NDA in Medical M&A: Disclosure Scope, Leakage Risks, and Signing Timing

When considering an M&A for a medical institution, information management is extremely important. In particular, when disclosing your institution’s confidential information to a negotiation partner, signing a “Non-Disclosure Agreement (NDA)” is essential. However, there are many situations that require specialized knowledge, such as protecting patient information unique to medical M&A, setting appropriate disclosure scopes, and responding to potential leaks. This article directly addresses the questions that executives may have regarding the timing of signing an NDA in medical M&A, the scope of disclosed information, patient data protection, and the design of damage compensation clauses in case of leakage. By signing an appropriate NDA, you can proceed with M&A negotiations with peace of mind and aim for the sustainable development of your medical institution.

Reasons Why Signing an NDA is Essential in Medical M&A

In the M&A of medical institutions, not only financial information like sales and profits, but also long-cultivated medical know-how, unique treatment processes, and most importantly, a large amount of patient personal and medical information, which is highly confidential, will be disclosed. The improper leakage of this information to external parties or its acquisition by competitors can directly lead to a loss of credibility for the medical institution, not only causing the M&A negotiations themselves to collapse but also potentially having serious repercussions on future business operations.

An NDA serves as a legal shield to protect your institution’s information from such risks and to make the other party recognize the importance of information management. Furthermore, it also plays a role as a “defensive contract” that guarantees that disclosed information will not be leaked to third parties, even if the M&A negotiations are unsuccessful. Especially for medical institutions, protecting patient privacy is a social responsibility, and the strictness of their information management system can be a significant evaluation point for potential M&A partners.

Appropriate Timing and Process for Signing an NDA

The timing for signing an NDA in medical M&A can vary depending on the progress of negotiations, but it is generally considered in the following phases:

1. Initial Contact to Before Basic Agreement: In the initial stages, where the parties assess whether the other party is serious about the M&A and if basic terms align, detailed information disclosure is usually not yet performed. While an NDA may be signed at this stage, the scope of disclosure will be limited.
2. After Basic Agreement to Before Due Diligence Commencement: Once a Memorandum of Understanding (MOU) is signed and the basic terms and direction of the M&A are established, more detailed information disclosure (financial statements, treatment records, personnel information, overview of patient lists, etc.) begins. Signing a full-fledged NDA at this point is the most common and recommended approach.
3. During Due Diligence Period: During the period when experts such as lawyers, accountants, and tax advisors conduct detailed investigations (due diligence), more in-depth information (parts of detailed medical records, employee information, contract details, etc.) may be disclosed. Information is managed under the effect of the NDA during this period as well.

General Flow to NDA Signing

While a template for the NDA may be provided by the other party, it is crucial to carefully review its contents and request modifications if necessary to protect your institution’s information. Consultation with experts such as lawyers is strongly recommended.

Scope of Disclosed Information and Limitations to Include in the NDA

One of the most critical items in an NDA is the definition of “Confidential Information,” meaning clearly defining “what scope of information will be treated as confidential.” In medical M&A, the following types of information are typically included:

• Financial Information: Financial statements for the past several years, trial balances, loan information, fixed asset lists, etc.
• Treatment & Operational Information: Performance by specialty, patient number trends, average outpatient/inpatient charges, major medical equipment, treatment processes, electronic health record system information, pharmaceutical and supply procurement status, etc.
• Personnel Information: Staff composition of doctors, nurses, administrative staff, salary structures, employment regulations, executive information, etc.
• Patient Information: (See “Protection of Patient Information” discussed later.)
• Contract Information: Details of contracts with major suppliers, lease agreements, information related to insurance medical care, etc.
• Other: Proprietary IT systems, marketing strategies, licensing information, regulatory compliance status, etc.

Key Points for Limiting the Scope of Disclosure

On the other hand, disclosing all information without limitation carries risks. In particular, if the M&A negotiations end without success, you must consider the possibility that the disclosed information could negatively impact your institution’s business. Therefore, it is important to limit the scope of disclosure by considering the following points:

• Relevance to the M&A Objective: Limit disclosure to information truly necessary for the other party to achieve the M&A objective (e.g., business expansion, community contribution, resolution of succession issues, etc.).
• Phased Disclosure: Gradually increase the scope of disclosed information according to the progress of negotiations. For example, provide summary information in the initial stages and detailed information during the due diligence phase.
• Anonymization and Aggregation: Exclude personally identifiable information or disclose data in an aggregated form to prevent the identification of individual patients.

Information to Exclude from Disclosure

Generally, the following information is often excluded from confidential information:

• Information that was already publicly known before disclosure.
• Information that becomes publicly known after disclosure through no fault of the recipient.
• Information that the recipient legitimately possessed before disclosure.
• Information that the recipient lawfully obtained from a third party with proper authority after disclosure, without being subject to a confidentiality obligation.
• Information independently developed without relying on the disclosed confidential information.

By clearly stating these exceptions in the NDA, the risk of unnecessary information disclosure can be reduced.

Protection of Patient Information and NDA Precautions

When it comes to NDAs in medical institution M&A, “patient information” requires the most careful handling. Compliance with laws and regulations such as the Act on the Protection of Personal Information is essential, as is consideration for maintaining patient trust.

