Carried Interest

NDA Rant - part 2

I have already posted a long rant about the proliferation of unreasonable non-disclosure agreements.  Today I received a 22-page NDA, so I'm in a frenzy again (Mallesons and Allens are currently neck and neck contenders for the "most outrageous NDA" award).

These long documents are always 80% boilerplate.  When you strip away all the bullshit there are four or five core terms that every private equity investor should carefully consider before scrawling a signature.  Here are the ones I look for:

1.  Term:  insist on one, and the shorter the better. Anything longer than two years is unreasonable.

2.  Indemnity:  these stink, but if the vendor absolutely insists on receiving an indemnity then it should be tightly limited to direct losses suffered due to a breach of the agreement.

3.  Return or destroy:  preference for destroy since returning stacks of documents is an expensive nuisance.  Must be allowed to keep investment committee minutes, investment proposal papers and similar fund records.

4.  Vendor release:  probably being a bit anal here, but it's worth checking that any release regarding accuracy of information or duty of care by the vendor can't undermine future (critical) legal documents like a share sale agreement.

Non-Disclosure Agreements

This afternoon I'm having a squabble with a very aggressive lawyer over the terms contained in his client's non-disclosure agreement.  NDAs have become the bane of my existence.

In my venture capital days, managing NDAs was simple--  we refused to sign them.  Like most VCs, we came across the same "unique" technology or concept too many times each year to risk signing up to a confidentiality agreement.  We also believed that any decent venture investment opportunity should be hard to replicate and able to withstand some sunlight. 

Private equity is a different game.  Deals come from global investment banks, blue chip corporations, law firms, accountants.  If you want the information memorandum, you've got to sign the NDA. 

The Australian Venture Capital Association's standard NDA is just three pages long.  And a few years ago most of the agreements floating around town were pretty innocuous.  But the lawyers have been having fun and a twenty-page NDA is now common.  Some of the terms (always defended with a wide-eyed "oh, but these are very standard") are just beauties. 

Today I'm fighting two battles:

• Indemnity:  Buried in the indemnity clause is a right for the information discloser to simply demand damages if they feel they've suffered a loss.  The burden would then be on us to prove the damages unfair or unreasonable and try to get our money back.  Come on!

• Term:  There's no term at all, no sunset.  In twenty years a confidentiality obligation would still be lurking in the file cabinet.

I hope we're not alone, that other private equity firms are pushing back on this stuff.