Why would some lenders refuse to sign an NDA?

August 08, 2019

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Chicago, IL, United States

Dear SF Community, I have a company under an LOI and I have been reaching out to lenders to get term sheets. While most lenders are okay with signing an NDA, some lenders insist it is not necessary as they treat all deal-related information as confidential material anyway.

Is it "safe" for me to work with lenders without an NDA?

Why would some lenders refuse to sign an NDA?

Thank you for your time.

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Reply by a searcher
from University of Wisconsin in Chicago, IL, USA

NDAs are “silly”. They are difficult to enforce. So if you are trying to use someone else’s NDA form, the bank would need to waste time in getting it approved, logging it, quarantining information, reviewing laws for venues, and so on. But here is the crux: banks are reviewing thousands of loan opportunities- NDAs can be tricky (enforceability, liability, joint/severed from employees) because 1) employees and go and do their own thing (independently or work for another business) after being employed by the bank and could drag the original bank into the NDA breach by a rogue employee, 2) will they be precluded from evaluating other deals and could confidential information from one deal be used when evaluating another, and 3) other provisions such as non-solicits can be put into NDAs. A major bank doesn’t want to ever think about hiring limitations from operating level hires from potential clients. It would be burdensome and irrelevant.
If a bank is signing this, they are ignoring it, it will be filed and they don’t give a hoot about it. A bank that refuses is being thoughtful, candid, and honest and saying, “we aren’t signing it, because it is meaningless.” The bank will be reasonable and protect the information because their reputation matters.

Reply by a professional
from Emory University in Austin, TX, USA

I agree that the risk here is low because the bank already has to keep your information confidential. There are a few layers of protection for your business proprietary information. One is contract law, so if you sign an NDA, the counterparty agrees to keep your info confidential and not use it. Second is trade secret law. Trade secret law protects information that provides you an economic advantage but only if you take reasonable precautions to keep confidential. Courts have regularly ruled that the most critical of those reasonable precautions is that you systematically sign NDAs before disclosing that confidential information. If once in a while, confidential information is disclosed without an NDA, the risk is low you lose trade secret protection unless that counterparty makes the info publicly available. Another layer of protection are regulations that require information be kept confidential regardless of whether an NDA signed. As a lawyer, I can't disclose confidential info, NDA or no NDA. There are extensive bank regulations that govern when they can disclose it and it is unlikely a bank would agree to an NDA that contradicts those laws. There is no way to manage different layers of obligations individualized for each applicant.

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