By Erwin Krasnow and Doug Ferber
Safeguarding your company’s confidential information is of utmost concern for just about every executive in the C-Suite.
That’s why it has become standard practice for sellers to require prospective buyers to sign a non-disclosure agreement (NDA) before sharing sensitive information about their stations.
Indeed, the first document produced and executed in a transaction involving the sale of a radio or television station is typically an NDA, sometimes referred to as a confidentiality agreement.
The core of an NDA are provisions that prohibit one party from wrongfully using or disclosing certain information provided by the other parry.
Why use an NDA? Here are some great reasons.
WHY USE AN NDA?
NDAs are legal documents designed to protect confidential information from being disclosed to a third party, or being used against the party disclosing the information. Having an NDA in place makes good business sense, because both the seller and the potential buyer have an interest in preserving the value of the business. As a business owner or CEO considering the sale of your station, you will need to consider how and when to use an NDA to protect your company.
Perhaps a private equity group has approached you to discuss the possibility of selling your company, even though your business may not be for sale at the present time. Or perhaps a competitor at an NAB Show spoke to you about forming a joint venture. It’s important that when these situations arise you have a basic understanding of NDAs, their key elements, and how to use them to protect yourself and your business. We recommend that you have an NDA ready for presentation to prospective buyers at the earliest stage of the transaction process.
ONE-WAY VS. MUTUAL NDAS
NDAs can typically be structured in one of two formats: A one-way NDA or a mutual NDA. In a one-way NDA, also known as a unilateral NDA, the receiving party of the confidential information is bound to protect such information. For example, if you have been approached by a private equity firm, you could require the execution of a one-way NDA. Such an agreement would protect any confidential information you disclose to the firm, but you would not be bound to secrecy if the firm disclosed confidential information to you. By contrast, if a competitor approached you at a trade show, you may be required to sign a mutual NDA, also known as a bilateral NDA. In this case, any confidential information that you disclose, and any confidential information that your competitor discloses, is protected by the NDA.
AN NDA CHECKLIST
NDAs are not “one size fits all” agreements. The specific terms that cover the scope of the NDA and the legal obligations of the parties will vary depending on the transaction. Here is a brief summary of some basic provisions that might be included:
Scope of Confidential Treatment.
An NDA should clearly define what is considered confidential information and what is not. Most NDAs list the types or categories of the confidential information to be protected. Some NDAs require the disclosing party to mark as “Confidential” those written materials that require protection.
Exclusions: The NDA should contain exclusions from the definition of confidential information whereby the party receiving the information has no duty to protect its confidentiality. Such exclusions might include information already in possession of the receiving party or information that is in the public domain. Another exclusion might permit disclosure of confidential information to the prospective buyer’s lawyers, accountants or employees who have a legitimate need to know the information. The NDA might also include a provision that the receiving party is responsible for any breach of the agreement by its representatives.
Term.
The term of the NDA specifies how long the confidential information will be protected. The term will depend on the nature of the transaction and market conditions. The length of the term is often a negotiated provision. While business owners want to protect their information as long as possible, buyers don’t want to be bound by an NDA for an indefinite or protracted period of time. A term of one to two years is not unusual.
Permitted Use: The NDA should provide that the confidential information is not to be used for any purpose other than what is set forth in the agreement, such as purchasing the assets of the station or exploring the possibility of a business relationship. Such a provision is designed to prevent the party to whom you disclose information from hiring any of your employees and from poaching your station’s advertisers.
Indemnification: The NDA should state that in the event of a breach, the breaching party agrees to indemnify the non-breaching party for attorneys’ fees or expenses that are necessary to enforce the terms of the agreement.
Duties on Termination: Some NDAs require that upon termination of the agreement, the receiving party shall deliver to the disclosing party all tangible copies of the disclosed information (including digital and hard copies) or to certify that all copies have been destroyed.
Remedies: The NDA should spell out the remedies that are available to the non-breaching party in the event that the confidential information is wrongfully used. Such remedies include monetary damages, liquidated damages and injunctive relief to prevent further disclosure and use of the information. The agreement might state that in the event of a breach, monetary damages might not be sufficient and that the parties agree that injunctive relief is proper.
Miscellaneous Provisions: Most NDAs include boilerplate provisions concerning such matters as what state’s law will apply to enforce the agreement and what court will have jurisdiction over an enforcement action. A standard provision in NDAs states that if one section of the agreement were to be found void, the remainder of the agreement survives and is enforceable.
BEYOND NDAs
In addition to having the recipients of confidential information sign an NDA, you might set up a non-business email address and use it for all communications with the prospective buyer. Documents for the prospective buyer might be prepared in an electronic file format, ideally in an on-line shared file location. The prospective buyer will need to access this information in a secure format. Also, consideration might be given to setting up an electronic or virtual data room (VDR) using a secured website that can only be accessed by a special password. The secured server enables the website to be protected against anyone other than those logging in with the correct usernames and passwords. See Diane Warren and Erwin Krasnow, “Maximizing the Use of Technology in Broadcast Transactions,” RBR + TVBR, October 6, 2012.
Benjamin Franklin, in Poor Richard’s Almanack, said that “three can keep a secret if two of them are dead.” There is no foolproof way of protecting confidential information, as witnessed during the past several weeks by the Trump White House. Nevertheless, because the leak of information about a possible sale of your company as well as your company’s proprietary information can cause irreparable damage, you would be well advised to use caution in selecting individuals with whom you do business and to take the steps outlined in this article to insure legal protection of your confidential information.
Erwin Krasnow, the co-chair of the Communications Group of Garvey Schubert Barer, is Washington counsel to the Media Financial Management Association, former General Counsel of the NAB, and a co-author of Profitably Buying and Selling Broadcast Stations. He has represented sellers and buyers of broadcasting, cable, tower and telecommunications properties in transactions totaling in excess of $21 billion. Erwin has been described as “a dean of the Washington communications bar” by the Legal Times; a “superlawyer of communications” by American Film magazine, and “the guru of communications law” by the Broadcast Cable Financial Journal.
Doug Ferber has been involved in broadcasting for over 30 years in capacities ranging from operations to financial consulting and ownership. He began his career as an entry-level sales trainee for Bonneville International Corp. in 1984. After important milestone assignments with Capital Cities/ABC and Interep National Radio Sales, Doug has brokered more than 50 transactions valued at over $400 million. He has been invited to speak on panels at industry trade functions on subjects such as company and industry values, the state of the capital markets, and the availability and cost of capital. His company, DEFcom Advisors LLC is a Media Financial Consultancy Company that was founded in 2009. The Firm is a member of FINRA and SIPC.
