Non-disclosure agreements: the practicalities and pitfalls - Guides - Gateley
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Non-disclosure agreements: the practicalities and pitfalls

Gateley Legal

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Confidentialty of private information is extremely important when buying or selling a business. Beth Mather, a partner in our Corporate team, discusses the importance non-disclosure agreements. 

In this episode:

  • How are NDAs used in a sale?
  • Key points to consider as a seller
  • What to be aware of as a buyer
  • How long do NDAs last for?
  • Breaching confidentiality obligations

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This episode is part of our straight talking business success podcast series. Learn more about the series and what we cover.

Read the transcript:

Host: Welcome to Straight Talking Business Success, your guide to growing and developing your business.

Host: Hello, today I'm joined by Beth Mather, a partner in our corporate team to discuss the practicalities and pitfalls of NDAs or nondisclosure agreements. Now, this podcast is particularly relevant for anyone thinking of buying or selling a business. So Beth, to begin with, nondisclosure agreements, they've got quite a bad press. They've been in the headlines a lot recently. Why is everyone talking about them?

Beth Mather: NDAs have rightly attracted bad press when they're used to suppress allegations of misconduct in settlement agreements. This is when an employment relationship ends. The reason we're talking about them today is that they are much more commonly and legitimately used in commercial transactions to protect a company's sensitive commercial information.

Host: Okay, so how are they used in the sales process? Who or what do they protect?

Beth Mather: NDAs are relevant to the due diligence investigation. This is a key part of the sale process. A buyer will be trying to protect itself against unknown liabilities in the target and to decide whether to go ahead with a deal and on what terms. This requires the seller to disclose significant information about the target's business for the buyer to review. In disclosing information, the seller will be concerned that the transaction may not go ahead or that the buyer is just fishing for information and isn't actually serious about making the purchase. The sellers wouldn't want the buyer to use information for commercial gain or to disclose that information to anybody else, so before a seller discloses information to a potential buyer, the parties sign an NDA to protect both the sellers and the target.

Host: What happens if the parties don't sign an NDA? Will the seller have any protection?

Beth Mather: The seller might have some protection under the law of confidence. This protects a party from taking unfair advantage of information received in confidence, provided that information has the necessary quality of confidence. But the law in this area is complex and quite uncertain, so having a formal written nondisclosure agreement provides certainty about what's protected and what a potential buyer can, can't or must do with the information disclosed to it.

Host: As a seller then, what are the key points to think about?

Beth Mather: I think there are two key areas. The first one is the definition of confidential information itself. The seller will want this to cover everything in every form including information that's been shared verbally, which has been provided to a potential buyer or it's advisors. This would include information generated by a buyer using the confidential information it's received from a seller. The second area is obligations placed on the potential buyer. The seller will want to know that the potential buyer is required to keep the information confidential, i.e. not disclose, and be limited to making internal disclosures only, not use the information except for the agreed purpose, return information on request in case negotiations cease between them, and to destroy all electronic copies made.

Beth Mather: To answer you as to what does an NDA protect, an NDA protects confidential information about a target and its business. It can also cover the fact that parties are in discussions to prevent customers, suppliers, competitors, and employees finding out about the potential sale and it having a disruptive effect on the business, and also the existence of the NDA itself.

Host: Okay, so what are the key points for the seller, or the person disclosing the information?

Beth Mather: I think there are two key areas. Firstly, the definition of confidential information. The seller wants this to be as wide as possible covering everything in every form, including information that is shared verbally. This would be information provided to a potential buyer and its advisors, and the seller would want it to cover information generated by a buyer based on the confidential information it's provided. The second key area is the obligations that are placed on a potential buyer. The seller will want the potential buyer to be required to keep information confidential i.e., not disclose it and be limited to making internal disclosures only, not to use the information except for the agreed purpose, and to return information on request in case negotiations cease, and to destroy all electronic copies.

Host: Okay, so what else might the seller be concerned about as the buyer investigates his business?

