Posts

Non-Disclosure Agreements: Important Facts Every Seller Should Know

Non-Disclosure Agreements (NDAs), sometimes referred to as Confidentiality Agreements, are universally binding contracts intended to ensure the confidentiality of shared information. They are frequently used in a wide variety of business transactions, including Mergers and Acquisitions (M&As).

It can be difficult for those who don’t have dedicated legal experience to understand exactly what information needs to be included in a Confidentiality Agreement. Given that these forms are considered to be binding contracts, it’s important for buyers and sellers to know what they’re agreeing to when they sign on the dotted line, though. This article will introduce the key terms of NDAs, including the most striking differences between standard form NDAs and M&A MDAs.

The Basics

As stated above, NDAs are designed to ensure the confidentiality of information being passed from one party to another. There are two basic formats for NDAs: mutual and non-mutual agreements. The former is typically used in business transactions where both parties will likely be sharing confidential information, while the latter is often more appropriate for M&As, in particular.

Since sellers are the ones who typically release confidential information during the M&A process, NDAs are designed primarily to protect their interests. Often, though, the terms of NDAs are negotiated prior to the sale. Thankfully, sellers do typically have substantial leverage when it comes to negotiations and sending out form NDAs is an accepted part of the sale process.

Why Go Non-Mutual?

The majority of M&A sellers prefer non-mutual NDAs, especially if they do not anticipate receiving confidential information from their buyers. The use of a non-mutual NDA offers prospective buyers the assurance that the seller will not be requesting access to restricted information, as well. The majority of serious, cash buyers don’t intend on sharing confidential information, to begin with, so although the use of a non-mutual NDA is of primary benefit to the seller its use generally goes unquestioned by buyers, as well.

Essential Elements

NDAs don’t have to be absurdly lengthy and complex documents. In fact, well-structured NDAs are typically only a few pages long. There are a few essential elements that should be included in every NDA, especially those issued in the process of M&As.

Every NDA should begin by identifying the seller and the buyer. It should also offer a precise definition of what is considered confidential information in the context of the M&A and what the scope of the confidentiality agreement will be for the recipient. Often NDAs include terms obliging the buyer to either return or destroy certain information that has been deemed confidential when it is requested by the seller.

The NDAs used in M&As typically contain a set term, as well. When that term expires, the agreement will be voided. If there are any exclusions from confidential treatment that will be in place throughout Defining Confidentiality.

Woman making a phone call and smilingSellers should make a point of carefully defining what information is considered confidential, as disreputable buyers may intentionally seek out loopholes that allow them to start using the company’s valuable secrets before the term of the NDA has expired. Decide in advance whether oral information can be deemed confidential or if, by definition, confidential information must be actively defined as such in writing. Since orally conveyed information can be a tricky subject, many M&A NDAs contain stipulations that the confidentiality of any information conveyed orally to the buyer must be confirmed in writing within a certain period of time.

Non-Use Agreements

The purpose of sharing confidential information with potential buyers prior to executing an M&A is to facilitate negotiations. Most NDAs go one step further than just requiring recipients to keep confidential information to themselves, though. They also contain clauses specifying the intended use of confidential information, which is exclusively to be used for evaluating and negotiating the specific M&A transaction in question.

Explicit Exclusions

Sellers may not be happy about it, but the fact is that almost every NDA, no matter how beneficial to the seller, contains at least a few exclusions. These are intended to release the recipient from the terms of confidentiality and non-use in certain circumstances that may place an unreasonable burden on the buyer.

Letter Of IntentExclusion clauses typically cover, at a minimum, information that was already available to the recipient prior to signing the NDA and not explicitly subject to the obligation, information that was publicly available prior to signing, and information disclosed to the buyer by a third party with no obligation of confidentiality.  Some NDAs also allow for the use or disclosure of information that has been independently obtained by the buyer without the use of any information covered by the NDA.

Sellers should also bear in mind that there may be circumstances under which buyers will be forced by court orders to disclose confidential information. Even an NDA offering the maximum possible amount of seller protection cannot require buyers to break the law by withholding information. However, it can require the recipient to offer adequate advance warning prior to releasing information under a court order.

Return or Destroy Provisions

Every NDA, whether drafted in the context of an M&A or used for other business transactions, will include a provision that requires confidential information to be either returned or destroyed upon request. In the context of M&As, this provision is designed to protect sellers in the event that the acquisition does not move forward.

Sellers should word their return or destroy provisions carefully. They should ensure that the NDAs recipient is required to delete electronic files in addition to paper copies and to turn over any analyses that have been performed in-house using confidential documents.

