In the sale of a business, a Non-Disclosure Agreement (“NDA”) should provide sufficient protection of the confidential information of the seller. The NDA contains many different terms that can be negotiated. On May 30, 2023, we wrote a Deal Note® emphasizing the importance of sellers drafting an NDA with terms and conditions that are “close to market”. This Deal Note® will focus on one specific term in an NDA: the choice of law.
There are two key elements of the “Choice of Law”:
- Governing law – the legal framework that will be applied to interpret and enforce the contract.
- Jurisdiction – determines which court(s) will have the authority to hear disputes related to the contract under that governing law.
When a seller is in a high-business activity state such as NY, FL, etc., it is common to begin NDA law negotiations in that state. When a seller is in a less business active state, often a seller will present a nearby neutral state, for example, an NH located business would suggest NY.
A seller should try to keep the choice of law geographically close to where they are located as any disputes may result in them having to be physically present for litigation. Driving down the road from your house is much more pleasant than flying to another state and staying in a hotel.
A high business activity state is usually preferred because of the larger pool of legal expertise, more precedent and case law, specialized courts available, increased efficiency, and improved enforceability (especially when considering international potential buyers).
The NDA is the first contract between a buyer and a seller during the sale process. More negotiated contracts follow the NDA if the buyer is interested in the company. By agreeing to and executing a choice of law in the NDA, you set a precedent for future negotiations of the Letter of Intent and Purchase Agreement. Therefore, we recommend only agreeing to a choice of law that you would be comfortable with in the Purchase Agreement.
In addition to keeping these key considerations of choice of law in mind, we recommend retaining seasoned M&A legal counsel to consult you through NDA negotiations during a sale process.
As middle-market Aerospace and Defense (“A&D”) M&A Bankers, Alderman & Company does not serve as legal counsel and is not providing legal advice; this Deal Note® is provided for educational purposes only.
Have a great day.
Ryan Kirby
Vice President
