these issues, NDAs should define "Representatives" broadly. This definition should include affiliates, directors, employees, officers, and professional advisors, eliminating the need for constant consent. Additionally, adopting a "need-to-know" standard for sharing information with advisors can streamline the process. As Sterlington PLLC explains:
"Disclosing Parties generally require that all Representatives: (a) have a need to know the information and (b) are, at the very least, informed of the confidential nature of the confidential information".
For acquirers requiring external funding, it’s critical to negotiate a carve-out in the NDA to allow disclosures to potential financiers. Without this flexibility, securing the necessary capital to close the deal can become an uphill battle. Clear definitions and adaptable standards are key to keeping the transaction on track.
4. Non-Solicitation Clauses
Non-solicitation clauses are designed to stop buyers from poaching the seller’s employees, customers, or suppliers if a deal falls through. While these clauses aim to protect essential business relationships and talent, they can become problematic when written too broadly.
One common issue is when the clause restricts hiring all employees instead of just key personnel identified during due diligence. For large companies, this kind of sweeping restriction can cause unintended compliance headaches, especially if standard HR practices unintentionally violate the agreement. This highlights the importance of using precise language in every part of an NDA.
Another concern is the inclusion of non-hire provisions that ban employing individuals even if they apply independently. These overly broad terms can disrupt regular business operations and create unnecessary complications. It’s especially troubling when such restrictions extend beyond employees to include customers, suppliers, and other business partners. Erik Lopez, Partner at Jasso Lopez PLLC, sheds light on this:
"Parties to potential M&A deals are frequently afforded a great deal of access to the other party’s personnel, vendors, suppliers and other commercial counterparties… They may therefore attempt to poach one another’s employees and commercial partners if the deal doesn’t close."
While the concern is valid, overly restrictive terms can stifle normal operations and hinder future growth.
To strike the right balance, non-solicitation clauses should be carefully tailored. Typically, these restrictions last between 6 and 24 months, with 12 months being the norm. Any clause exceeding two years should raise red flags. It’s also important to include carve-outs for general activities like job postings, LinkedIn ads, or using third-party recruiters. Without these exceptions, even standard hiring efforts could be jeopardized.
When reviewing an NDA, focus on limiting non-solicitation obligations to employees directly involved in due diligence. If possible, replace non-hire provisions with non-solicitation language and insist on carve-outs for routine recruitment practices. The goal is to safeguard legitimate business interests while avoiding legal and operational pitfalls that could lead to costly disputes.
5. Refusal to Negotiate One-Sided NDA Terms
When a party refuses to amend one-sided NDA terms, it often sets the tone for future negotiations. This kind of rigidity can be a red flag, suggesting that inflexibility may persist during more complex discussions, such as finalizing purchase agreements or other key documents. If a party is unwilling to compromise on something as foundational as confidentiality, it’s reasonable to expect similar resistance on larger issues. Additionally, relying on generic templates for NDAs can introduce unnecessary risks.
One-sided NDAs are inherently unbalanced because they impose restrictions on one party while leaving the drafting party unrestricted. As Erik Lopez, Partner at Jasso Lopez PLLC, points out:
"Mutual NDAs tend to be more balanced and reasonable than one-way agreements. If the drafting party knows that it will be bound by the same restrictions it is seeking to impose on the other… it will generally be more moderate in its approach."
The use of generic templates adds another layer of concern. Many NDAs presented in these situations are repurposed vendor agreements, unsuitable for the complexities of M&A transactions. Eric H. Wang of DLA Piper highlights the risks:
"In a situation where a party is presented with the other side’s form NDA, a careful review is warranted – the text is ‘boilerplate’ that can bite!"
For example, some templates include residual clauses that allow the recipient to use any information "retained in memory" for future projects. Such clauses can significantly weaken trade secret protections.
In M&A deals, both parties need to share sensitive details, from financing plans to synergy strategies. A rigid, one-way NDA can stifle these essential disclosures. Opting for a mutual NDA fosters a more balanced relationship and can simplify negotiations.
To avoid unnecessary complications, ensure the NDA is tailored specifically for M&A purposes rather than relying on a generic form. Be vigilant about hidden provisions like "no-shop" or exclusivity clauses, which should be addressed in later agreements instead. If the other party refuses to negotiate fair terms, it may reflect a broader unwillingness to collaborate effectively throughout the transaction.
