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“Can I Share This?” NY Court Highlights Importance of Defining Representatives in Private Equity NDA

David J. Mongillo, Esq., dmongillo@tuckerlaw.com, (412) 594-5598

A recent case highlights the importance of properly defining the representatives with whom confidential information can be shared in the context of a private equity non-disclosure agreement (NDA). 

Case Background

A party who technically violated an NDA by sharing confidential information with prospective financing sources was prohibited on summary judgment from pursuing claims that a counterparty breached the NDA by disclosing negotiating details to other bidders. Garda U.S.A., Inc. v. Sun Capital Partners, Inc., 2023 N.Y. Misc. LEXIS 3641 (N.Y. City., July 7, 2023).

Garda U.S.A., Inc. (Garda), a security services company, was negotiating the purchase of another security services company, SOS, from private equity firm Sun Capital Partners, Inc. (Sun), which held a controlling interest in SOS.

Garda claimed Sun improperly disclosed details of their negotiations to other buyers in violation of their NDA, and this disclosure allowed a competitor to outbid Garda for the purchase of SOS.  The Court held, regardless of whether Sun breached the NDA, Garda had no claim because Garda also breached the NDA by disclosing confidential information to potential financing sources not included as Garda’s representatives in the NDA. Although Sun was aware Garda was disclosing confidential information in violation of the NDA, and Sun did not object, the Court explained Sun never explicitly waived the confidentiality terms of the NDA. 

Mutual NDA Executed

As part of the negotiation, the parties executed a mutual NDA which included a list of representatives with whom Garda could share confidential information regarding SOS. The NDA also prohibited both Garda and Sun from telling any third parties that they were negotiating the purchase or from disclosing the “timing or status of the Transaction.”

As it was negotiating with Garda, Sun was also negotiating the sale of SOS with at least two of Garda’s competitors in the security services industry. During the course of the negotiations, Garda and SOS entered into a 21-day exclusivity agreement restricting SOS from negotiating the sale with any other parties and also containing confidentiality terms similar to those in the NDA.

Outcome of Negotiations

Sun and Garda did not consummate a deal within the 21-day exclusivity period, and soon afterward Sun entered into an agreement of sale with another security services company that outbid Garda. Garda filed a lawsuit alleging Sun disclosed the details of their negotiations to the winning bidder.

There was evidence that Sun did disclose details of the negotiations with Garda, which resulted in an increased bid from a third party (the eventual winning bidder). In particular, Sun disclosed to this third party that Garda had entered an exclusivity agreement with Sun, and that the third party would have to pay a “substantial premium” over its initial bid in order to beat Garda’s bid.  However, there was no evidence that Sun disclosed Garda’s exact purchase price.

Court Decision

The Court held since Sun did not disclose Garda’s purchase price, the third party outbid Garda “fair and square,” and Garda was not entitled to damages.

However, the Court explained, even if Sun did breach the NDA or the exclusivity agreement, Garda did not have a claim against Sun because Garda also breached the agreement by sharing confidential information with third parties not listed as representatives in the NDA.  Garda shared confidential information regarding SOS with Garda’s potential financing sources including lenders and a private equity firm with an ownership interest in Garda. The NDA did not permit Garda to share confidential information with these financing sources because they were not included as representatives in the NDA.

Garda pointed out Sun was aware Garda was sharing confidential information with Garda’s financing sources, and e-mails from Sun acknowledged they were aware of this. Garda argued that Sun therefore waived its objection to Garda’s sharing of this information. The Court disagreed, citing non-waiver language in the NDA and explaining that a waiver can only occur when there is an explicit statement of waiver.

For more information regarding NDAs, contact David Mongillo at (412) 594-5598 or at dmongillo@tuckerlaw.com. 

December 18, 2023

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