NDAs: plugging the compliance gaps

Non-disclosure agreements (NDAs) can present challenges to your firm’s compliance requirements and policies. Here are five essential tips on how to avoid NDA-related compliance headaches for your investment firm:

1. Get the party name right 

Issue: It is common to receive an NDA that addresses your entire fund group rather than the specific fund or management company that is looking at the potential transaction.

Tip: Narrowly define the party name to the specific party that is looking at the potential transaction. By doing so, you’ll avoid accidentally taking on liabilities for affiliated entities.

2. Properly define your representatives 

Issue: You need to share information with employees, advisors, attorneys, and financing sources without binding anyone that doesn’t receive the information.

Tip: List everyone you want to share information with but add a caveat that they will only be considered “Representatives” if they actually receive information.

3. Include a non-targeted disclosure carve-out 

Issue: You must be able to comply with information requests that are directed to you by the SEC, IRS, and other regulatory organizations.

Tip: Include language that allows for making non-targeted disclosures of confidential information in response to any such request without going through the exercise of expunging confidential information or triggering notice clauses.

4. Make sure you have carve-outs from any standstill 

Issue: Your firm and its employees may be unable to engage in certain investment or trading activities under an NDA’s standstill provisions.

Tip: You may have employees investing out of separate funds and executing different investment strategies. Due to the severe restrictions imposed by standstill provisions, only the appropriate entities should be bound by such provisions and the proper exceptions should be made for separate funds and investment strategies.

5. Have an out if you aren’t provided a company’s name 

Issue: Certain investment banks are notorious for sending out NDAs without the name of the target company. Since your firm may be restricted from evaluating investments in certain companies, this can be a big problem.

Tip: Include a clause that allows your firm a certain number of days following receipt of the company’s name to run internal checks and determine if you want to proceed with your evaluation of the potential transaction. To the extent you decide against moving forward, you should be released from all the terms of the NDA.

Troy Pospisil is the founder and chief executive of InCloudCounsel (ICC), which manages and processes high volume, repetitive legal documents for private equity firms and other enterprises.