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6. Non-Mutual or Buyer-Only NDA Templates
Buyer-only NDA templates introduce a significant concern in negotiations. These agreements typically bind only the buyer to confidentiality, leaving the seller free from similar obligations. This creates a clear imbalance, particularly when both parties are expected to exchange sensitive information during discussions. As Kate Sherburne, Partner at Faegre Drinker, explains:
"NDAs negotiated at the onset of the M&A process are often non-mutual and only bind the buyer with respect to the seller’s confidential information".
This one-sided approach can become especially problematic when financial evaluations come into play. For example, if a buyer offers equity as part of the deal, the seller must carefully evaluate the buyer’s financial stability and operations. In doing so, the seller exposes its own sensitive data during due diligence. Michael Mills, Attorney at Klein Solomon Mills PLLC, emphasizes the importance of fairness:
"Confirm the NDA is a mutual one. Many companies use a form that protects only their information… You should insist on an NDA that protects you as well".
Buyer-only NDAs also risk revealing other critical details, such as the fact that negotiations are happening or specific terms being discussed. Both parties usually prefer to keep such information private to maintain their competitive edge and avoid tipping off rivals. Furthermore, these one-sided agreements tend to slow down the negotiation process. Their aggressive terms require more extensive legal reviews, often leading to delays. On the other hand, mutual NDAs streamline the process by imposing equal restrictions on both parties, fostering more balanced and efficient discussions.
To prevent these complications, always ensure the NDA offers equal protection for both sides. If presented with a buyer-only template, request a mutual version to promote fairness and expedite negotiations.
7. Unreasonable Termination Periods
In M&A NDAs, termination periods generally fall between one and five years. Straying too far from this range – whether too short or indefinite – can raise serious concerns.
Let’s break it down. Indefinite terms often cause issues for buyers. Courts may view such terms as unreasonable, and they also saddle buyers with ongoing administrative responsibilities. Jacqueline R. Caserio, Attorney at Barrett McNagny LLP, explains:
"An indefinite term could potentially be viewed as unreasonable to the receiving party. … courts will look to the NDA’s reasonableness in interpreting the agreement and determining whether an actionable breach occurred."
On the flip side, terms that are too short can leave critical trade secrets exposed. For instance, if an NDA expires after just two years, sellers might lose the legal protection for sensitive information shared during negotiations. Securities Attorney Destiny Aigbe highlights this risk:
"If a company discloses information to a third party using an NDA with confidentiality obligations that expire, then the information will under most circumstances cease to be protectable as a trade secret after the restrictions lapse."
A thoughtful, tiered approach can help strike the right balance. For example:
- General business data (like sales forecasts or customer lists) might only need protection for two to three years, as it tends to lose relevance quickly.
- Trade secrets (such as proprietary algorithms or source code) should either remain protected indefinitely or for as long as they meet the legal definition of a trade secret.
It’s also important to note that an NDA without a specified term doesn’t automatically mean perpetual protection. In many jurisdictions, courts will decide what constitutes a "reasonable" duration, which could end up being shorter than anticipated. To avoid this uncertainty, always define clear timeframes for different types of information to ensure proper coverage and alignment with best practices in M&A.
8. Unclear or Missing Protections for Oral Disclosures
In M&A transactions, oral exchanges – like management interviews or stakeholder negotiations – are a regular part of the process. Yet, NDAs often fail to adequately safeguard these conversations. Since much of the information shared during a deal happens verbally, this creates a risky gap in confidentiality protections.
One major issue is the "legending" requirement. Some NDAs stipulate that any oral disclosure must be summarized in writing and labeled as "confidential" within 15–30 days to be protected. Missing this step can leave sensitive information unprotected. Jacob Orosz, President of Morgan & Westfield, highlights the impracticality of such clauses:
"Requiring the seller to stamp information is impractical in the IT age, as most information is now conveyed electronically. Having a labeling requirement also slows down the process, and time is the enemy when selling your business".