Additional Provisions

The NDAs used for M&As may also include a number of additional provisions, although they are not required. It is not uncommon for sellers to include injunction clauses governing how breaches of the NDA will be handled, for example. Many sellers also require provisions that explicitly remove the contractual obligation to go through with the M&A except as provided in any future agreement and just about all of them include disclaimers regarding the accuracy and completeness of the information being provided, as well.

What is a Non-Disclosure Agreement and Why Do You Need It?

A non-Disclosure Agreement (NDA) is an agreement between two different parties about how to handle sensitive information. Typically, an NDA is signed before releasing confidential information to another party to ensure the other party will not disclose that information to someone else. In some cases, the NDA is for businesses working together and covers sensitive information given out about either party. There are many different instances where an NDA can be useful and crafting the NDA carefully can make a big difference in how enforceable it will be.

Why is an NDA Important?

An NDA is crucial where a business wants to keep employees, businesses they’re working with, and others from sharing confidential information. This information could include trade secrets, client information, strategies, product information, or any other proprietary information they might have. It is basically designed to keep secret information secret so no one can make a profit from it. They may also be used to show that the company owns anything developed on behalf of the company during a staff member’s employment or to keep employees from starting a competing business by using trade secrets or taking the company’s current clients.

When an NDA is created and signed by both parties, it becomes a legal agreement. It is not an oral or implied agreement and holds more weight if there is a breach of the non-disclosure agreement. If there is a breach, the person who breached the agreement can be sued. They may have to pay to cover lost profits. In addition, since the NDA is a legal agreement, someone who breaches it may be found in contempt of court and face criminal charges along with a civil suit to cover any damages from the breach.

Basically, a non-disclosure agreement enables employers to use the court system to recover damages if trade secrets or other proprietary information is revealed by someone who has signed the agreement. They have proof that the person was aware they could not reveal the information they knew about but went ahead and shared the information with someone else.

Why Should You Have an NDA?

Businesses often have many different reasons to create and use a non-disclosure agreement. If they want to protect trade secrets or client information that employees may be able to access, they can have the employees sign an NDA. If the business owner wants to sell the business, they might have an NDA for potential buyers to sign before discussing how the business works or the details for the products they sell. Businesses that hire freelancers or independent contractors may also want to create an NDA as this can help protect the business in the event a freelancer or independent contractor decides to share confidential information.

What Should an NDA Include?

Man in a suit, standing next to stairsAny non-disclosure agreement a business creates should be designed with their specific needs in mind. Business owners may want to hire a lawyer to create the NDA to ensure it will hold up in court in case a breach does occur. There are a few important pieces every NDA should have, however, to ensure it is as complete as possible before both parties sign the agreement.

  • Who is Involved – Every NDA should include who is signing the agreement. This may be more than just the name of both parties and should include which party is sharing the confidential information and which party is receiving the information.
  • What the Confidential Information Includes – Every NDA must include a description of the confidential information. It should note exactly what is confidential as well as what is not confidential and can be shared with others. The agreement should be as specific as possible so it’s clear what it covers and what it does not cover.
  • Expiration Date – If the NDA covers information that is not always going to be confidential, there should be an expiration date included in the NDA. For instance, if the information is about a new product that will be released in 6 months, the expiration date for the NDA might be the same as the release date for the new product. Some non-disclosure agreements will not include an expiration date as the confidential information can never be released.
  • What Signing the NDA Means – It’s usually a good idea to include information on what happens if there’s a breach of the agreement. This could include legal information about going to court to seek damages for the release of the information.
  • Potential Immunity – There may be times when the information needs to be released to another party, such as when it’s ordered through the courts. There should be a section in the NDA that covers what happens if the information must be released and when it can be released if required.
  • Other Information – The agreement might also include how disputes are resolved, where disputes are resolved, who pays the legal fees if there is a dispute, and more. Any information that might be needed by one party or the other for consideration before signing the NDA should be included in the agreement so they have all the information before signing it.

Store Sensitive Documents in a Data Room

Writing a business emailAn NDA can discourage people from sharing the information and provide remedies if the information is shared but does not actually stop someone from sharing the information. Along with creating an NDA, it may be a good idea to look into how documents that may need to be shared are handled. Data rooms are designed to protect sensitive documents so only those who have permission are able to view them. While this may not be able to completely stop someone from sharing the information, it does add another level of protection.

If you have trade secrets, important client information, or other information that should be kept confidential, having a non-disclosure agreement that must be signed before the information is shared can help you keep protect it. After creating the NDA, consider keeping your sensitive documents safe in a data room. Between the data room and the non-disclosure agreement, you can keep your sensitive information much safer.