Deal Point - Confidentiality Agreements

Confidentiality agreements, otherwise known as non-disclosure agreements (“NDA”), are a ubiquitous feature of the corporate finance landscape and are almost invariably requested before confidential information is supplied to prospective purchasers or investors. This article focuses on the issues for prospective buyers/investors in signing an NDA presented to them by the seller or its advisers. For convenience we will refer merely to a buyer and a seller.

The first consideration for a buyer is whether a written NDA is even necessary. Under the common law the courts will protect information supplied in confidence. This is of course a very aggressive stance. And, in many respects, it is to a buyer’s advantage to enter into a written NDA as at least the terms and extent of its obligations are certain.

The definition of “confidential information” is often very wide, in many cases wider than is what would normally be thought of as confidential. The key to the drafting of the NDA is the scope of the exceptions and this is the area for a buyer to focus upon. In some respects there is a community of interests between the buyer and seller in relation to the exceptions as an overly restrictive NDA is potentially an unreasonable restraint of trade and therefore void and unenforceable. Information in the public domain is a clear exception to the definition of confidential information.

The buyer should also exclude from the definition of confidential information, information which is in its possession or comes into its possession otherwise than from the seller. Ideally the NDA will not impose a burden of proof obligation on the buyer.
A key exception for a buyer is that they be permitted to disclose confidential information to the extent required by law. Most buyers will wish to extend the definition of law to cover the rules of any regulatory body binding upon the buyer. An obvious example of a regulatory body would be the City Code on Takeovers and Mergers which may not always be strictly binding in law but is always effectively legally binding as a matter of practice.
Buyers may wish to consider being permitted to disclose confidential information if they “reasonably believe” that disclosure is required by law or the rules of any regulatory body. Without the wording regarding reasonable belief the buyer must be absolutely certain that its disclosure is required. If it is subsequently proven that disclosure was not required then there will have been a breach of the NDA with potential damages. If necessary a buyer might agree to mitigate the effect of the reasonable belief wording by including references to opinions from counsel or solicitors supporting their reasonable belief.
More extensive NDAs sometime include obligations on the buyer to consult with the seller before disclosing information to the extent required by law/regulatory bodies. This is not necessarily an unreasonable principle provided that the consultation itself is not prohibited by law. An obvious example here is the The Proceeds of Crime Act where disclosing an actual or prospective notification to SOCA (formerly NCIS) can itself constitute the offence of tipping off.
Buyers should look very carefully at the practical obligations imposed on them to protect and preserve confidential information. Ideally buyers should accept no more than “reasonable endeavours” to avoid liability for breaches out of its control such as fire, theft etc.
Buyers should also seek to include a contractual time limit on their confidentiality obligations. The absence of a time limit will not make the NDA unenforceable but in practice most buyers would prefer to have the certainty of knowing when their obligations expire. Active buyers and investors could well have signed a considerable number of NDAs and in terms of managing their unknown liability time limits is an important benefit.
Buyers should always resist giving an indemnity against breach of the NDA. For the seller, claims under indemnities are clearly easier as there is no requirement for the sellers to mitigate their loss and the loss recoverable under an indemnity may be greater than damages. From a buyer’s perspective common law remedies of damages and/or an injunction are sufficient without giving the seller the additional protection of an indemnity.
Seller drafted NDAs often include clauses purporting to state that an injunction is an appropriate remedy for a breach of the NDA. These clauses are of persuasive value only as an injunction is an equitable remedy and a court will not feel constrained or obliged to grant an injunction simply because of a provision of the NDA.
It is a standard clause in NDAs that a buyer can be required to return documents it holds containing confidential information, whether these are documents supplied by the sellers or copies the Buyer has made. Difficult issues arise where confidential information has been incorporated into electronic records or now forms a part of a wider report, analysis etc prepared by the buyer. Buyers should not resist returning documents supplied by sellers and any copies but they should resist the return or destruction of reports/analyses generated by the buyer on the basis that this is “secondary information” and that the ongoing confidentiality obligations would continue in relation to secondary information. Buyers in regulated sectors should consider whether the obligation to return/destroy should be subject to ongoing legal/regulatory obligations.
It is becoming more common for NDAs to include non-solicitation provisions, whether of employees, customers or suppliers. Again these clauses are potentially restraints of trade and will be unenforceable if they go wider than is reasonably necessary to protect the interests of the seller. In relation to employees this means that the restriction must be limited only to key employees. Ideally from the buyer’s perspective the definition of key employees should be as precise as possible, preferably identification by job title. Non-solicitation of employees will need to be limited in time and the buyer should also provide itself with an exclusion for general recruitment advertising (though it is probably reasonable not to offer a job to a key employee who responds to a general advert).
Buyers will need to carefully consider other forms of non-solicitation such as non-solicitation of customers or suppliers. In most normal deals such non-solicitation clauses will be inappropriate and unacceptable to the buyers. Indeed if the identity of the customer is so important it is probably more appropriate for sellers to refuse to disclose the identity of key customers until much later in the sale process.
Buyers should not enter into NDAs lightly. Disclosure or misuse of confidential information can result in a detrimental effect to the goodwill of the seller or the target business which in itself could result in sizeable damages. Of course litigation is inherently uncertain and it will be for the seller to prove breach of a confidentiality undertaking but in view of the potential sizeable damages buyers should be very careful first to limit the extent of their obligations and secondly to have procedures in place to ensure compliance. It cannot be ignored that for regular purchasers of businesses or regular investors a reputation for breaching NDAs would be very damaging.
NDAs in the context of an auction process sometimes seek to give the ultimately successful bidder the right to enforce the NDA. Buyers need to think carefully about such third party rights as the attitude of the ultimately successful bidder (who might be a trade competitor) might be quite different from the seller.
Lastly, UK based buyers should ensure that the NDA is governed by English law and that the courts of England and Wales have exclusive jurisdiction. Without these provisions a buyer would need to be alive to issues under the laws of any other jurisdiction, such as those where the seller or target is based, which might affect the underlying principles under which the buyer enters into the NDAs.

