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Guide to Efficient Business Transactions: Part III

Efficient Business Transactions(July 6, 2012):  This article is a continuation of our discussion on how a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize the costs and risks.  A link to Part II is provided:  Click here for Part II.

 

 

I.  Efficient Business Transactions, Continued:

(k)  Conform to Conventions about Roles of Parties in Transactions. In most transactions, the buyer, investor or lender (i.e. the money side of the deal) will expect their legal counsel to produce the first draft of most documents in the transaction, on which the other side will make comments and negotiate changes. While this means the documents start out skewed in favor of the money side, there are sound reasons why the seller or issuer side should allow this. If the seller, say, insists on providing a first draft document, the process of the buyer negotiating it into a form signable by his side will add more time and expense to the closing for all concerned than will be justified by any drafting advantage.

(l)  Understand what Legal Documents are involved in your Deal, and What Function Each Serves. The day is long past (if it ever came) when a business person can turn an important transaction over to legal counsel, say “Close this deal for me please”, and walk away. By now the reader will see that his or her relationship with their professionals should be less like a patient’s relationship with a physician than a boss’s relationship with highly-skilled employees. Your transaction counsel may have been through a hundred transactions, and you through none, but you still need to play a leadership role, and make business (i.e. economic) decisions. While you don’t need to know all the law to do these things, you do need to understand the basics, and know the functions on a business level of all significant documents.

(m)  Respect the Negotiation Process. Store up Credits when you Concede a Point. Table small negotiating items, and Trade them down the road for a bigger point you Know Is Coming. Westerners often view the process of negotiation with disdain. I have had clients approach a negotiation saying “I will just open with my bottom line number, and let them take it or leave it. We will cut to the chase.” This is seldom effective. Business people of all cultures hate to take a first offer in any important matter. Rigid intransigence in negotiation usually repels the other side. And humans seldom view any decision as binary, with a fixed bright-line dollar amount where it stops being desirable. The prudent business person allows for this, starts every negotiation a bit away from his bottom number, and assumes the other side is doing likewise.

In section (g) above I mentioned the psychological bonding that usually arises when parties negotiate. There is a natural tendency for a party winning a point in negotiation to feel softer about the next point. Bear this human trait in mind, and use it.

If you are communicating well with your professionals, they will alert you to issues they expect to emerge in the transaction process which may be serious problems for you. Every significant deal has hurdles. One of your biggest challenges will be to keep track of these matters and plan how to deal with them. Most issues in a business negotiation are more important to one side than the other. Experienced deal people look for points more significant to the other side than to themselves, and position themselves to grant the other side one or more “gives” on such points, in exchange for a concession important to them.

(n) Keep Business and Legal Issues Separate. Don’t let Attorneys get Stalemated; Make sure Yours Knows when to Hand-off an Issue. After the drafting side presents its initial draft of a transaction document, the commenting attorney reads the document, flags language possibly creating a problem or “issue” for his client, speaks to his client if necessary to clarify what are and what aren’t problems, replies to the drafting attorney with descriptions of the issues, and (usually) proposed text changes to fix them.  When the commenting attorney describes issues with the drafter, he does so in legal terms, while he normally communicates issues to his client in business terms.

One of 3 things must result from the above: Either (i) the drafter agrees with the commenter about both the issue and the text change; (ii) the drafter agrees an issue exists and with the concept of the proposed resolution, but disagrees on the text change; or (iii) the drafter disagrees on the issue and the proposed text change. In case (i) things are obviously fine, and the process continues without interruption. In case (ii), competent attorneys will always be able to craft some mutually agreeable drafting fix, and get to case (i). In case (iii) however, if good faith discussion doesn’t produce case (i) quickly, prolonged haggling by the attorneys becomes wasteful. Your attorney (whether he is the drafter, or the commenter), should recognize the stalemate in this situation, table that discussion with opposing counsel, and add the issue to a list of issues to be referred to you. Further conversation between lawyers is probably useless, and your counsel should know this.

