By Spencer Achiu – December 2023
In the fast-paced business world and especially as you get involved in mergers and acquisitions, Non-Disclosure Agreements (NDAs) are as common as handshakes. They’re the invisible fences that protect your company’s secret sauce—be it your financials, customer lists, or future strategies. But what happens when a deal goes south, and lawyers get involved? Can you still demand the return or destruction of your confidential information? Let’s delve into a few critical complexities of NDAs when litigation is in the air.
The NDA in Mergers and Acquisitions
Imagine you’re selling your company. You open the kimono, revealing everything from your financial records to your customer lists to potential buyers. To protect yourself, you have the buyer sign an NDA. If the deal closes, everyone is happy, and the NDA becomes a non-issue. But what if the deal falls apart?
In such cases, it’s natural for you, the seller, to ask the buyer to return or destroy all confidential information. After all, why should they keep it? But here’s where it gets tricky. If the deal’s collapse leads to legal threats, the buyer might argue they need to keep that information for their defense.
When Litigation Changes the Game
Sometimes, negotiations don’t just break down; they crash and burn, leading to a legal standoff. Accusations may fly, from claims of NDA breaches to other foul play. In this tense environment, the buyer’s legal team will likely argue that they must keep the seller’s confidential information as evidence. If things escalate all the way to formal legal action, this evidence could be essential to mounting a proper defense.
The Legal Precedent
Many states recognize the essential legal duty of preserving evidence. Without evidence, it can be impossible to resolve many legal disputes—effectively undermining the justice system.
The Supreme Court of Nevada has held that “[t]he duty to preserve [evidence] springs from a variety of sources, including ethical obligations, statutes, regulations, and common law. Courts, including this court, that adhere to a common-law duty to preserve evidence have held that a party is required to preserve documents, tangible items, and information relevant to litigation that are reasonably calculated to lead to the discovery of admissible evidence. Thus, the prelitigation duty to preserve evidence is imposed once a party is on ‘notice’ of a potential legal claim.”[i]
Similarly, multiple federal courts have consistently held that there is not only a pre-litigation duty to preserve evidence, but an adverse inference against that party may be drawn if a party fails to do so. The 1st Circuit Court of Appeals stated, “[w]e have held with some regularity that a trier of fact may (but need not) infer from a party’s obliteration of a document relevant to a litigated issue that the contents of the document were unfavorable to that party.”[ii]
The 1st Circuit Court of Appeals further explained that this “permissive negative inference springs from the commonsense notion that a party who destroys a document (or permits it to be destroyed) when facing litigation, knowing the document’s relevancy to issues in the case, may well do so out of a sense that the document’s contents hurt his position.”[iii]
The Buyer’s Dilemma
So, if you’re the buyer and you’re facing legal threats, you’re in a bind. On one hand, you have an NDA telling you to return or destroy confidential information. On the other hand, you have a legal duty to preserve evidence for a potential lawsuit. What to do?
First, assess how real and imminent the threat of litigation is. If a lawsuit has already been filed, you’re in the hot seat and should likely keep the information. If the threat is more of a warning tied to the NDA, then it might not be substantial enough to justify keeping the materials. You probably want to try and work your way through the conflict and do your best to avoid litigation.
The Seller’s Strategy
If you’re considering legal action as a seller, think before you leap. Making potentially premature threats could make getting your confidential information back harder. A smarter move might be to first ask for the return or destruction of the information and then, if necessary, escalate to legal threats. This sequence allows you to control your confidential materials better and strengthens your legal position.
The Bottom Line
NDAs are powerful tools, but they aren’t bulletproof, especially when litigation enters the picture. State and federal courts alike have made clear the duty parties have to preserve evidence when they are on notice of pending litigation. Premature destruction of evidence not only weakens a party’s position to craft a legal defense, but it could also open the door for the other side to convince the court that it should assume you did so for bad reasons. Thus, it might be a better option to return confidential materials rather than destroy them, at least to avoid this type of negative inference.
Both buyers and sellers need to think strategically and consult legal counsel when deals fall apart and legal threats emerge. After all, in the high-stakes business world, it’s not just about making the right moves—it’s about knowing the game’s rules.
Expert Guidance Makes All the Difference
At Navvee, we are more than just attorneys; we are your strategic partners in achieving your business goals. Whether you are considering a stock or asset acquisition, or seeking a unique, legally sound, and cost-effective structuring solution, our team can provide invaluable insights. We help you navigate the regulatory landscape, understand potential tax implications—bringing in a certified tax advisor for the more complex tax issues—and manage the complexities of each type of transaction. We are committed to standing by you throughout the process, ensuring a smooth and successful deal.
Feel free to reach out to us at Navvee to discuss these questions and any other concerns you may have. We are here to guide you every step of the way.
About the author: Spencer Achiu is an attorney with Navvee Business Advisory and Law, which is headquartered in the Las Vegas, Nevada metropolitan area. Spencer obtained his law degree and Master of Business Administration from the University of Nevada, Las Vegas in December 2022. Spencer was admitted to the Nevada Bar in May 2023.
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Disclaimer: The information provided in this article is for general informational purposes only and should not be taken as legal advice. The contents of this article do not establish an attorney-client relationship, and the reader should not rely on the information provided herein for any legal matters. If the reader has specific legal questions or concerns regarding their situation, they should consult with a qualified attorney who can provide advice tailored to their specific circumstances. The author and publisher of this article do not assume any liability for actions taken or not taken based on the information contained in this article.
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[i] Bass-Davis v. Davis, 134 P.3d 103 (2006).
[ii] Testa v. Wal-Mart Stores, Inc., 144 F. 3d 173, 177 (1998).
[iii] Testa v. Wal-Mart Stores, Inc., 144 F. 3d 173, 177 (1998).