M&A Monday: Et tu Brute. Non-Circumvention in an Investor NDA

Overlook the Non-Circumvent With Investors at Your Peril

I represented an Indy Sponsor on a business acquisition a little while back. This sponsor is one of my favorite people (let’s call him, Jimmy). He left a high-paying job to pursue the dream of acquiring businesses. Jimmy located a business being sold by aging owners and submitted an LOI. It was accepted.

As we were negotiating the purchase agreement, the Sponsor reached out to a very well-known investor group. The principal of the group became a mentor and friend to the sponsor. Investor loved the deal and sent him a commitment letter. They had weekly check-ins. As we got closer to closing, the investor suddenly started souring on the deal. Investor said the deal was bad and Jimmy should terminate the LOI and walk. Jimmy was in a tough spot. An experienced investor and trusted mentor told him it was a bad deal.

He loved the deal, but was losing his main investor prior to closing.

Jimmy decided to walk from the deal.

Less than a week later, we heard the Investor submitted an LOI to acquire the business himself. A couple of weeks ago, the deal closed.

There are three painful lessons here:

1. Verify Reputation. Before engaging with investors, check with people who know the space. I have worked with many of the known investors in the Indy Sponsor and Searcher space and can steer clients to or away from certain groups. Usually, their reputation is well-known.

2. Match Seller NDA. Make sure your NDA with investors matches your NDA with Sellers.

A buyer will almost always sign an NDA with the seller (Seller NDA). Seller NDA usually restricts sharing information with a representative who is bound by the same confidentiality as the buyer. Thus, for a buyer to share information with an investor, that investor must sign an NDA and (usually) the NDA terms have to be as restrictive as the Seller NDA.

3. Non-Circumvent. Include a non-circumvent provision in your investor NDA. This is often overlooked or viewed as too… um… not nice.

The Investor NDA should always include a non-circumvent and non-solicit of employees/customers to prevent Jimmy’s tragedy. This will restrict investor from using the confidential information to pursue the business for their own benefit (if you agreed to a non-circumvent with the seller, you may have to have investors agree to this).

Investors can be resistant to this provision.

My response is, do you plan to use confidential information to circumvent us or solicit employees and customers? If, not, they shouldn’t have a problem agreeing. If, yes, find a new investor.

A fallback is that the non-circumvent goes away if sponsor abandons the deal (assuming compliance with Seller NDA).

The Enforceability Challenge. Legal provisions are only as good as their enforceability. NDA violations are hard to prove, costly, and often not worth pursuing. It is doubtful Jimmy would have sued even if he could have.

However, in my experience, most professionals will abide by agreements they sign. As one of my clients says, “locks are made for honest people.” Of course, some will breach a contract, but most will not.

If you promise not to rely on this or treat it as legal advice, here is my Investor NDA form (remember it should be customized for your deal): INVESTOR NDA - ALBRECHT FORM.