 When all documents being drafted have been covered in the process described above, sit down with your counsel and review the full list of open issues. A skill absolutely vital for competent transaction counsel is the ability to translate each issue for you from legal to business terms with perfect clarity. From this conversation, decide what is and what isn’t worth negotiating. Issues falling into the former category are now identified as business issues. These you must resolve with your business counterpart in the transaction, failing which of course the closing process must halt. The point however is that lawyers must never be the ones to hold on to a stalemated issue.

(o) Be ready to Step In if other Professionals Over-Negotiate. If progress seems too slow in negotiating the legal documents, you may discover that opposing counsel is producing too many case (ii)s and case (iii)s in the process described above, which means he or she is either asking for or disagreeing with changes which aren’t really significant to their client. If that occurs, you should be prepared to complain politely but clearly to your counterpart.

I mention this with some hesitation, because it can easily be counter-productive, and you must tread carefully. It’s hard for you to know what is and isn’t truly significant for the other side. Also, be wary if it’s your lawyer who says the other is over-negotiating; perceptions like that are common but sometimes not fair. As you will appreciate, wrongly saying the other side’s attorney is behaving badly violates the courtesy and politeness rule above.

(p)  Avoid Too Many Turns of Documents. This is most important in negotiating the umbrella agreement, but applies to other documents too. During the document negotiation phase of the closing process, there is a temptation to urge the drafting lawyer to hurry making redrafts of the umbrella agreement, in an effort to speed the closing process. The problem here is that each time the drafting attorney redrafts a document, the commenting counsel has to read it and perform the discernment process described in (l) above. This is the most exacting work a transaction lawyer ever performs, and as mentioned in the Introduction, is the single most expensive part of the legal process. The drafting lawyer should not use the redrafting process to tell the commenting lawyer which requested changes the drafter’s side disagrees with. Instead, any decline of requested changes should be communicated verbally, and redrafting should wait until all known issues in the document are resolved at least in principle. This means that redrafting must wait until the business people finish the negotiation described in (l). In rare cases, redrafting may proceed although business people are stalemated on an issue, and the relevant text is bracketed in the redraft when this happens. But the only surprises a commenting lawyer should ever find in an intermediate draft is how the drafter chooses to phrase some concept that has been agreed on. Otherwise both the redrafting work and the review and comment work tend to be wasted, and previously-flagged issues get flagged again and re-negotiated. This slows the closing process and wastes legal fees.

(q) Look out for Legal Opinion Letters. Smoke Them Out Early. Lawyers loathe giving written opinions, and perceive them as professionally risky, although very few lawyers are successfully sued over them. Clients seldom appreciate the time they necessarily require, and the resulting bills. Every law firm has rigid internal procedures to follow in signing opinions, and they usually involve partners who aren’t making money from the client in question learning the facts and law involved and approving the opinion. This is a disagreeable experience for all concerned.

Opinion letters are therefore occasions for delay and conflict in legal closings. The best practice is for each party to advise the other as early as possible (around the time the 1st draft of the umbrella agreement is produced) what opinions they will need, with requested text, and what qualifications the signing attorney must have (usually, of what state’s bar must he be a member). Get the texts of opinions your side must provide to the relevant lawyer promptly, and find out if he or she is prepared to give them. Some deviation from requested texts always occurs, but a competent attorney will be able to tell you what if any parts require significant changes. The goal here is for any negotiations over opinions to go on in parallel with the drafting of the documents, which allows time for issues to be resolved. Don’t let these negotiations start near the projected closing date, which is exactly what will happen if opinions are not addressed early.

