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Advisors, Private Equity

Why We Created The Standard NDA

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The average generalist investor on Axial sources over 1,000 deals per year through Axial alone. Most investors review hundreds more through other channels. As part of our research into the non-disclosure agreement, or the NDA, in middle market transactions, we considered the average time it takes investors to receive, review, mark up, sign, scan, and return an NDA. Multiply the typical exchange process by hundreds of deals per year, the average deal-making organization is spending thousands of hours and dollars signing a contract, simply to get their hands on the right amount of detail to determine if deals are worth their time.

However costly the status quo, the NDA is critical. It provides necessary protection to business owners and defines the terms of engagement in a deal process. So, the solution to combat the expense of the existing process is not to eliminate it, but instead, to standardize it and digitize it. The time for change is now, as these challenges will only become more pronounced with more transactions occurring between parties who have never done business together as the middle market expands.

With this friction in mind, Axial set out to create a document deal professionals, business owners, and legal counsel across the middle market can all get behind. In the fall of 2014, we assembled an NDA task force, partnering our software engineers and product managers with  investors, advisors, lawyers, and business owners to craft a standardized contract.

In creating a Standard NDA, our goals were to help establish a common legal protocol that would govern the terms of engagement for all parties to a particular transaction, with all sides feeling protected, all sides saving time, and all sides empowered to move forward with the right safeguards in place.

Every deal is different, but the NDA doesn’t have to be.

Here are the essential elements of the Axial Standard NDA our members and our task force were most excited to include:

Including Representatives

In the Confidential Information clause, the NDA defines with whom confidential information may be disclosed, which is particularly important in M&A. Typically, financial sponsors will have a variety of employees, attorneys, accountants, consultants, financing sources, and other portfolio companies review the disclosed information. Ensuring these parties have access to the confidential information is critical for comfortable due diligence and analysis. This clause in the Standard NDA includes the Recipient’s or its affiliates’ employees, officers, directors, partners, shareholders, agents, attorneys, accountants, financing sources, or advisors as Representatives, to whom confidential information may be disclosed.

Required Disclosure

While an NDA is signed to prevent the disclosure of confidential information to third parties, such an event is occasionally unavoidable. Necessary exceptions to the NDA must apply when disclosure is mandated by administrative or legal proceedings. While compelled disclosure occurs infrequently, the clause helps protect both the discloser and the recipient in these difficult moments. The clause states that the recipient should only disclose that which is required and present a written notice to discloser if required to disclose any confidential information. This written notice allows the discloser to take appropriate action to ensure the confidential material stays confidential, and is not made publicly available during the legal proceedings.

12-Month Non-Solicitation

In the early stages of a deal, many business owners are concerned that news of the transaction will spill to employees and third parties. To prevent such information leaks, the NDA limits interaction with employees, especially in regards to solicitation or hiring. The Standard NDA clearly defines what constitute solicitation: contacting with the purpose of hiring, soliciting the business of any client, customer or licensee of the disclosing party, or contacting the business owner and its affiliates outside of the normal course of business.

18-Month Expiration

An NDA with no termination date can leave investors legally vulnerable or limit their ability to make investments after the close of their due diligence process, which is why the Standard NDA provides an 18-month expiration clause, terminating the agreement 18 months out from the effective date.

With over 500 Standard NDAs signed online through Axial in the last 6 weeks, we are incredibly encouraged by the adoption to date. We’re ready to witness the impact the Standard NDA brings to firms who recapture their time, and lower the expense to review and exchange deals.

Click here to see the full Standard NDA.

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