The Non-disclosure Agreement, referred to in this article as a “NDA” but sometimes also referred to as a “Confidentiality Agreement”, is an agreement that all start-up or established businesses should incorporate into their processes whenever a third party (a potential target or acquirer; lender or equity investor; strategic partner; or potential manufacturing, sales or distribution channel partner) comes calling. It should be the first formal and hopefully binding agreement that is signed and while confidentiality terms or provisions can certainly be incorporated into other documents or agreements that are to be used in any particular circumstance, there are reasons that a separate stand-alone agreement that can be signed as early as possible in a process, with effect regardless of whether a process continues, is a good idea.
At its most basic, the NDA sets out the parties subject to confidentiality obligations; what does and does not constitute confidential information; what confidentiality (and permitted use) obligations apply in the circumstances; how long confidentiality obligations apply and what happens if there is a violation of the prescribed confidentiality obligations.
However, a word of warning is justified. While there are certainly many templates of NDAs available either in circulation (“I have used this before”) or on internet websites that cater to new business or start-ups, please take care and consider this one caution – these are legal documents that create binding obligations, sometimes very material obligations, on one or more parties. Let me perhaps say this another way – these documents either (a) seek to protect something of one party that is considered so important enough to warrant legal protection; or (b) seek to restrict one party from doing something that could be in that party’s commercial best interest to do because it is believed to be unfair to the other party in certain circumstances. These are very important matters – in fact likely fundamental matters to your business either as it starts out or as it expands. Is this the right time to use a document you “think” works in the circumstances and contains terms you are not entirely sure could or should apply to you? Unless you are a seasoned M&A, intellectual property or privacy law professional (and even in some cases even if you are any of those), I would strongly suggest you speak with your lawyer and develop an understanding of how, when, what and why you need to consider using an NDA and revisit that process from time to time to ensure it any process is commercially reasonable and legally defensible.
With that in mind, here are five items that you should consider before you speak to, or with, your lawyer.
1. Do I even need a NDA? In my view, yes you do. While parties that are just beginning to discuss a potential arrangement or transaction may not need to, immediately, enter into a NDA, there are so many reasons why, in any particular context, you may find such an agreement eventually useful. While I often get a comment that a particular business does not have any particularly important proprietary information as a going concern – I often have to push back on this. Do you simply have a novel business idea, concept or approach that others could easily implement without you? Do you have business data (like sales, profit or marketing data) that could be useful to a potential direct or indirect competitor? Do you have management, staff or customers that you consider worth protecting from those that could benefit from taking them from you? Do you have an invention or process that you may wish to seek patent in the future? Are your securities listed on a public stock exchange or quotation system and undisclosed material information may be accessible to or reviewed by a third party? Are you currently subject to, or may be subject in the future to, a legal or regulatory process in which you would want to claim some sort of privilege over information that may be accessible to or reviewed by a third party? Have you already entered into other agreements whereby you have agreed to keep something, like a distribution and sales channel arrangement, confidential that is about to be reviewed by a third party? Do you maintain personal information (information about identifiable individuals like employees, customers, subscribers or patients) that may be accessible to or reviewed by a third party? One or more of these scenarios almost always apply and, therefore, a NDA may be very much appropriate if not required in the circumstances.
2. Whose version of a NDA should we use? A purchaser is considering buying your business and wants to conduct some due diligence. The purchaser provides you with the purchaser’s version of a NDA that is supposed to protect your confidential information. Is this appropriate? Well, it is not uncommon. Certainly any form of agreement provided by the other side may at the end of the day be sufficient in the circumstances – but do you presume it is in all circumstances? The other side says they are only willing to pursue a transaction with you if you agree to their terms, for whatever reason – is this the way you seek the legal protections available to you or the legal obligations applicable to you on such important matters? Having a go-to version of an NDA for the protection of your confidential information is always a good idea - and use it as much as possible. Using another party’s version of NDA may be acceptable, or even necessary, but have it reviewed by YOUR lawyer before signing it.
