Protecting your Commercial Interests with Non-Disclosure Agreements
In the preliminary stages of a merger or acquisition transaction, disclosing confidential information about a business is necessary so potential buyers may assess the transaction’s risks. Non-disclosure agreements (NDAs), also known as “confidentiality agreements,” are often integral to the due diligence process. While standard form NDAs are frequently used, buyers and sellers alike should pay close attention to the provisions below to ensure they match their specific circumstances and risk tolerance:
Unilateral or Bilateral
NDAs can either be unilateral (one-way) or bilateral (mutual) agreements. If only one party must disclose information, then a unilateral NDA will be sufficient. However, if either contracting party may disclose confidential information to the other (with confidential information being understood as broadly as possible), then a mutual NDA would be more appropriate.
Confidential Information Defined
Confidential information is often defined broadly as any information disclosed by a party to the other, whether before or after the date of the NDA and either directly or indirectly, in writing, orally or by inspection of tangible objects. It should be carefully crafted to include documents as well as know-how, technical specifications, analyses, compilations of information and general data of all kinds related to the practice and business of the disclosing party. Common exclusions include information that was (i) already in the public domain, (ii) already in the receiving party’s possession and (iii) rightly available to the recipient on a non-confidential basis. In addition, parties may be required to label all individual disclosed confidential documents as such to prevent any confusion.
Authorized recipients of the confidential information disclosed can be defined narrowly or broadly. Oftentimes, broader definitions are included by default in standard form NDAs, meaning that all members of the recipient’s company, including all employees, and sometimes even shareholders might be given access to it. Such broad disclosure is not appropriate (or necessary) for all transaction types and care must be taken to assess the type of confidential information to be disclosed to specific people, or groups of people, prior to agreeing to such terms. With trade secrets, for example, it would be more appropriate to limit disclosure to in-house counsel or a third-party professional who is not involved in the company’s day-to-day business.
Purpose of the Disclosure
Defining the purpose for which confidential information is being shared ensures disclosures are made to authorized recipients on a “need to know” basis relating to the defined purpose. In addition, it should be stipulated that the receiving party not use any confidential information for any purpose other than the stated purpose of disclosure. This is particularly important if the envisioned transaction does not come to fruition.
A claim for contractual breach requires that proof of damages be established. However, quantifying damages resulting from a breached confidentiality agreement can prove difficult. To circumvent this problem, some parties elect to include penal clauses in their NDAs. This practice is uncommon and should be used sparingly for instances when parties suspect an NDA breach is likely or inevitable.
In all contracts, vagueness is interpreted against the party who drafted the agreement. Boilerplate NDAs often include broad terms that may not be specific enough to adequately protect both parties’ respective interests or rights for the envisioned transaction. It is best to minimize the transactional risk and request that favourable language be included in the chosen NDA to protect your specific business interests.