Non Disclosure Agreements
A Non Disclosure Agreement (NDA, also called CA for Confidentiality Agreement and MNDA for Mutual Non Disclosure Agreement) are contracts that stipulate that information received from a counter-party will only be used for the purpose as defined in the NDA. Meaning, it will not be used as a basis for competitive tactics or shared freely with others. NDAs are signed when information is shared in the process of selling a business but also for joint ventures and other collaborative or strategic relationships. The term of an NDA can be up to 5 years but is typically 1 to 3 years and the appropriateness of the term depends very much on the rate of change in the company and the industry in which it operates.
Standard NDA Agreement Clauses
Every NDA will include standard clauses that describe when the agreement does not apply such as, (i) if the information falls into the public domain, other than as a result of a disclosure in violation of the agreement; or (ii) if the information is already known to the recipient at the time of its disclosure; or (iii) if it is independently obtained or developed by the recipient. The reasons for these are fairly self evident. You can’t stop a person from acting on information that they already know or is publicly available (that everyone else can act on).
Typical NDA Agreement Edits
NDAs may need to be adjusted for different jurisdictions and for certain counter-parties. For example, NDAs usually address what the recipient should do with the information once one party determines the process is over. This may include returning or destroying the information; however, in certain jurisdictions companies will want to retain a copy of the information in case it is required to be disclosed pursuant to applicable law, regulation or legal process. An example of such an exemption clause is as follows:
“Notwithstanding the foregoing, Counterparty shall not be required to return or destroy Information to the extent required by law, professional standards, with security, disaster, regulatory or internal document retention policies and those copies created pursuant to back-up or archival procedures.”
Private equity and venture capital groups typically add a clause to protect their ability to invest in, or operate companies in the same or related fields of business as that engaged in by the company. Such a clause might look as follows:
“It is acknowledged and agreed that that Counter-party and its affiliates are involved in a variety of businesses and may have acquired (or invested in), or may acquire (or invest in), directly or indirectly, other businesses which do or may compete with the Company. For the avoidance of doubt, nothing in this Agreement is intended to limit you or your affiliates’ ability to acquire or invest in such other businesses”
Certain companies will not sign NDAs at all (at least not in the initial stages). IBM will not review blind teasers (i.e. a summary without disclosing the company name) and requires all introductory information to be marked “non-confidential”. Microsoft’s policy is that NDAs are executed on the condition of aligned business group(s) willing to sponsor an engagement. These companies see so many proposals and are in so many businesses that they have simply decided that it is not worth the expense of processing NDAs at an early stage.
Optional NDA Agreement Clauses: Non-Solicitation, Non-Circumvention, Stand-Still
NDAs may include additional clauses such as employee or customer non-solicitation, business plan or concept non-circumvention and/or public share purchase stand-still clauses.
Non-solicitation clauses can apply to customers and/or employees. The idea here is that parties that have signed the NDA will not hire the counter-party’s employees or solicit their customers. Not soliciting employees is a must but counter-parties typically request that this not apply to non targeted employment advertising. Such an exemption clause might look like this:
“Notwithstanding the foregoing, nothing contained herein shall be construed to prohibit the undersigned from (a) placing general advertisements for employment, (b) hiring employees or former employees of the Company who contact the undersigned of their own accord, or (c) recruiting through employment agencies.”
Non solicitation of customers can be tricky with some large enterprises being customers of many small suppliers and excluding them as a potential customer would seriously limit a company’s potential.
Non circumvention clauses protect entrepreneurs with great ideas from well capitalized parties acting on the idea without acknowledging or compensating the entrepreneur. An example of a non-circumvention agreement is as follows:
“The Receiving Party agrees not to circumvent, avoid, bypass or obviate the Disclosing Party directly or indirectly to avoid payment of or to collect fees or commissions in any transaction, or interfere with or usurp any earning opportunity related to and/or following being introduced to a client, product, property, concept, strategy, opportunity, business relationship, project and/or source of capital by the
Disclosing Party. The Receiving Party hereby agrees not to: (a.) complete any transaction relating to the Disclosing Party’s clients, properties, ideas, products and/or contracts without specific permission and an agreement for compensation in writing from the Disclosing Party; (b.) contact, negotiate with, execute contracts, nor consummate any transaction directly or indirectly with any parties introduced by the Disclosing Party or related to the Project or information presented without the expressed written permission of the Disclosing Party; and, (c.) interfere with the relationship between the Disclosing Party and any of its current or prospective related tenants of the Parties, clients, suppliers, business relations, deals or developments except where required by law.”
Stand-still clauses apply to NDAs with public companies preventing parties from accumulating the publicly traded shares while potentially material confidential discussion are taking place. An example of a stand-still clause is as follows:
“Standstill Agreement: Sellers hereby represents and warrants that it, together with any related parties does not own any common shares in the capital of the Buyer and agrees that until the Termination Date, neither Sellers nor any Agents nor any Affiliate (regardless of whether an Affiliate or not on the date hereof) will, either directly or indirectly or individually or jointly or in concert with any other person (as that expression is used in Multilateral Instrument 62-104 – Takeover Bids and Issuer Bids), without the prior written consent of the Corporation:
a. acquire, offer to acquire or agree to acquire, directly or indirectly, by purchase or otherwise, any voting securities or securities convertible into or exchangeable for voting securities, or direct or indirect rights or options to acquire any voting securities, of the Corporation or any material assets of the Corporation; or
b. directly or indirectly make, or in any way participate in, any solicitation of proxies to vote, or seek to advise or influence any other person with respect to the voting of any voting securities of the Corporation, or securities convertible into or exchangeable for voting securities; or
c. otherwise act alone or in concert with others to seek to control or influence the management, directors or corporate policies of the Corporation or to obtain representation on the Corporation’s board of directors; or
d. engage in any discussions or negotiations, enter into any agreement or submit a proposal for, or offer of (with or without conditions) any business combination or extraordinary transaction involving the Corporation or any Affiliate of the Corporation or any of their respective securities or assets; or
e. enter into any discussions or arrangements with any third party with respect to any of the foregoing; or
f. make any public announcement or private disclosure (except to its Agents and Affiliates as permitted herein) of any intention, plan or arrangement to do or take any of the foregoing; or
g. attempt to induce any party not to make or conclude any proposal with respect to the Corporation by threatening or indicating that Recipient, any Affiliate of Recipient or any Agent may take any of the foregoing actions; or
h. assist, advise or encourage any person in doing any of the foregoing (including, without limitation, by providing or arranging financing).”
So, do NDAs really protect you from counter-parties using the provided information against you? And if someone contravenes an NDA, can you prove it? Can you sue them.. yes, will it be worth it? Rarely. My view is you should always put an NDA in place before you share information but then use caution and share only select information in phases to ensure that its release will not potentially harm your business. Don’t view an NDA as a bullet proof vest. Continue to be guarded particularly in the areas of new business partners, potential new customers and key employees.
Recommended Further Reading
For more on how to write a great LOI, see: Why is the Letter of Intent (LOI) so important?
For a more in-depth review of CIMs and Purchase and Sale agreements, see: Terminology and Documentation