NDAs inevitably take different forms but in many respects they are becoming fairly standard documents with the central areas of concern well known. The above list of points can act as a checklist for buyers or potential investors when reviewing NDAs they are asked to sign. Prospective buyers and investors may also be interested in seeing the BVCA standard confidentiality agreements which is available on the BVCA website: www.bvca.co.uk. This is a pro forma NDA agreed by the BVCA on behalf of its members and it is rare that a private equity or venture capital house will agree to give an NDA in any terms other than that approved by the BVCA. It is interesting to note the limited extent of the BVCA pro forma when compared to the much more extensive NDAs often produced by sellers. Although much shorter in words the BVCA precedent does achieve the core confidentiality obligations which sellers should be looking for.




Dealpoint is a regular briefing on issues relevant to corporate transactions, notably M & A and reconstructions. Each edition of Dealpoint will focus in detail on one area of law and practice which may be of interest to principals and practitioners in the corporate transactions area. In this issue of Dealpoint we focus on confidentiality agreements from the perspective of buyers or potential investors who are asked to sign confidentiality agreements produced by prospective sellers. Confidentiality Agreements
Introduction Confidentiality agreements, otherwise known as non-disclosure agreements (“NDA”), are a ubiquitous feature of the corporate finance landscape and are almost invariably requested before confidential information is supplied to prospective purchasers or investors. This article focuses on the issues for prospective buyers/investors in signing an NDA presented to them by the seller or its advisers. For convenience we will refer merely to a buyer and a seller. The first consideration for a buyer is whether a written NDA is even necessary. Under the common law the courts will protect information supplied in confidence. This is of course a very aggressive stance. And, in many respects, it is to a buyer’s advantage to enter into a written NDA as at least the terms and extent of its obligations are certain. Common Issues The buyer when presented with a draft NDA should consider the following issues: The definition of “confidential information” is often very wide, in many cases wider than is what would normally be thought of as confidential. The key to the drafting of the NDA is the scope of the exceptions and this is the area for a buyer to focus upon. In some respects there is a community of interests between the buyer and seller in relation to the exceptions as an overly restrictive NDA is potentially an unreasonable restraint of trade and therefore void and unenforceable. Information in the public domain is a clear exception to the definition of confidential information. The buyer should also exclude from the definition of confidential information, information which is in its possession or comes into its possession otherwise than from the seller. Ideally the NDA will not impose a burden of proof obligation on the buyer. A key exception for a buyer is that they be permitted to disclose confidential information to the extent required by law. Most buyers will wish to extend the definition of law to cover the rules of any regulatory body binding upon the buyer. An obvious example of a regulatory body would be the City Code on Takeovers and Mergers which may not always be strictly binding in law but is always effectively legally binding as a matter of practice. Buyers may wish to consider being permitted to disclose confidential information if they “reasonably believe” that disclosure is required by law or the rules of any regulatory body. Without the wording regarding reasonable belief the buyer must be absolutely certain that its disclosure is required. If it is subsequently proven that disclosure was not required then there will have been a breach of the NDA with potential damages. If necessary a buyer might agree to mitigate the effect of the reasonable belief wording by including references to opinions from counsel or solicitors supporting their reasonable belief. More extensive NDAs sometime include obligations on the buyer to consult with the seller before disclosing information to the extent required by law/regulatory bodies. This is not necessarily an unreasonable principle provided that the consultation itself is not prohibited by law. An obvious example here is the The Proceeds of Crime Act where disclosing an actual or prospective notification to SOCA (formerly NCIS) can itself constitute the offence of tipping off. Buyers should look very carefully at the practical obligations imposed on them to protect and preserve confidential information. Ideally buyers should accept no more than “reasonable endeavours” to avoid liability for breaches out of its control such as fire, theft etc. Buyers should also seek to include a contractual time limit on their confidentiality obligations. The absence of a time limit will not make the NDA unenforceable but in practice most buyers would prefer to have the certainty of knowing when their obligations expire. Active buyers and investors could well have signed a considerable number of NDAs and in terms of managing their unknown liability time limits is an important benefit. Buyers should