I started reveiwing confidentiality agreements (a.k. non-disclosure agreements or NDAs) in 2008, as a legal intern at Goldman Sachs, primarily working in the private equity industry. In the subsequent 15 years, I’ve reviewed over 10,000 NDAs and become an NDA specialist, representing both buyers and sellers (though never in the same transaction). As such, I’ve been able to identify some of the most frequent mistakes made in NDA negotiations.

In the heat of negotiation – especially when there are dozens, or perhaps hundreds, of NDAs to process in a short time period – it’s easy to overlook certain points. Thus it’s critical to have a plan to identify and rectify such errors before each NDA is finalized. Thus, without further ado, here are the five most common mistakes I see in NDAs from a “buy-side” perspective (i.e. when I’m representing a potential buyer).

1. Omitting the term. When you are signing an NDA, that imposes legal obligations on you and that means potential liability for so long as those obligations are valid. Even if you have no intention of violating the confidentiality obligations, accepting perpetual obligations – and thus potentially perpetual potential liabilities – is never a good idea.
2. Including “affiliates” in the definition of the Company. Another common mistake is allowing the definition of the “Company” that is protected by the NDA to include all of its subsidiaries and affiliates. By doing so, you broaden the scope of your obligations (and corresponding liabilities) from a single entity to multiple entities. Not only does that increase the chances of a foot-fault, it flows through to other obligations besides confidentiality (e.g. non-solicitation covenants) and also limits your options down the road if the transaction doesn’t go through to completion.
3. Accepting “detrimental use” clauses. Many NDAs state that you cannot use the Company’s confidential information for any purpose that is detrimental to the Company. Let’s say, however, that you discover some information that causes you to revise your estimate of the Company’s value downward. That would be detrimental to the Company, whose objective is to obtain the highest possible sale price.
4. Not limiting the definition of “Representatives”. Usually, PE firms evaluate transactions internally at the first turn; then if there is sufficient interest in moving forward, they turn to outside advisors or potential financing sources. These third parties are usually referred to as “Representatives”, though some NDAs may use a different term. The buyer generally has to accept responsibility for the actions of its Representatives, so if a banker or consultant of a potential buyer happens to leak the details of a transaction, the buyer would be on the hook for the damages resulting from the breach by its Representative. However, many third party representatives can represent multiple buyers in the same transaction, with internal deal teams walled off from one another. What happens if a deal team that’s not working for you spills the beans? Are you on the hook even though the breaching party was representing another buyer? Unless you carefully limited the definition of Representatives, the answer might be yes. That’s why your “Representatives” should only include those persons that receive confidential information from you.
5. Binding Representatives to non-solicitation covenants. Although confidentiality and use restrictions are the most common covenants in an NDA, there are other restrictive covenants that frequently show up as well, such as non-solicitation and no-contact covenants. The non-solicitation covenant is meant to keep buyers from poaching the Company’s employees before the transaction can be finalized. Since much of any company’s value lies in its the expertise of its top personnel, protecting these employees is often as much a priority as protecting confidential information. Many buy-side companies will make the mistake of accepting the non-solicit covenant not only for themselves, but on behalf of their Representatives – meaning any law firm, consultant or financing source that receives confidential information will automatically be bound by the non-solicit. That can be a deal-breaker.