Mark Pestronk
Q: Our agency has a specialized niche that is shared by only a small number of agencies nationwide. One of our competitors has expressed interest in acquiring us and has signed a nondisclosure agreement (NDA) that our attorney drafted. It states that the potential buyer cannot use or disclose any information that we provide except in connection with the acquisition.
The potential buyer has sent us a list of documents that it needs to review, including our client, supplier, employee and financial information. I would like to cooperate, but I am afraid that the competitor might decide to use the information to compete against us instead of acquiring us. Is my fear valid? If so, how should I proceed? Also, what's the difference between an NDA and a confidentiality agreement?
A: You fear is valid. Even if the competitor has no present intention of using your information to compete against you, it could decide not to proceed with an acquisition and then much later decide to use your information without realizing that it is still subject to the NDA's restrictions.
In one case that I know of, a potential seller had a very favorable agreement with a key supplier. After a potential buyer learned about it and called off the acquisition, it asked for and received the same agreement from the supplier.
Although the potential buyer had violated the NDA, there was not much that the potential seller could do about it. Even if it sued the potential buyer, it would have a hard time proving what happened.
I don't mean to advise you that you can never trust potential buyers that are your competitors. However, you should disclose less-sensitive information first and then gradually disclose more as you become more confident that the acquisition will go through.
For example, if the potential buyer sends you a list that asks for your articles of incorporation; bylaws; names of owners, officers and directors; and shareholders' agreement, there is usually no harm in disclosing all that, so you can do so as soon as the NDA is signed.
If the list asks for your most recent financial statements, and the potential buyer indicates that they are needed in order to set an offer price for your agency, you undoubtedly need to provide those documents as soon as you are reasonably certain that the potential buyer is serious.
If the list asks for employees' names, positions and compensation, you can provide a list with the names blacked out along with a statement that you will provide names as soon as a letter of intent is signed.
If the list asks for the names of your top 10 clients and the volume of each, you can again black out the names on the list you provide and state that the identities will be provided X days before the closing on the sale. If the potential buyer accuses you of paranoia, just indicate that you are following your attorney's advice.
Finally, an NDA and a confidentiality agreement are the same thing. The term "NDA" is used more often in B2B transactions, and "confidentiality agreement" is used more often for employees and ICs.