(r) Arbitration. Arbitration clauses pass in and out of fashion, and are touted as cheaper alternatives to court litigation. Most of the cost savings in arbitration come from the reduced or absent discovery, which in court litigation is the most expensive part of 90% of all cases. In my experience arbitration produces a less predictable result, meaning verdicts which don’t naturally flow from the facts occur more often. I also believe the abbreviated process gives the arbitrators less confidence in their own conclusions than a judge usually has in a court case, creating a reluctance to select clear winners and losers. (It should be appreciated that our laws tend to force courts to determine clear winners and losers). So arbitrators more frequently just “split the baby”; and obviously this favors a contract breaching party. Based on this, my advice to clients is to decline arbitration clauses if they expect to be the party trying to enforce the hard contract terms in a business dispute.

II. Conclusion:

Legal transactions require owner’s management to be efficient like any other part of a business operation. Selection of and reliance on an able transaction lawyer who works well with you is vital to an efficient closing process. Likewise, hewing to some simple rules and procedures that are proven over time can save time, legal fees, and wear and tear on the parties.

Healthcare LawyerDavid Parker is the managing member of Liles Parker in our Washington, D.C. office. David handles corporate finance, structuring and negotiating secured debt and loans, corporate governance and compliance, and business transactions. If you are interested in buying or selling a business, or raising or lending capital, call David for a free consultation today at 1 (800) 475-1906.

Guide to Efficient Business Transactions: Part II

(June 24, 2012): How a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize cost and risk and maximize efficiency – Part II of III.  Click here for Part I. Check back soon for the third installments.

I. Precepts and Procedures.

(a) Choose an Attorney With Whom You are Comfortable. Obviously your transaction counsel must have a thorough working knowledge of the legal subject matter of your transaction, and sound work habits, so no discussion is needed  on that. Instead, I mention that you should employ only attorneys you yourself are personally comfortable with.

Efficient Business TransactionsYour comfort should be driven by your perception of the attorney’s loyalty, the sense he or she is looking out not just for the legal interests of the client entity, but for your personal interests in the context of your organization. In my experience, it is hard to protect the first without looking after the second. It should be driven by an ease of communication between you, which should explain itself. It should involve knowing you share a common understanding about  priorities in your business & his or her law practice. This is difficult to describe clearly, and can take time to develop, but comes down to trust that, in looking at any set of facts, each will know instinctively what is important to the other.

The working relationship between a business person and his or her transaction lawyer should amount to a comfortable bond. This relationship aspect is at least as important as technical skills, and without both it will be hard for either of you to work efficiently.

(b) Address Cultural Differences before you Start a Deal. This Guide is pitched to transactions where both principals are people involved in commerce in English-speaking countries. Personally I have observed a common business culture to exist in the United States, Canada, England, India and Australia, such that business people from such countries can usually interact effectively with each other. I expect the same is true in all Common-law countries. Outside those areas, however, real cultural differences exist in business practices, in addition to any language barrier. It is outside the scope of this Guide to advise about specific cultural differences. Suffice it to say that before negotiating even the first term, a prudent person contemplating a transnational deal where cultural norms vary widely needs to secure not only attorneys knowledgeable about laws in all relevant jurisdictions, but also business-level advice for  the transaction from someone experienced in the foreign culture.

(c) Start with a Letter of Intent. Go from the General to the Particular.  On occasion I have had transaction clients say, “To save money and time, we are skipping the LOI and going straight to definitive documents.” Nothing is more counter-productive. Spend the time needed to draft and sign a letter of intent before anything else. Once deal terms are nailed down in principal, it is vastly easier to reach agreement on particulars. More detail is better than less. In my view it is less important whether the LOI is binding or non-binding, as long as both parties sign it. There is real value in both parties signing an LOI, even if it isn’t legally binding. In my experience a party may walk away from a deal with a non-binding LOI, but if they do proceed with it, they find it hard to go back on the terms in the letter.