Beth Mather: As well as protecting its information, a seller needs to protect its staff and its customers. A seller would no doubt be alive to the risk that a potential buyer, particularly a trade competitor, may try to poach its key employees or approach its customers. This is dealt with in an NDA by including restrictive covenants to prevent solicitation and dealing. These covenants would usually apply both during the negotiations and for a fixed period, usually around 12 months, after negotiations terminate.

Host: Thanks, Beth. So moving onto the buyer, the recipient of the information, what are the key things that they need to be aware of?

Beth Mather: Converse to the seller key points, a buyer should try to narrow the definition of confidential information as much as possible. A buyer would look to exclude information shared verbally, because that's really uncertain. Exclude information already disclosed before the NDAs entered into, again, because this is uncertain. And limit it to only genuinely confidential information rather than everything provided by the seller. A buyer would also look to exclude information of which its already aware, which is in the public domain or which is been legitimately obtained from a third party. A buyer should also try to limit the requirement to return information to include a reasonable notice period and allow the buyer or its advisors to retain copies for regulatory or procedural reasons. A buyer would want to change the requirement to return information to an obligation to destroy. They'd want to ensure the permitted purpose covers exactly what they need to do, and they'd want to ensure that forced disclosures are permitted i.e., a buyer can disclose if they are required by law or by regulation.

Host: Okay, that all makes sense. So once we've got the NDA in place, how long does that last for?

Beth Mather: Well, a seller may want, or even push for, an unlimited duration, but a buyer wouldn't want the practical burden of the obligations forever. In practice, length usually depends on the nature of the information. It needs to be long enough to protect the information until it's lost its commercial sensitivity. Financial or trading information is probably out of date quite quickly, so you'd look for a period of, say, three to five years. But trade secrets, know-how, technical information, for example, the recipe for Coca Coca-Cola, retains its confidential nature for much longer. So in those circumstances, a really long or even indefinite period might be appropriate.

Host: What happens if the NDA is breached by the buyer?

Beth Mather: The standard remedy for breach of contract will apply, so that's damages. But the seller will need to show it's suffered loss and is then under a duty to mitigate that loss. It will need to prove that the information disclosed stemmed from a breach by the buyer and this can be quite difficult. A seller could also choose to seek an injunction to stop the buyer from disclosing the information, but this is only available where the seller knows the buyer is about to breach the terms of the NDA. Once the information has been disclosed, it's too late for an injunction.

Host: So how should we be looking at NDAs? Do they provide complete protection for a seller?

Beth Mather: Sadly, no. Signing an NDA doesn't guarantee that the information is protected, especially if the buyer has no intention of complying with its terms. In reality, once the information is out of the box and in the public domain, we can't put it back in the box and make it confidential again. In that scenario, the seller's only remedy would be damages, which may not be adequate, especially if the information has a future, rather than current, value. So these limitations and issues with remedies mean that a seller should really view an NDA as part of a package of measures to protect its confidential information.

Host: Okay, so what else would you see forming part of that package?

Beth Mather: We would recommend that a seller redact information which it intends to provide, withhold highly sensitive information until much later in the sale process or even immediately before completion. We'd advise them to disclose via an electronic data room so it can control and monitor access to its information. We'd advise they keep accurate records of what's disclosed, when and to whom, and that they make a note of information disclosed verbally. We'd advise that they clearly mark all information as confidential, and potentially even seed traceable information within its confidential information to help evidence future breach. For example, you put your grandma's details in your customer list.

Host: Thank you, Beth. That's a really useful background. So what should anyone who's listening who has any questions on NDA do next?

Beth Mather: Feel free to contact me. I'm available, my details are on the website and I'm more than happy to answer questions either seller or buyer side have.

Host: Thank you for listening to Straight Talking Business Success. To find out more about the series, please visit gateleyplc.com/businesssuccess. From here, you can subscribe for updates, meet our speakers, and get more information on all of the topics that we've covered.

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