A lesson from the recently reported Yahoo! sale process: carefully review and negotiate your NDAs!  As Yahoo! illustrates, confidentiality agreements can reach well beyond mere confidentiality and can affect not only the process but the potential outcome of a sale.

Confidentiality agreements, as we all know, are the life blood of private equity and, generally, M&A transactions.  In a typical NDA, the recipient agrees to keep information confidential and to limit its use to the transaction under consideration.  However, not infrequently, the disclosing party will include additional restrictions on the recipient which go well beyond confidentiality.  Common examples include non-circumvention (e.g., with respect to a particular target or subject), non-solicitation of employees, and no contact with the acquisition target (or borrower, if the transaction involves debt) as well as its customers, suppliers, vendors, etc.

These restrictive provisions are designed to protect the legitimate business interests of the target company by preventing, for instance, damaging rumors and employee and customer defections.  They may also serve to protect the interests of the broker or introducing party with respect to a particular opportunity. Occasionally, however, the disclosing party may seek to include in the NDA a provision which is primarily designed to influence the sale process.  As has been widely reported, Yahoo! included just such a provision—no “cross talk” as it has been described—into the NDAs circulated to potential private equity bidders.  

As reported, this no cross-talk provision precludes the potential bidders from speaking to each other regarding the potential transaction (presumably, whether or not confidential information is disclosed in the course of such conversations).  What is Yahoo!’s possible motivation for including such a provision in the NDA?  It is, almost certainly, a business consideration – the desire to influence the bidding process and, indeed, the likely outcome of the sale.  Given Yahoo!’s market capitalization of $20 billion, if the bidders are not able to discuss potential co-investment agreements, it makes it much less likely that any private equity bidder would be able to make an offer for 100% of the equity.  Not surprisingly, many potential private equity bidders balked at this restriction.  The one private equity sponsor who has reportedly agreed to this restriction in the NDA is TPG Capital which, as reported, is specifically interested in a minority stake.

From our perspective, as buy-side counsel, we strongly encourage our private equity and hedge fund clients to review and negotiate all NDAs, whether in M&A, private equity, distressed debt, real estate or other contexts.  As this case amply illustrates, the restrictions contained in many confidentiality agreements go well beyond confidentiality and may significantly impact one’s ability to evaluate and consummate a potential transaction (and, indeed, influence what kind of transaction or bidder is likely to succeed).