Key NDA Terms in M&A Deal Processes: Non-Solicit, Standstill, Residuals, and Term
Updated: 2 minutes ago
The process NDA is the first contract in an M&A deal and often the least read. It governs every page the buyer sees, every person the buyer's team talks to, and in some cases whether the buyer can hire, compete, or make an offer later. The terms that draw the most attention are the definition and use restriction, the representatives clause, the non-solicit, the standstill, residuals, and term. This article walks through each with sample language, the case law that shows how courts read them, and the positions buyers and sellers usually take. For the narrower negotiation points on residuals and trade secrets, see NDA residuals, non-solicits, and standstills.
The definition and the use restriction
A seller-form definition usually captures "all information, in any form, furnished by or on behalf of the Company," plus notes and analyses prepared by the buyer that contain or reflect it. The standard exclusions are information that is or becomes public through no breach, was already in the recipient's possession without a duty of confidentiality, is received from a third party not known to be bound, or is independently developed without use of the confidential information. A buyer should insist on all four. A strategic buyer in the same industry should also make sure the "already in possession" exclusion does not require written records predating disclosure, which its business teams will not have.
The use restriction does more work than the definition:
"The Recipient shall use the Evaluation Material solely for the purpose of evaluating, negotiating, and consummating a possible negotiated transaction between the Recipient and the Company (the "Transaction") and for no other purpose."
Words like "negotiated" and "between" can decide a takeover fight. In Martin Marietta Materials, Inc. v. Vulcan Materials Co., 56 A.3d 1072 (Del. Ch. 2012), aff'd, 68 A.3d 1208 (Del. 2012), there was no express standstill, but the court held that a confidentiality agreement limiting use to a business combination "between" the parties barred use of the information to pursue a hostile bid, and enjoined the bidder's exchange offer and proxy contest for four months. A buyer that wants freedom to make an unsolicited offer later should strike "negotiated" and expect a standstill fight instead. A seller that cannot get a standstill should keep "negotiated" in the use clause.
Representatives, financing sources, and responsibility
A representatives clause defines who may see the information and who is liable for their mistakes:
"The Recipient may disclose Evaluation Material to its Representatives who need to know such information for the purpose of evaluating the Transaction and who are informed of its confidential nature; provided that the Recipient shall be responsible for any breach of this Agreement by its Representatives (other than any Representative that has entered into a separate confidentiality agreement with the Company with respect to the Transaction). "Representatives" shall not include any actual or potential source of debt or equity financing unless approved in writing by the Company, such approval not to be unreasonably withheld."
Notes on each piece:
The "need to know" standard is customary. Buyers sometimes add a sentence that the recipient's portfolio companies are not Representatives unless they actually receive information, which keeps a PE fund's 30 portfolio companies outside the non-solicit and the use restriction.
The responsibility sentence is where the buyer's real exposure sits. The carve-out for Representatives who sign their own joinder is the usual buyer ask, so the buyer is not the guarantor of its lender's conduct.
The financing-source sentence protects the seller from "lender lock-up," where a buyer ties up the only financing sources likely to support competing bids. Sellers in auctions commonly add an express prohibition on exclusive arrangements with financing sources. A buyer that needs a co-investor or a debt provider early should get approval mechanics written in now, so the NDA does not need an amendment two weeks before bids are due.
Privilege and the Texas allied litigant rule
Sellers sometimes put privileged material in the data room: litigation analyses, regulatory counsel memos, internal investigation reports. Buyers like to see them. In Texas, sharing them can waive privilege. Texas Rule of Evidence 503(b)(1)(C) protects communications with a lawyer representing another party "in a pending action" concerning a matter of common interest, and in In re XL Specialty Insurance Co., 373 S.W.3d 46 (Tex. 2012), the Supreme Court of Texas confirmed the allied litigant privilege requires a pending action and protects communications among lawyers and their representatives, not the parties directly. A transaction-focused "common interest" recital in the NDA does not create a pending action. The safer course for a Texas seller is to summarize the conclusions in a non-privileged form, limit access to outside counsel, or defer privileged material until after signing.
The employee non-solicit
A balanced clause:
"For a period of 12 months after the date of this Agreement, the Recipient shall not, and shall cause its controlled Affiliates acting on its behalf or at its direction not to, directly or indirectly solicit for employment or hire any officer or management-level employee of the Company with whom the Recipient had contact, or of whom the Recipient first became aware, in connection with its evaluation of the Transaction; provided that this Section shall not restrict (a) general solicitations, including through search firms, not specifically directed at Company employees, or the hiring of any person who responds to such a solicitation, (b) the hiring of any person whose employment with the Company ended at least six months before the commencement of employment discussions, or (c) the hiring of any person who contacts the Recipient on his or her own initiative without solicitation."
The pieces and the positions:
"Solicit or hire" is the seller's version. Buyers want "solicit" only, so a person who answers a job posting can be hired. Clause (a) does much of that work while keeping "hire" for targeted approaches.
"Contact, or first became aware" limits the covenant to people the process exposed. Sellers sometimes want all employees. Buyers with active portfolios should refuse that.
"Controlled Affiliates acting on its behalf or at its direction" keeps a fund's portfolio companies outside the covenant unless the fund steers them.
Texas law adds a question many forms ignore. Texas courts have treated employee and customer non-solicitation covenants as restraints analyzed under the Covenants Not to Compete Act. In Marsh USA Inc. v. Cook, 354 S.W.3d 764 (Tex. 2011), the court evaluated a non-solicitation covenant under Business and Commerce Code Section 15.50 and its "ancillary to or part of an otherwise enforceable agreement" requirement. A non-solicit in a stand-alone NDA between two companies is not a classic employment covenant, but a seller that wants to enforce it in Texas should be ready to show it protects a legitimate interest, such as the confidential employee information disclosed in the process, and is reasonable in time and scope. Twelve months, limited to people the buyer met, is far easier to defend than three years covering every employee.
