What are NDAs

They can be called many things – non-disclosure agreement, confidentiality agreement, deed of fidelity etc. In this article we discuss NDAs that are entered into between companies who are sharing information for the purposes of considering entering into a transaction or a venture together. These agreements are also used, for example, in employment agreements where additional considerations will apply, but this is outside the scope of this article.

Unilateral or bilateral?

Sometimes an NDA is unilateral, meaning it protects confidential documents of the disclosing party only, rather than of both parties. Whilst it is often tempting to agree to this, for example in an M&A transaction where it is assumed only the seller is disclosing information on the target for the buyer to conduct its due diligence, often information is also disclosed by the buyer – for example, information relating to its finances/lending for the purchase price, its organisational structure, its constitutional documents to prove signing authority etc. Therefore a bilateral, or mutual NDA should always be considered if a unilateral NDA is proposed – in this case, to protect the information of the buyer.

The purpose

Always check the definition (or include if there is none) of the purpose for which the confidential information is being shared. This will provide the legal context to resolve any ambiguity in the use of the information. For example, sales information that was provided as part a defined purpose of carrying out due diligence for a potential acquisition is more likely to be considered improperly used if used for commercial purposes by the buyer in an aborted transaction than if the information were provided confidentially but for an undefined or vague purpose. It helps for this to be specific.

Ensure that the NDA is practical, i.e. avoid language that provides the information will be kept ‘strictly confidential’ when, for example, it may need to be shared with advisers.

Who is bound and how?

Make sure the NDA is between the correct parties – often transactions are structured using group companies different to those entering into the NDA so the scope should be wide enough to encompass such group entities. Usually disclosure to representatives and is allowed, which is sensible, but sometimes the method of binding such advisers (who are not directly a party to the NDA) might be unreasonable. Aspects to consider here are:

• Sometimes representatives and advisers are required to enter into a back to back NDA with similar provisions to the main NDA. It may not be reasonable to require a recipient to execute specific NDAs with persons to whom the information is being shared.
• Many advisers (eg lawyers) will be bound by regulation to maintain confidentiality without the need for specific agreement with their client.
• Often the most appropriate compromise is for the recipient of the information to agree to let its representatives and advisers know that the information was received by the recipient on a confidential basis and is the subject of an NDA.
• For the discloser, the aim should be to have the recipient be responsible for any breach of confidentiality by its representatives and advisers.

Carve Outs

There are some usual carve outs to the confidentiality restrictions that should always be present in an NDA. These typically are:

• Information the recipient or its representatives and advisers already have which had been obtained on a non-confidential basis.
• Information that is already public (provided it was not made public by the recipient in breach).
• Information that is required to be disclosed by law, a judicial order, a regulatory authority etc. There are a number of nuances to this provision, ranging from requiring the recipient  to produce a legal opinion that such disclosure is required (which seems unreasonable) to ensuring the information is kept as confidential as possible during such disclosure  and allowing the disclosing party to challenge the basis of disclosure of the information, at its cost.

The NDA should only be an NDA

Unless commercially agreed, you should avoid the NDA used as a ‘Trojan Horse’ for provisions that ought to be kept separate. These would include, for example, non-solicitation (of customers or employees), exclusivity periods/break fees etc. These types of provisions are more appropriate in a commercial MOU or Head of Terms relating to the transaction.

Termination of the obligations – and what happens to the information?

There should be a time period after which the confidentiality obligations lapse. Normally this period starts from the date last information is shared – it can be the date of the NDA but in many transactions a number of months may elapse between signing the NDA and finishing the exchange of information. Typically we see this period as 2 years – 3 is possible but longer periods, (save in relation to certain specific trade secret information) may be viewed as being too long and therefore unreasonable for protective purposes.

Be wary of provisions that are impractical in terms of the return/destruction of the confidential information held at the time of termination:

• Requiring deletion of information held by advisers – some advisers may be bound to retain records for a certain period by their regulatory body.
• Permanent erasure from computers – these days most information can be retrieved after deletion so it may be that the only means of such ‘permanent’ erasure is the destruction or reformatting of hard drives – which might not be practical.
• Return of all information held and destruction of copies made – whilst this is sometimes included as a ‘belt and braces’ approach, practically it is impossible to ensure this provision has been complied with. If the confidentiality period is long enough that the commercial value of the information has diminished sufficiently, this may not be a must have.

Governing law and jurisdiction – remedies

Often the governing law is agreed as the law with the closest connection to the information being kept confidential – usually this is the jurisdiction of the target, or if a group where the largest business of the group is located. For example, UAE law would not be uncommon where the target is a UAE company. However, often (particularly on cross border transactions) it is either a neutral law, or the law of the jurisdiction of the party having the greatest bargaining power that is chosen. Jurisdiction generally follows governing law and is often courts rather than arbitration for reasons set out below. Some aspects to consider here are:

• Some remedies provided for in the NDA may not be available in the jurisdiction selected. For example, the UAE courts rarely grant the equivalent of equitable or injunctive relief, so may not be suitable where this is an important remedy. However, if the defendant is a UAE entity this may not be avoidable.
• Given the importance of interim relief to protect confidential information, courts are often chosen as the venue rather than arbitration (which would require a subsequent court process to enforce an interim award).
• There have been instances where the choice of law/jurisdiction in an NDA (or other preliminary agreement) has been used to try to impose the same choices in the main transaction documents, where the considerations will be different.

Next Steps

Although NDAs are deceptively simple agreements, breach could have far reaching commercial consequences and therefore should be taken seriously as a commitment on the part of the company. They are a good way of getting your legal advisers involved early in a possible transaction and so we always recommend reaching out to your Hogan Lovells contact, who will be happy to assist.

Authored by Imtiaz Shah.