The Institutional Limited Partners Association has released a model non-disclosure agreement in the hopes that an often time-consuming process can be significantly streamlined for both GPs and LPs.
The short document was prepared by ILPA’s Model NDA working group, chaired by Ed Klees, partner at the law firm Hirschler Fleischer in Charlottesville, Virginia. The working group was formed over the summer, and the model NDA was released for public comment by both GPs and LPs over the autumn before being finalized in December.
“Most people see NDAs as a check-the-box exercise,” Chris Hayes, senior policy counsel at ILPA, told Private Funds CFO. “But what we’ve seen through the process is that GPs and LPs have very diverse and different views about how they approach it.”
Klees added that, when working as in-house counsel at the University of Virginia Investment Management Co, he found that NDAs took up an inordinate amount of time. “The amount of time put in and the urgency of NDAs was often out of whack with the benefits,” he said.
There are few general points of tension between GPs and LPs on NDAs, as there are for limited partnership agreements, standardized versions of which ILPA has released in recent years.
But among the chief points of debate are usually the time period by which LPs are bound to the NDA.
“If you’re an institutional investor, you’re going to keep confidential information confidential, because you’re a market participant,” said Hayes, who added that some managers don’t even require NDAs of well-known investors. “So how long do you really need to retain the documents and be thinking about this after you’ve signed?”
“Naturally managers want a really long term, and, naturally, recipients do not,” Klees said. To that end, ILPA has left the term of the agreement blank, only suggesting a one-year term, “allowing people to use the term that works best for them,” Hayes said.
The model LPA also addressed the issue of what constitutes confidential information by treating all information communicated by a manager as such, with the exception of information that is or becomes generally public or that is already in possession of a signatory before the effective date of the NDA.
ILPA initially drafted the document as a two-way NDA to solve for LPs’ sensitivity about information disclosed to managers they may hire, but the organization backed away from the idea, though may produce one at a later date, Hayes said. “As a mutual NDA, our document wasn’t robust enough,” he noted.
The final model NDA has removed a requirement that all information from a manager be in writing, as many LPs don’t want to bear the risk of using verbally communicated confidential information. “My peers on the committee convinced me that we should let that go,” Klees said, “since the burden of proof would be on the GPs to show that they did in fact verbally communicate the information to an LP.”
Other issues ILPA has attempted to solve include potential discrepancies between NDAs and data room click-through agreements. In such instances, Klees said, the model NDA would govern. And the document attempts to solve any concerns LPs have about obtaining materially non-public information, a major focus of SEC enforcements in recent years.
The NDA stipulates that a manager “will not knowingly furnish to [the recipient] any material non-public information relating to any issuer of publicly-traded securities, whether respect to the manager’s portfolio or otherwise.”
There is no legal definition of MNPI, it’s only defined retrospectively in court actions, Klees added. “We want to be very clear that we’re not asking managers to conduct legal diligence to determine whether they might be providing MNPI to LPs,” he said, adding that managers should focus on situations where they already know the information is MNPI or have decided to treat it as such otherwise.
Klees hopes the inclusion of the clause will make the model NDA useful to a larger swath of the private markets, including hedge funds, which more typically obtain MNPI in the course of their investment activities.
And ILPA has attempted to bring the NDA “into the 21st century,” Klees said, by replacing often-used legacy wording referring to physical documents with references to “information.”
ILPA is hopeful that managers will see the document as a “one-stop shop” for their NDAs. “We’re hopeful that a good number of market participants will adopt this as a template,” said Hayes, who noted ILPA had “great engagement” from the GP community. Klees added that the document should “reduce the volume and burden on everyone.”
“People can adopt it, or adopt and modify it,” he said. “It should reduce the points that require negotiation. We thought this could be low-hanging fruit.”