always resist giving an indemnity against breach of the NDA. For the seller, claims under indemnities are clearly easier as there is no requirement for the sellers to mitigate their loss and the loss recoverable under an indemnity may be greater than damages. From a buyer’s perspective common law remedies of damages and/or an injunction are sufficient without giving the seller the additional protection of an indemnity. Seller drafted NDAs often include clauses purporting to state that an injunction is an appropriate remedy for a breach of the NDA. These clauses are of persuasive value only as an injunction is an equitable remedy and a court will not feel constrained or obliged to grant an injunction simply because of a provision of the NDA. It is a standard clause in NDAs that a buyer can be required to return documents it holds containing confidential information, whether these are documents supplied by the sellers or copies the Buyer has made. Difficult issues arise where confidential information has been incorporated into electronic records or now forms a part of a wider report, analysis etc prepared by the buyer. Buyers should not resist returning documents supplied by sellers and any copies but they should resist the return or destruction of reports/analyses generated by the buyer on the basis that this is “secondary information” and that the ongoing confidentiality obligations would continue in relation to secondary information. Buyers in regulated sectors should consider whether the obligation to return/destroy should be subject to ongoing legal/regulatory obligations. It is becoming more common for NDAs to include non-solicitation provisions, whether of employees, customers or suppliers. Again these clauses are potentially restraints of trade and will be unenforceable if they go wider than is reasonably necessary to protect the interests of the seller. In relation to employees this means that the restriction must be limited only to key employees. Ideally from the buyer’s perspective the definition of key employees should be as precise as possible, preferably identification by job title. Non-solicitation of employees will need to be limited in time and the buyer should also provide itself with an exclusion for general recruitment advertising (though it is probably reasonable not to offer a job to a key employee who responds to a general advert). Buyers will need to carefully consider other forms of non-solicitation such as non-solicitation of customers or suppliers. In most normal deals such non-solicitation clauses will be inappropriate and unacceptable to the buyers. Indeed if the identity of the customer is so important it is probably more appropriate for sellers to refuse to disclose the identity of key customers until much later in the sale process. Buyers should not enter into NDAs lightly. Disclosure or misuse of confidential information can result in a detrimental effect to the goodwill of the seller or the target business which in itself could result in sizeable damages. Of course litigation is inherently uncertain and it will be for the seller to prove breach of a confidentiality undertaking but in view of the potential sizeable damages buyers should be very careful first to limit the extent of their obligations and secondly to have procedures in place to ensure compliance. It cannot be ignored that for regular purchasers of businesses or regular investors a reputation for breaching NDAs would be very damaging. NDAs in the context of an auction process sometimes seek to give the ultimately successful bidder the right to enforce the NDA. Buyers need to think carefully about such third party rights as the attitude of the ultimately successful bidder (who might be a trade competitor) might be quite different from the seller. Lastly, UK based buyers should ensure that the NDA is governed by English law and that the courts of England and Wales have exclusive jurisdiction. Without these provisions a buyer would need to be alive to issues under the laws of any other jurisdiction, such as those where the seller or target is based, which might affect the underlying principles under which the buyer enters into the NDAs. NDAs inevitably take different forms but in many respects they are becoming fairly standard documents with the central areas of concern well known. The above list of points can act as a checklist for buyers or potential investors when reviewing NDAs they are asked to sign. Prospective buyers and investors may also be interested in seeing the BVCA standard confidentiality agreements which is available on the BVCA website: www.bvca.co.uk. This is a pro forma NDA agreed by the BVCA on behalf of its members and it is rare that a private equity or venture capital house will agree to give an NDA in any terms other than that approved by the BVCA. It is interesting to note the limited extent of the BVCA pro forma when compared to the much more extensive NDAs often produced by sellers. Although much shorter in words the BVCA precedent does achieve the core confidentiality obligations which sellers should be looking for. August 2006
For further information please contact: Richard Wrigley on: 44(0)870 763 1586

This article is a summary of the law of England & Wales as at August 2006. Its contents are general only and should not be relied upon in relation to any specific matter or transaction where advice should be sought.

	© Martineau 2004