(d) Establish a Closing Timetable, but Be Reasonable. Generally one or both parties to a transaction have hard business reasons why it must be concluded by a particular date, but even if this isn’t the case, your Letter of Intent should set the expected date for closing, and possibly for intermediate steps like completion of due diligence. Overly long closing processes create outsized legal bills, but so do unrealistically short ones. An experienced transaction lawyer will know what is reasonable. Expect all dates to slip, of course, so allow some margin of time. Once document drafting and negotiation starts, it should continue until completed and the documents are signed. When lawyers halt their drafting work for over about one week, time is inevitably required to get them back up to speed.

(e) Engage All Professionals Early; Get All Their Fingerprints on the Deal. At or before the LOI stage, identify what legal and other professionals will be needed to close the transaction, and engage all of them up front, not just your transaction counsel. For instance, most M&A transactions call for advice from a tax accountant or lawyer, whom you should consult before agreeing to any transaction structure. If the transaction will involve retirement fund issues, for example, engage ERISA counsel early on. Other specialist disciplines must be handled similarly. At early stages of the transaction, each specialist needs to do only enough work to advise you on the decisions required at that point. This need not be an invitation to heavy billing. Competent specialists will know how to monitor early transaction stages with minimal expenditure of time, while alerting you to issues which affect your LOI or other early process; and they should give you clear assurances on this point before their engagement. If the transaction fails early-on, these bills should not be burdensome. The aim here is to avoid having to re-do steps in the transaction process because of issues you knew about all along but failed to address early enough. The biggest inefficiency you can avoid is the drafting and negotiation of the same document multiple times.

(f) The Other Party Should Engage his Professionals in Synch with You. Get their Fingerprints on the Deal Too. Especially in cases where there is no binding agreement until definitive documents are signed, you will be at a disadvantage if the other party to your transaction postpones hiring his professionals while you move ahead with yours. What often happens in such a case is the other side’s attorney or other professional steps into the transaction after you have spent money getting documents drafted, and reveals issues which make the terms as drafted impossible for his client. You are forced to repeat significant drafting and other steps. If the other party insists on delaying the introduction of his professionals, it is generally a sign he is uncommitted to your deal, so be warned.

(g) One Lawyer as Quarterback for All Attorneys When legal specialists are needed in a deal, they should report their advice and counsel directly to you, but their work should be scheduled and coordinated through your transaction counsel. They should keep him apprised of their progress and particularly any problems or delays they encounter; and in most cases your transaction counsel, who has full understanding of all aspects of your deal, will be able to help you evaluate a specialist’s advice, and make needed decisions based on it. 

(h) Use Courtesy and Politeness Whenever Possible. Make sure Your Team Does Likewise. While not all practitioners agree on this point, I find that a party is best served by consistent politeness and courtesy with their counterparts except in the most extreme circumstances, and cloaking their adversarial emotions as much as possible. While it can be argued that each party will use every advantage available to forward their own monetary interests in any transaction, whether or not they feel personal animus against the other, my experience is otherwise. A transaction is never entirely a zero sum game, and pleasant dealings with the opposite party usually pay off. Transaction professionals (especially younger ones) may need reminding on this point.

(i) Match yourself with a Bargaining Partner on or near your Level of Seniority.  Avoid Negotiating with a non Decision-maker. If you are the principal on your side of a transaction, and you bargain with someone lacking authority to make decisions on the other side, the conversation becomes a downward ratchet for you. You can make a concession which grants the other side a victory, finally and irrevocably, but the other side can’t. The best you can get from him or her is “I’ll go back to my Principal and see if they agree.” The absent principal isn’t psychologically involved in the concessions you are making, and seldom agrees to his side’s concession.

(j) Don’t Meet Alone with the other Side’s Professionals. By the same token, avoid placing yourself in a position to be lectured to by the other side’s attorney or other professionals, without your professionals being present. When this occurs the opposing professionals tend to describe the facts under discussion, and also the law, in ways subtly or not so subtly less favorable to you than they truly are. If your professionals are present, they will promptly object, or the other side won’t try this in the first place. Don’t let the other side play with your head in this way.