Customer non-solicits and no-contact clauses
Customer non-solicits are rarer in process NDAs and should be resisted by any strategic buyer in the target's market, because ordinary competition cannot depend on forgetting customer names. The usual compromise is a no-contact clause:
"Without the prior written consent of the Company, the Recipient shall not initiate or maintain contact with any employee (other than those designated by the Company), customer, supplier, landlord, or lender of the Company regarding the Company or the Transaction, except for contacts in the ordinary course of business unrelated to the Transaction."
The ordinary-course exception is essential for competitors. Without it, a sales call to a shared customer is a breach.
Standstills
In a public company or a process where a buyer might go hostile, a standstill bars the buyer for a period from acquiring securities, launching a tender offer, soliciting proxies, or publicly proposing a deal without invitation. In private middle-market sales they appear less often, and many private processes run without one.
When a standstill is in the paper, the terms to read are duration, affiliate coverage, and fall-aways. A fall-away releases the buyer if the target signs a deal with someone else or a third party launches a tender offer. Public-company sellers should also be careful with "don't ask, don't waive" language, which bars a bidder from even privately asking for a waiver. In 2012 bench rulings, In re Complete Genomics, Inc. Shareholder Litigation, C.A. No. 7888-VCL (Del. Ch.), enjoined enforcement of such a provision, and In re Ancestry.com Inc. Shareholder Litigation, C.A. No. 7988-CS (Del. Ch.), held they are not per se invalid but must be used with care and disclosed. A common modern drafting fix is a sentence permitting confidential requests to the board for a waiver.
Residuals
A residuals clause lets the recipient's people use information retained in unaided memory. A narrow version:
"Nothing in this Agreement shall restrict the use by the Recipient's personnel of Residuals for any purpose, provided that this sentence shall not (a) grant any license under any patent, copyright, or trade secret of the Company, (b) permit disclosure of the source of any Residuals or of any Company financial, customer-specific, or personal information, or (c) apply to any information that a person intentionally memorizes for the purpose of retaining and subsequently using or disclosing it. "Residuals" means information in non-tangible form retained in the unaided memory of personnel who had access to Evaluation Material."
Sellers should accept residuals only from buyers with a real need, such as large strategics whose engineers or product teams will see the material, and should exclude trade secrets, pricing, customer-level data, and source code. Financial sponsors rarely need a residuals clause at all.
Term, return, and destruction
A two-track term is the cleanest: general confidentiality for a fixed period (two or three years in many private processes), and trade secrets for as long as they remain trade secrets under applicable law. A single short sunset that also covers trade secrets invites an argument, under the Texas Uniform Trade Secrets Act's requirement of reasonable measures to keep information secret, that the owner treated the information as having a limited life. The Texas statute is Chapter 134A of the Civil Practice and Remedies Code.
Return and destruction clauses should be performable. Require destruction of materials in active use with written certification, permit retention in automatic backups and as required by law or bona fide document retention policies, and keep the retained copies subject to confidentiality for as long as they exist.
Remedies and governing law
Most forms provide that money damages are inadequate and the discloser may seek an injunction without posting a bond. Courts decide injunctions under their own standards regardless, but the clause helps. Indemnity for NDA breaches is a seller-form overreach that buyers should strike, because contract damages already compensate. On governing law, a Texas-law NDA keeps the Section 15.50 analysis in play for the non-solicit. A Delaware-law NDA does not necessarily avoid Texas policy if the employees are in Texas: in DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Tex. 1990), the Supreme Court of Texas applied Texas law to a non-compete despite a Florida choice-of-law clause. Pick the law deliberately.
Where each side lands
Sellers want a broad definition, a "negotiated transaction" use restriction, responsibility for all Representatives, approval rights over financing sources, an 18 to 24 month solicit-or-hire covenant, a no-contact clause, a standstill where relevant, no residuals, and a long or indefinite term. Buyers want the four standard exclusions, joinders that end their responsibility, portfolio companies excluded, a 12-month solicit-only covenant with the standard carve-outs, an ordinary-course exception to no-contact, no standstill, residuals where they need them, and a two-year term.
A middle ground I see often: a 12-month solicit-or-hire covenant limited to management employees the buyer met, with general solicitation and six-month former-employee carve-outs, financing sources approved on request, no standstill in a private process, no residuals for sponsors, and a two-track term.
How I can help
I negotiate M&A process NDAs for buyers and sellers and run high-volume NDA programs from a consistent playbook. Office: 1921 Greenville Avenue, Suite 200, Dallas, TX 75206. See NDA review and private equity and M&A.
FAQ
Can a process NDA stop a buyer from making a hostile offer even without a standstill?
It can. In Martin Marietta, a use restriction limited to a transaction "between" the parties was read to bar use of the information for a hostile bid. If the buyer wants that freedom, the use clause has to give it.
Does a common interest clause in an NDA protect privileged data room documents in Texas?
Not reliably. The Texas allied litigant privilege requires a pending action, so sharing privileged material in an ordinary sale process risks waiver.
Should a private equity buyer ever accept a residuals prohibition?
Usually yes, because a sponsor's deal team rarely needs one, and conceding the point can buy concessions on the non-solicit.
Next step
When you are ready to dig into the documents, email info@robertsandwillie.com or call (469) 910-4017. Sending a message does not create an attorney-client relationship.
This article is for general information and is not legal advice. Cases, statutes, and rules are summarized for general discussion, and their application depends on the facts, contract language, and governing law of each transaction. Attorney Advertising. Roberts & Willie, PLLC, Dallas, Texas; Trenton Roberts, responsible attorney.
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