3. Unilateral or Mutual NDA? Often times parties will enter into a mutual NDA (whereby each party purport to be sharing confidential information and each party will be subject to generally similar obligations with respect to the other party’s confidential information) and in some circumstances a mutual NDA is actually required. However this is not automatically the case. Is the other party anticipated to share anything to you that could be considered confidential? Sometimes the use of a mutual NDA is simply a strategic method of having a party that is legitimately sharing important confidential information with a third party use a form of agreement provided by that third party which contains provisions somewhat less than what may have been appropriate to protect that important confidential information (a mutual NDA often reads rather balanced, since it is generally meant to be a reciprocal agreement, but while balanced on its face it is only appropriate if both parties are actually sharing confidential information of equal importance to both parties). If asked to sign a mutual NDA supplied by the “other” party make sure you understand what information that other party intends to be providing to you – and determine whether such information is as important to that party as, for example, your business plan, IP strategy and customer list is to you.
4. The “Who”; “What”; “Why”; “When” and “Where” of a NDA. Yes, these are the details of the standard NDA. And yes, these are all things that can be worked out in consultation with your lawyer. But these are all things you may wish to consider before you sit down to actually draft a NDA.
Should an entity or individuals related to an entity – or both – be subject to the confidentiality obligations under a NDA? If individuals who are not parties to a NDA are intended to be subject to the NDA take the time to determine exactly how this is done in an enforceable manner.
Be careful to identify what is meant by “confidential information” and avoid limiting it only to matters labelled as confidential information. Generally, the disclosing party will want to broaden the definition and will want to avoid requirements to identify information as confidential and a receiving party will want the do the opposite.
You should understand the difference between “disclosure” and “use” and want, if you are the disclosing party, to restrict both. Be sure to define permitted uses carefully and, likely, narrowly.
Whether any confidentiality obligation has a limit on the term may depend on the type of information to be shared and the industry in which the information is used. Technology moves quickly and a confidentiality term of ten, five or even two years may be more than sufficient. Personal information, if shared, should not be subject to a term limit as privacy legislation does not usually limit your obligations to protect such information of your employees or customers. Also if the underlying reason for entering into a NDA is terminated – like a purchase and sale transaction – the confidentiality obligations should not end. Be sure that is the case.
Understand the distinction between the jurisdiction (which law governs the NDA) and venue (where a legal action to enforce the NDA may be brought). While a “standard” NDA likely can be governed by any jurisdiction in Canada and still be enforced, a NDA with unique or unusual provisions may not be so, well, lucky. Consult a lawyer capable of advising on the law of the jurisdiction that governs the interpretation of the NDA. As for venue, understand you may need to enforce an agreement and that will have a lot to do with where “other” parties to any NDA reside.
5. The party is over – what next? What happens if the proposed transaction is abandoned or terminated? What are the respective parties’ obligations with respect to the confidential information of the other party in possession of a party to a NDA. Usually, there will be an obligation (sometimes upon written request) to return confidential information or to certify that all confidential information in possession has been destroyed (sometimes in accordance with specific protocols). However, it may not be so simple. There may be legitimate reasons for the receiving party needing to retain all or part of the confidential information received for some purpose (like to the extent required by law like income tax purposes or regulatory requirements like IIROC or as required in accordance with internal record-keeping requirements. There may be practical difficulties of deleting data from electronic databases (which may be archived) or from legal memorandums, reports or summaries maintained in internal records. If there are carve-outs should carefully described and provisions regarding the ongoing restricted disclosure and use applied to those carve-outs should be in place.
NDAs are, for many reasons, important business and substantive legal documents. They are essential elements in any IP strategy; business expansion plan; M&A transaction process or investment/ lending due diligence. Despite their importance too often the NDA is left to scattered, infrequent or inconsistent use; inapplicable, inappropriate or unintelligible internet templates; and/or reliance on versions offered up by the “other” party seeking access to, and possible use of, your proprietary information. Why?
Endeavor Law can assist entrepreneurs, business owners, management, vendors/ purchasers and investors in negotiating, drafting or reviewing NDAs. Endeavor Law will always seek to provide competitive pricing for any legal services requested and is pleased to discuss fee arrangements that suit any potential client.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstances. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.