II. Final Comments:

Check back soon for Part III, and be sure to check out the rest of David Parker’s articles here.

Healthcare LawyerDavid Parker is the managing member of Liles Parker in our Washington, D.C. office. David handles corporate finance, structuring and negotiating secured debt and loans, corporate governance and compliance, and business transactions. If you are interested in buying or selling a business, or raising or lending capital, call David for a free consultation today at 1 (800) 475-1906.

Guide to Efficient Business Transactions: Part I

(June 18, 2012):  How a business person can manage attorneys and other professionals in the legal process of his business transactions, to minimize cost and risk and maximize efficiency? Let’s look at a few these issues below.

I. Goal of this Guide; Goals of Your Business Transactions.

Making Business Transactions Happen

This Guide is written for those handling important business transactions, who will need to engage and direct one or more attorneys and other professionals in the process. It will also be useful for a junior person in a business who expects to have responsibilities in legal transactions. The goal of course in any legal transaction is to get the deal closed at minimum cost, not just in money and time, but also in psychic energy, goodwill and risk.

The desire to save money and time are obvious; but a business person needs to focus his or her mental energy (a very finite resource) on many tasks and problems, and so should also manage business transactions to avoid over-sized drains on themselves.

Additionally, businesses depend on the goodwill of many constituents. In a transaction, they need principally the goodwill of the other transaction party. But they need the goodwill also of any banker or finance source, landlord and government regulator too. Customers’ and employees’ goodwill are always critical. Business transactions have potential to alienate any or all of these key players in your business life, and need to be handled with a view to avoiding unnecessary stress and inconvenience on them.

Attorneys and other business transaction professionals charge by the hour, so managing your deal so it can close in less time is the obvious way to save money. But if attorneys’ work can be done in an orderly sequence employing some simple rules, they will inevitably be more thorough in their work, communicate their advice to you better, strengthen your bargaining position with the other parties, and avoid your having to accept adverse deal terms. The result is that you and your business bear less risk from the transaction, meaning there is a reduced probability that you or your business will lose money after the deal closes.

Management of an orderly and predictable legal process in a closing also reduces the irritation inflicted on others involved. It will head-off conflicts with the other transaction party, with whom in many cases you will be having business dealings for a substantial time to come. It also lets you obtain the cooperation needed from other players with minimum fuss and bother.

This Guide sets out a few key considerations, and some simple steps to take (or avoid), in managing the legal closing process of a transaction to achieve these goals. We will also try to demystify the closing process of business transactions as well.

II. Introduction to Business Transactions.

(a) Parts of the Deal Document and their Function. Most business transactions of significant size are governed by a set of transaction or “deal” documents consisting of multiple documents which each perform a narrow function, plus an “umbrella” agreement which governs the entire transaction and ties the other documents together. In an acquisition, for instance, the umbrella document will be the Asset Purchase Agreement, Stock Purchase Agreement or maybe Agreement and Plan of Merger. In a bank loan it is usually a Loan Agreement. Normally 50% or more of the legal costs of a closing are spent on drafting and negotiating this “umbrella” agreement, so most of this Guide should be understood as How to Negotiate, Draft and Consummate Umbrella Agreements Efficiently.

Umbrella agreements necessarily address the same matters, and so tend to be organized in a predictable pattern, including:

Recitals. Umbrella agreements normally begin with recitals or Whereas clauses, which explain the background and circumstances of the business transaction, and say Who we are and how we’ve come to be signing this document. On a 30,000 foot level they should explain what each party hopes to get out of the deal. While the rest of the agreement is written for the parties, recitals are addressed to a stranger coming onto the transaction cold. Any lawyer who has found himself in court trying to explain to a judge and jury why some particular wording in a contract was a vital part of his client’s bargain can attest to the importance of recitals. Nuances and circumstances that are obvious during a business transaction are often very unobvious years later when an agreement gets enforced. Without a clear understanding of these things, however, a trier of fact will inevitably misunderstand the significance of many terms even in a simple deal. Recitals are the normal way to address this.