Another common pitfall is vague language around what qualifies as "Confidential Information." If verbal communications aren’t explicitly included in the NDA, the receiving party could claim that information shared during meetings or calls isn’t covered. This lack of clarity makes it nearly impossible to enforce confidentiality for oral disclosures, as verbal exchanges don’t leave behind the clear documentation that written communications do.
To close this loophole, NDAs should explicitly cover oral, visual, and electronic disclosures – without requiring follow-up written confirmation. As Eric H. Wang, an attorney at DLA Piper, warns, even standard "boilerplate" language in NDAs can lead to problems if not carefully reviewed. During discussions, verbally designating information as confidential can also help reinforce the agreement’s terms.
For highly sensitive trade secrets or proprietary details, it’s wise to limit verbal disclosures to trusted advisors who genuinely need the information. Alternatively, consider delaying the sharing of such critical details until later in the transaction, once trust has been established. With this final red flag addressed, we now move toward summarizing the key takeaways from these NDA challenges in M&A deals.
Conclusion
An NDA is more than just a formality in an M&A deal – it’s the foundation that sets the tone for everything that follows. It creates a layer of trust between parties and safeguards critical information like trade secrets, client lists, and strategic plans, all of which directly influence your company’s value and competitive position. A poorly constructed NDA can leave you exposed to risks like data breaches, employee poaching, and operational disruptions caused by legal disputes. Even small mistakes – such as overlooking protections for verbal disclosures or agreeing to an unfair attorney fee clause – can lead to costly consequences. That’s why having a well-drafted, tailored NDA is non-negotiable.
Generic NDAs won’t cut it. Work with experienced M&A counsel to customize key terms, including provisions for injunctive relief, trade secret protections, and signatory authority. Additionally, use secure Virtual Data Rooms with features like role-based access and dynamic watermarking to maintain control over sensitive information. Ensure that only authorized representatives, such as CEOs or board chairs, sign the agreement to avoid enforceability issues down the road.
For sellers preparing to enter the market, engaging experts early can help you sidestep costly mistakes. Services like Deal Memo offer tailored Confidential Information Memoranda (CIM) and Offering Memoranda (OM) for business brokers, M&A firms, and investment banks, with drafts delivered in just 72 hours. Professional, polished materials ensure that you’re negotiating from a position of strength.
Overlooking NDA red flags – like vague exclusions or inadequate protections for oral disclosures – isn’t just about technicalities. These details can determine whether your deal safeguards your interests or leaves you exposed. Take the time to review, negotiate, and finalize your NDA carefully. A well-negotiated NDA isn’t just a document; it’s the cornerstone of a secure and successful M&A process.
FAQs
What are the dangers of using an unbalanced NDA in M&A transactions?
Using an NDA that’s skewed in favor of one party during M&A transactions can spell trouble. When the agreement safeguards only one side’s confidentiality, the other side is left vulnerable – especially if sensitive details are mishandled or leaked. This imbalance can spark disputes over the agreement’s fairness, enforceability, and overall scope.
On top of that, NDAs that lean too heavily in one direction can make negotiations awkward or even stall progress. They might signal a lack of good faith, which could delay or derail the deal entirely. A well-crafted NDA that protects both parties equally not only minimizes these risks but also fosters trust, setting the stage for smoother collaboration throughout the transaction.
How can I make sure oral disclosures are covered under an NDA in an M&A deal?
To safeguard oral disclosures under an NDA during an M&A deal, it’s crucial to ensure the agreement explicitly includes oral communications in its definition of confidential information. The NDA should specify that oral disclosures are considered confidential if they are identified as such at the time of disclosure or confirmed in writing shortly afterward.
Additionally, the agreement should require the recipient to handle oral disclosures with the same level of care as written information. Their use should be strictly limited to evaluating the transaction. Including a clause that mandates documenting oral disclosures in writing within a specific timeframe adds an extra layer of protection. Using clear, precise language throughout the NDA is essential for effectively securing oral information.
Why should attorney fee provisions be carefully negotiated in NDAs?
When drafting NDAs, addressing attorney fee provisions is crucial. These terms clarify how legal costs will be managed if a dispute arises. Without this clarity, unexpected expenses can catch parties off guard, leading to financial strain and added complications. By laying out these provisions early, both parties can safeguard their interests and create a fair structure for handling potential breaches. This proactive approach helps ensure smoother and more secure M&A transactions.
