The Bite-Size Business Brief: Non-Disclosure Agreements (NDAs)

Introduction to Non-Disclosure Agreements (NDAs)

During World War II the slogan "loose lips sink ships" was used to advise servicemen to avoid careless talk that could undermine war efforts. In a similar vein, the release of confidential information which is not protected could scupper an M&A deal before its ship has sailed out of port.

At the outset of a buyer weighing up an offer for a business, and before financial or legal due diligence has begun, they will likely want to review information about the target business which is not otherwise public knowledge. Before releasing any information a seller must ensure the buyer enters into an NDA (also commonly called a confidentiality agreement) so that the confidential information of the target remains confidential.

Key NDA protections 

• Broadening the scope of confidential information: The definition of “confidential information” should be broad enough to capture all types of information and materials shared, with a focus on ensuring that valuable information and trade secrets are captured. As a practical matter a seller should assess if certain information (especially confidential information) should not be capable of being copied or printed and is only available from an on-site inspection or read-only access in virtual data rooms.
• Limiting the purpose and use of confidential information: A seller will want to ensure that a buyer may only use the confidential information for the sole purpose of evaluating or negotiating the specific transaction. A buyer should only be able to disclose to its employees and advisers on a need-to-know basis and the buyer should be obliged to procure their compliance with the terms of the NDA. The only allowable exceptions should be limited disclosure which is otherwise required by law or a court order. Even then, a seller will want to be informed and may request an option to contest any such disclosure (to the extent permitted by law).
  
• Ensuring return or destruction of information: If the deal does not complete then a seller will want the buyer to return or destroy confidential information either upon request or at a fixed point in time. It is usually expected that a buyer may request a limited carve-out for confidential information stored on computer back-up servers or a right to retain copies for audit purposes.
  
• Duration of confidentiality: A seller’s starting point is often that whatever is disclosed should remain confidential without time limits. A buyer will often seek to limit this to a fixed duration of, say, two to five years.
• Drafting clear and enforceable governing law and disputes forum clauses: This is particularly important in cross-border M&A deals.  A seller should always assess if its ultimate potential remedies, such as damages or specific performance, are capable of being awarded and if they are enforceable against the buyer.