Definitions. One section contains definitions of words used repeatedly in the agreement. Often a word or term will become a shorthand expression for a complex process or concept, and can therefore control major deal terms. Definitions are always the focus of some negotiations.

Description of the Transaction Itself. The heart of the agreement describes the actual deal, such as exactly what is being bought and sold, or what moneys are being loaned or invested, and exactly what the money-provider is giving for it, and when. Some of this may require listing in attachments or “schedules” to prevent the document from getting too long.

What each Party says to be True. These are the representations and warranties each party makes to the other. Many facts will be un-knowable or difficult to discern to the party to whom they are important. So the other party, if he has a clearer view of the subject, will state what the facts are and agree that the first party can rely on them. The seller, the borrower or the securities issuer in a transaction (whichever is involved), will generally make more of these statements than the money-providing party because of the former’s greater knowledge of the business in question.

What has to Happen First. In most cases certain steps must be taken as preparation before business transactions can close, such as governmental or other third-party consents. Often, both parties have their own list of Conditions Precedent which are written as tasks the other side (or less often, themselves) need to complete before the party is bound to go forward with the deal.

Things the Parties agree to Do or Avoid Before, During & After the Closing. These covenants may address things as diverse as operation of the subject business, tax filings to be made, or handling of an important side-matter.

Risk-transferring. Each party normally agrees to take on himself certain risks that circumstances otherwise place on the other side, meaning “If X bad event occurs, I will  pay for it.”  This Indemnity section is the most technical writing in the document.  In most cases, there are dollar or other limits on how much the indemnifer can be asked to pay, and time limits after which he cannot be asked. Most significantly, this is the teeth to the representations and warranties; and like reps and warranties, this section is more likely to be useful to the money-providing party than to the seller, borrower or securities issuer.

Other Things. The rest of the umbrella agreement is supporting text to the above, such as  descriptions of where and how the closing will be conducted, and agreement on what jurisdiction’s laws and/or courts will govern if there is a dispute.

III. History of Business Transaction Documents:

It is an open secret that business transactions lawyers spend their lives plagiarizing from each other, and few if any transaction documents are ever drafted from scratch. All of us maintain sets of document templates and copies from prior deals, which we mine in our drafting work. The document bank of my own law firm is intricately divided into myriad subjects for easy reference, and runs to over a thousand documents. An experience that all business transactions lawyers share is reading a document drafted by another firm, seeing text that makes one say “Hey, that’s good language”, and then grafting the improved text into one or more of your own model documents.

There is a powerful reason for these practices, and our clients are the beneficiaries of them. You see, 99% of the substantive terms in business transaction documents were initially drafted, whether recently or in some predecessor agreement in the dim mists of history, to address an event that caused a lawyer’s client to lose money. My own documents contain many provisions I added or rephrased over the years after seeing business deals go sour.

Check back soon for Parts II and III.

Healthcare LawyerDavid Parker is the managing member of Liles Parker in our Washington, D.C. office. David handles corporate finance, structuring and negotiating secured debt and loans, corporate governance and compliance, and business transactions. If you are interested in buying or selling a business, or raising or lending capital, call David for a free consultation today at 1-800-475-1906

Non-Disclosure Agreement – Checklist for the Recipient of Confidential Info

Non-Disclosure Agreement.(April 12, 2012): You are considering a business transaction. The other party will be disclosing confidential information to you and asks that you sign its “standard form” Non-Disclosure Agreement.   Before signing a Non-Disclosure Agreement, you need to carefully review whether it is in your best interests to enter into such a document.  Here is a list of questions you should consider when reviewing a proposed Non-Disclosure Agreement.  The list has been compiled from the perspective of the Recipient of the confidential information.  Keep in mind that a “standard form” Non-Disclosure Agreement is usually slanted to the benefit of the disclosing party.  Non-Disclosure Agreements can come back to haunt the Recipient and should be carefully reviewed.  For best results, ask your counsel to review the Non-Disclosure Agreement as well!

