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Why a non-disclosure agreement is worth the paper it’s written on

20th April 2022

 

A non-disclosure agreement (NDA) or a confidentiality agreement is a contract where one or more parties agree not to disclose confidential information that they have shared with each other.

Even though an NDA cannot guarantee that a recipient of the confidential information will not misuse that information, we explore below why it is beneficial to have an NDA in place, in particular covering the role an NDA can play in the context of a proposed company sale.

What if you don’t have an NDA?

In the absence of a written agreement, a duty of confidence may still arise but in order to rely on this, the disclosing party must show the information had the necessary quality of confidence (i.e., not be in the public domain), and that it is being disclosed in circumstances importing an obligation of confidence. Whilst this would seem obvious in the context of a sale the requirements can sometimes be difficult to demonstrate, which is why a written agreement is always preferable as provided the information is not already in the public domain, it will satisfy both requirements.

In the context of a company sale the Legal Due Diligence process will require a seller to disclose a significant amount of information about the target company to the buyer.  This is likely to include sensitive financial and commercial information. As a result the seller should only disclose such information where he can be sure that the buyer is placed under an obligation of confidence, and for the reasons mentioned above this is why an NDA is preferred.

Breach of Confidentiality

An obligation of confidentiality is breached where information is disclosed to unauthorised recipients, and/or used for an unauthorised purpose.

Where no agreement is in place, the courts will be required to look more deeply into the facts of the case, by assessing the type of information disclosed, whether it has a nature of confidence in the first place and whether the duty of confidentiality was imposed on the buyer.

Limitations

The main remedy for breach of confidentiality is damages for loss suffered but quite often it is more important to ensure the information remains confidential and to suppress any unauthorised disclosure before it happens.  Therefore it should always be the case that a potential breach can be headed off at the pass by the use of injunctive relief to prevent such unauthorised disclosure.  Once information has already been placed in the public domain then it is the question of damages that will need to be considered.

Key terms of an NDA

To ensure that the best possible protection is afforded to the confidential information, the following key terms should be included in an NDA:

  • Definition of Confidential Information – This defines the confidential information to be protected. In the context of acquisitions the seller will want to protect the detailed commercial information of the target company and the fact of the potential sale and that negotiations are taking place.
  • Buyer’s obligations – This will set out what the Buyer must do to protect the information’s confidential status such as agreeing to preserve the confidential information, to only use it for the permitted purpose (i.e. evaluating the proposed acquisition) and not to disclose it to anyone other than agreed third parties. Without this provision a recipient could use the confidential information to their commercial advantage and compete with the target company. 
  • Duration – such provision will usually be drafted so that the confidentiality obligations terminate on the earlier of the expiration of a fixed period and completion of the acquisition (in so far as it relates the target company’s information).
  • Permitted Disclosure – it sets out the extent which the buyer is permitted to share confidential information with third parties, such as directors, professional advisers, bankers, investors and funders. This may include getting them to enter into direct non disclosure covenants with the seller or agreeing to be responsible directly for any losses arising should such persons disclose the information in an unauthorised way. 
  • Mandatory Disclosure – It is prudent to note that a buyer may be obliged by law or a regulatory authority, such as HMRC, to disclose confidential information. This clause therefore allows for a buyer to make such disclosures without being in breach of the NDA but may still place restrictions on how the disclosure takes place.
  • Return of confidential information – In the event that the proposed acquisition does not go ahead this provision requires a buyer to return or destroy any confidential information. In practice, it is quite difficult to police such obligation.
  • Non-solicitation – This aims to prevent a potential buyer from approaching the seller’s customers, suppliers or employees for a specified period. To be enforceable, this clause must be reasonable in terms of duration and extent.

As referred to above, an NDA cannot guarantee that the confidential information will be protected, and that the risk of an unauthorised disclosure will be eliminated.  However, it provides a safety net and makes it much less burdensome to pursue a claim for breach of confidentiality.  It also helps a seller focus on what needs to be disclosed and put in place procedures to prevent information being disclosed to unauthorised persons.

 If you are thinking of selling your business or require general advice regarding confidentiality agreements, Ansons Solicitors’ Corporate are here to help.  Please contact Neil Jones on 01543 431184 or email njones@ansonssolicitors.com

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