Negotiating Non-Disclosure Agreements

In-house lawyers are likely to encounter non-disclosure agreements (“NDAs”) in a variety of different contexts. Sometimes called confidentiality agreements, NDAs are especially common in the M&A transactional context. In fact, a non-disclosure agreement is often one of the first agreements signed in the deal process.

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Purpose of Non-Disclosure Agreements

NDAs are often signed in the initial stages of a deal. They set the parameters for the sharing information between the buyer and the seller. It is helpful to have an NDA signed as early as possible in the deal process in order to prevent misunderstandings from arising later on.

While NDAs can technically be unilateral agreements, they are most often mutual agreements. Mutual NDAs are usually more balanced and can save time later on. They also typically cover matters beyond just keeping the business information of the buyer and seller confidential. For example, some NDAs require the identity of the buyer and seller to be kept confidential. Some NDAs even require the parties to not disclose the fact that negotiations are taking place to anyone besides a very small group of individuals.

If confidential information is disclosed before the parties sign an NDA, you should make sure the NDA has a provision that specifically ensures all prior disclosures are covered by the agreement.

Sometimes certain confidentiality provisions are included on the deal term sheet. When this is the case, a question that can arise is why a separate confidentiality agreement is necessary. In most cases it is advisable to enter into a separate confidentiality agreement rather than relying on the term sheet. A key reason is that the term sheet is non-binding between the parties.


Special Considerations for Public Companies


If the disclosing party is a public company, there are some specific provisions to consider including those that may be less critical if the company is private. In order to comply with U.S. securities laws, the confidentiality agreement should include an exception to Regulation FD under the Securities Exchange Act of 1934. Regulation FD prohibits companies from selectively disclosing information. If material, non-public information is disclosed only to certain people, it can be considered a violation of Regulation FD. An exception to Regulation FD in the NDA can enable certain pieces of information to be disclosed in confidence without running afoul of securities laws.

Another provision to consider adding to an NDA if the disclosing party is a public company is a standstill provision. This provision restricts the buyer from making unsolicited bids for the public company.


Limitations of Non-Disclosure Agreements

Unauthorized disclosures of confidential information about a company can have severe consequences on the business. NDAs often provide injunctive relief in addition to monetary damages. Injunctive relief can be more effective as a remedy than monetary damages alone in stopping the unauthorized disclosure of sensitive company information.

An indemnity provision requiring the recipient of confidential information to pay the costs relating to the enforcement of the NDA, including legal fees, may also be included in the NDA. The parties typically negotiate the indemnity provision such that the losing party in a dispute is forced to pay all the fees and expenses of the prevailing party.

Despite the protections offered by a well-negotiated confidentiality agreement, there are certain limitations. Sometimes proving a breach of confidentiality can be difficult. Also, once commercially sensitive is disclosed to competitors, damages and other legal remedies offered by the terms of the NDA may not be adequate. This is especially true when commercial information has potential future value.


Contents of Non-Disclosure Agreements

As the company’s in-house counsel, you should advise the company of the appropriate terms and provisions to include based on the specific facts and circumstances of the transaction. The negotiation of NDA terms will also depend on the relative bargaining power between the parties entering into the agreement.

NDAs can run indefinitely or be effective up until a specified date. Most confidentiality agreements have a term of between one to three years.

The definition of “confidential information” is often heavily negotiated. Confidential information is often defined to include:

  • The seller’s business information, including trade secrets
  • Derivatives of the seller’s business information, such as financial projections prepared using confidential data
  • The existence of negotiations about a potential M&A transaction
  • The terms of any M&A transaction being negotiated

A non-solicitation clause can prevent the buyer from hiring the seller’s employees for a defined period of time following signing of the NDA. The most common timeframe is one year. Non-solicitation clauses can also prevent the buyer from soliciting key customers and suppliers of the seller.

Most NDAs contain a number of boilerplate provisions, or standard provisions typical across NDAs for various circumstances. Common boilerplate provisions include choice of law provisions, assignment clauses restricting the ability of the parties to assign their rights under the agreement, and notice provisions. While these provisions appear across different types of NDAs, they can have a significant impact on the enforceability of the agreement.