  • How is confidential information defined? The Recipient should seek a narrow definition and one that is precise.
  • Does the agreement contain standard exceptions to what constitutes confidential information?
  • The Non-Disclosure Agreement should have a stated term (e.g., one year).
  • Does the agreement contain non-compete provisions and are they appropriate?
  • Does the agreement contain non-solicitation provisions and are they appropriate?
  • Is the agreement mutual where appropriate?
  • Consider whether the agreement impairs, or could impair, the conduct of your current business now or in the future.

If the Non-Disclosure Agreement has a vague definition of confidential information, no exceptions to what is considered confidential, no termination date and broad non-compete and non-solicitation provisions … let the buyer beware and review the Non-Disclosure Agreement especially carefully. Be prepared to further negotiate the terms of the Non-Disclosure Agreement.  As you negotiate the Non-Disclosure Agreement, ask yourself (or do) the following:

  • Can the confidential information be defined to include only written materials that are marked “confidential”?
  • Does the definition of confidential information  specifically reference only proprietary, non-public information?
  • Conversely, does the definition of confidential information exclude (1) information that is or becomes generally known to the public, (2) information in your possession before or after the date of the Non-Disclosure Agreement that is not subject to a confidentiality restriction, and (3) information that is independently developed by you?
  • Does the Non-Disclosure Agreement describe specifically and precisely the nature of the confidential information to be disclosed?
  • Keep records of what confidential information is actually received.
  • Take steps to insure your employees and representatives are aware of and comply with the Non-Disclosure Agreement.
  • The agreement should allow the recipient to disclose information as may be required in a legal proceeding or as required by applicable law or regulation.
  • Does the Non-Disclosure Agreement contain a term and/or termination provision that is reasonable and appropriate?  What is the “economic life” of the confidential information?
  • If you are to receive material, non-public information from a company whose securities are publicly traded, be aware of and comply with applicable “insider trading” regulations.
  • Be aware that the agreement will likely prohibit disclosure and use of the confidential information other than for the stated business purpose.
  • Does the agreement include a “non-compete”?  Is a non-compete appropriate for your business transaction?  Is it overly broad, such as by prohibiting contacts with “all customers” or “prospects”?
  • Within the definition of confidential information, check if the agreement includes items or work product that are derived from the confidential information – make sure the “derivative work” provision is not overly broad.
  • A provision providing for specific enforcement and injunctive relief is commonplace in an Non-Disclosure Agreement; any provision for incidental or consequential damages should be carefully reviewed.
  • Does the Non-Disclosure Agreement include a “non-solicitation of employees” provision?  Is this appropriate given the nature of the business transaction being considered?  Does the non-solicitation contain carve outs for general advertisements for employment or a situation where the employee initiates the conversation regarding employment?
  • Should the agreement be “mutual” in nature – i.e., should your counterparty be making agreements for your benefit as to confidential information, non-competition, or non-solicitation?  Depending of the business transaction being considered, perhaps the agreement should be a two-way street.

Over the years we have seen examples of Non-Disclosure Agreements that are over-reaching and have caused a Recipient unnecessary complication after the fact.  In summary, when signing an Non-Disclosure Agreement as a Recipient, carefully review the Non-Disclosure Agreement as a contract that may be important not only to the disclosing party, but to your current and future business as well.

Andy Lynch has extensive experience representing corporate entities and reviewing non-disclosure agreements.

Andy Lynch has significant experience in reviewing Non-Disclosure Agreements and negotiating business transactions. In addition, Andy is skilled in advising clients on both sides of a deal about the potential risks and consequences of the purchase or sale of a business. Andy can also help with corporate compliance and governance. Andy can be reached at (202) 298-8750.