Marxman Advocaten has a team of specialists in the field of M&A, with Berthe Schellinger and Pieter Verloop dedicated to this practice every day! Because they like to share our knowledge, a blog appears on our website on this topic every fortnight. This week, an article on non-disclosure agreements.
During a merger, business acquisition or investment round, many different agreements come along. One of these agreements is the non-disclosure agreement (also called Non-Disclosure Agreement ("NDA") or confidentiality agreement).
If you are planning to sell your business, at some point you will need to provide potential buyers with more insight into, amongst other things, your business model, customers and financial figures. However, potential buyers are often competitors or funds managing competing businesses. Naturally, you won’t simply hand over details of all the ins and outs of your business. A buyer, on the other hand, will want clarity on what information they are permitted to access and how they may share that information.
One solution to this problem could be to draw up and sign an NDA. Once an NDA has been signed, information can be shared with potential buyers. After all, the buyer is then bound by confidentiality, and the conditions for handling the information are set out in writing. As the seller, make sure you do not allow yourself to be tempted to share documents with parties before the NDA has been signed.
What do you put in the NDA and how do you ensure that data does not still end up on the street?
From our experience, an NDA does not always provide sufficient coverage. Often, this is due to the wording of the agreement. Sometimes, concrete concerns, such as privacy, have not been considered. A number of aspects we regularly come across:
If it is clear for what purpose the information is provided, both the provider and the acquirer of confidential information will know what fits within that purpose. For example, if selling the business is that purpose, there is no need for a buyer to share customer data with his sales department. So think carefully about the purpose of providing the data to the acquirer.
It is important to think about the term of the NDA and what happens when the NDA ends. How long should information remain confidential even after an agreement ends? Should documents be returned or destroyed, and what happens to automatic backups of hard drives, for example? Often these are not easy to erase. In addition, it is important to contractually rule out legal constructions such as dissolution or destruction of the agreement as much as possible, so that an NDA is not suddenly crossed a line after sharing documents.
A recipient will want to share the documents with certain employees and advisers. It is then important to define the circle of people who are contractually allowed to have access to confidential information, to prevent the information from being out on the street anyway.
If it does involve going outside the circle - disclosure of information to subsidiaries or third parties, for example - it is important to bind the recipient to the same safeguards as those in the NDA. For this purpose, a so-called chain clause can be included. You then arrange for all recipients who receive information from the original recipient to have the same confidentiality.
If the NDA is breached, it is likely to result in damages to the provider of confidential information. Then the ball is also in the provider's court (in or out of court) to claim those damages. Although penalty clauses are often not accepted in NDAs, it may therefore be good to possibly include a penalty for breach of the NDA, or to include a sharp definition of damages.
Finally, if you are processing personal data, it is important to check whether that data also fits within the purpose of providing information. Just agreeing on an NDA may not be enough in that context to avoid fines related to data breaches or privacy violations.