• Relationship with the Act on the Protection of Personal Information: Patient information (names, addresses, contact information, medical history, treatment details, health check results, etc.) is subject to strict management under the Act on the Protection of Personal Information. When disclosing to an M&A partner, procedures such as “notification of purpose of use” and “obtaining consent” as stipulated by the Act may be required.
• Minimizing the Scope of Disclosure: It is extremely important to limit the disclosure of patient information to the minimum scope necessary for the other party to conduct M&A due diligence (business valuation). Information that can identify individuals, such as names, addresses, and contact details, should be avoided as much as possible and limited to anonymized or statistical information (e.g., number of patients by age group, number of patients by disease, average length of stay, etc.).
• Strict Access Control: Access rights to the disclosed patient information must be strictly managed and limited to the minimum necessary personnel within the other party, such as those involved in M&A negotiations.
• Prohibition of Use for Unintended Purposes: The NDA must clearly prohibit the use of disclosed patient information for purposes other than M&A negotiations and due diligence.
• Obligation to Return or Destroy: It is important to include clauses requiring the other party to promptly return or destroy all confidential information, including disclosed patient information, if the M&A negotiations are unsuccessful.

【Highlight】Cautionary Note Regarding Handling of Patient Information

Leakage Damage Compensation Clauses and Penalties

It is essential to include clauses in the NDA regarding compensation for damages in the event of a confidential information leak. This secures the right to seek financial compensation if a leak occurs and serves as a deterrent to the other party.

Matters to be Specified in Damage Compensation Clauses

Damage compensation clauses generally stipulate the following:

• Scope of Damages: Clearly state that all damages incurred by your institution due to the leakage of confidential information (including direct damages, indirect damages, loss of opportunity, attorney fees, etc.) are subject to compensation.
• Method of Calculating Damages: In cases where calculating the amount of damages is difficult, it is also effective to set a fixed amount as a penalty (liquidated damages). For example, set an amount based on the importance of the disclosed confidential information and the potential impact of the leakage.
• Right to Claim Compensation: Clearly state that upon leakage of confidential information, you have the right to promptly claim damages from the other party.
• Right to Injunction: It is also important to reserve the right to seek an injunction against the leakage act, in addition to claiming damages, if the leakage of confidential information is ongoing or likely to occur.

Importance of Penalty Clauses

In addition to damage compensation clauses, establishing penalty clauses for breaches of confidentiality obligations can further strengthen the deterrent effect on the other party. Examples include clauses such as “If a breach of confidentiality is recognized, the party will be immediately excluded from M&A negotiations” or “A penalty of XX yen will be paid.”

【Comparison Table】Examples of Damage Compensation and Penalty Clauses

Clause Type	Example Content	Purpose/Effect
Damage Compensation	Compensation for all damages incurred due to leakage (direct, indirect, loss of opportunity, attorney fees, etc.)	Reimbursement of economic losses, securing financial risk in case of information leakage
Penalty (Liquidated Damages)	Obligation to pay a fixed amount (e.g., XX million yen) upon breach of confidentiality obligation	Avoids complexity in calculating damages, strengthens deterrence against the other party
Right to Injunction	Right to seek injunction against leakage acts or suspension of use of confidential information	Prevention of further information leakage expansion, blocking of unauthorized use of confidential information
Exclusion from Negotiations	Immediate exclusion from M&A negotiations in case of a confidentiality obligation breach	Direct penalty for contract breach, avoidance of disadvantages in continuing negotiations

The content and amount of these clauses should be carefully considered based on the other party’s creditworthiness and the status of M&A negotiations. It is essential to work with experts (lawyers) to design appropriate clauses tailored to your institution’s situation.

FAQ (Frequently Asked Questions)

Q. What is the validity period of an NDA?

A. The validity period of an NDA varies depending on the nature of the M&A negotiations and the confidentiality of the disclosed information. Generally, it is often set at around 3 to 5 years from the signing of the agreement. However, for particularly confidential information (e.g., proprietary medical technology, unpublished clinical data, etc.), a longer validity period may be considered. It is important to set a period agreed upon after thorough discussion with the negotiation partner.

Q. If negotiations fail after signing the NDA, how is the information handled?

A. NDAs generally include clauses regarding the return or destruction of information if negotiations fail. Based on these clauses, the other party must promptly return all disclosed confidential information (copies of documents, electronic data, etc.) to the seller (your institution) or securely and reliably destroy it. Requesting proof of destruction (a certificate of destruction) is also an effective measure for secure information management.

Q. What should I do if the other party refuses to sign the NDA?

A. If the other party refuses to sign the NDA, the first step is to understand the reason. If the other party is unfamiliar with information management or does not understand the necessity of an NDA, explaining it carefully may lead to an agreement. However, if they still refuse to sign or insist on unreasonable terms, the risk of information leakage is very high, and M&A negotiations with such a party should proceed with caution. In the worst-case scenario, you may need to consider abandoning information disclosure and halting negotiations with that party.

Q. Are there any differences between an NDA for medical M&A and a general M&A NDA?

A. Yes, there are specific points to consider for medical M&A. The biggest difference is the handling of patient information. From the perspective of complying with the Act on the Protection of Personal Information, stricter measures such as limiting the scope of disclosure, anonymization, and obtaining consent are required. Furthermore, it is necessary to include appropriate disclosure scope and protection measures in the NDA, understanding the importance of industry-specific confidential information such as medical treatment know-how, electronic health record systems, and pharmaceutical/supply procurement information of medical institutions.

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