Basics done well: non-disclosure agreements

By Chris Brown and Katelyn Free

Standard form confidentiality agreements (also known as non-disclosure agreements or NDAs) have become the norm in transactions. Little thought is given to these documents in the rush to start processes and receive bids. But taking NDAs for granted may jeopardise a disclosing party’s intellectual property and commercially sensitive information.

Each NDA should be drafted to address specific business and process concerns, including the identities of likely bidders. Here are some tips for sellers to consider.

Who should be on the hook?

Evaluating the commercial sensitivity of your confidential information will help understand which parties should sign an NDA. In some (typically larger) deals, it may be appropriate to bind the bidder plus their major investors, financiers, advisors and consultants. Seeking direct enforcement rights against all these parties ensures broad-based protection.

This needs to be weighed against the inconvenience of getting numerous NDAs in place and monitoring compliance with them. The alternative (and typically the default position) is to make the bidder personally responsible for its authorised persons’ compliance with the NDA as if the authorised persons were a party. In that way, the bidder is liable for any breach by those persons.

The seller should ensure that the categories of authorised persons put forward are credible and have a genuine need to access information for the agreed purpose. A sensible half-way house is to have the bidder disclose the identity of its authorised persons and to reserve the right to request such persons to sign direct NDAs on a case-by-case basis.

It is also important that sellers look through straw man structures (eg special purpose vehicles) and attach responsibility to persons or entities of substance.

Sellers should also not fall into the trap of selling a company or business without protecting it from predatory behaviour by under-bidders. Sellers should ensure that any NDA is for the benefit of the target company in addition to themselves. The alternative is to ensure that the target is assigned the benefit of those other NDAs, or the seller enforces those NDAs for the target’s benefit, but this is the less satisfactory approach.

Sometimes deeds poll are used. A deed poll allows the receiving party to execute the NDA unilaterally and give undertakings in favour of the seller and other entities identified by name or category – eg the seller and each of its subsidiaries as at the date of the deed poll. Unilateral execution is helpful where numerous NDAs are required, as it eases the administrative burden on the seller. However, some doubt remains as to whether the full range of remedies will be available to the disclosing party if this mode of execution is relied on. We outline further below under ‘Consider consideration’.

Often, information flows both ways so a two-way NDA is needed. This is the case where a merger of equals is proposed, where the seller will receive part of the purchase price in bidder shares or in other situations where a thorough two-way due diligence needs to be conducted. Additionally, the very fact of discussions and the possibility of a deal will be sensitive and warrant protection against disclosure. This may be the case where one or both of the parties are listed and have to manage continuous disclosure obligations, or where a leak would otherwise damage a party’s business.

Confidentiality is relatively short-lived (typically)

Generally, the duration of a confidentiality undertaking should reflect how long the information is expected to be commercially sensitive. A long or indefinite term runs the risk of strict undertakings being found to be unenforceable and in restraint of trade.[1]

Market practice appears to be converging on one to three years for this purpose, although there is no hard and fast rule that confidential information becomes stale within that time span.

Concerns around the shortness of the term can generally be addressed by proactively managing obligations under the NDA. For instance, the obligation on a discontinued bidder to return or destroy all confidential information (or at least to put it beyond reasonable access) should be insisted on. Of course, return or destruction does not guarantee that a competitor will unsee what they have seen, so competitors should be chaperoned very carefully though any sale process and data room.

Consider consideration

For a NDA to enjoy the full range of possible remedies, consideration must be provided for a receiving party’s undertakings. At law, consideration is a reciprocal promise of some value given by the party looking to enforce the other’s promise under their bargain. Generally, gratuitous undertakings are not legally enforceable unless given under seal. However, in the absence of valuable consideration, execution of the NDA under seal (ie as a deed) still won’t open up the full range of remedies.

Equitable remedies, including injunctions, will not be available if consideration cannot be demonstrated. This means that in the event of an apprehended breach, there would be limited ability to prevent the other party from misusing the confidential information. Often the horse has bolted, but threat of injunction is important to combat anticipated ongoing breach.

Similarly, account of profits (where the party in breach is obliged to cough up any material gain resulting from breach) is an equitable remedy which is often a better outcome than contract damages. While we’re on financial remedies, recipients of information are best to avoid indemnities which can expand (sometimes significantly) recoverable loss.

Ordinarily, the existence of consideration by the disclosing party is not an issue. The act of agreeing to disclose information to the bidder is consideration enough. However, care needs to be taken in special cases (eg where the seller is looking to protect entities that are not parties to the NDA).

Restraints – confidential information (and not the seller’s market position) protected

Often, NDAs include non-compete and anti-solicitation or anti-dealing (staff, customers, suppliers, etc.) undertakings. Sellers consider these necessary where competitors come into a process. Difficulties arise where the bidders feel that such restraints impinge on their ability to carry on and grow their existing business by legitimate means. This often results in impasse.

To be enforceable, restraints must go no further than required to provide reasonable protection for legitimate business interests.[2] When including a restraint in an NDA, explicitly provide that the restrained activities (eg solicitation of staff, dealing with customers, etc) are only prohibited where they are connected to use (ie misuse) of confidential information.

Retention policies

Clauses are often negotiated allowing the receiving party to retain a copy of the confidential information for record-keeping and regulatory compliance purposes. These clauses serve as an exception to the ‘return or destroy’ requirement which otherwise operates when a bidder or other party is discontinued from a process. While falsely premised – what possible record-keeping or regulatory requirements would apply if the deal didn’t go ahead with a particular party? – they are fairly commonplace when dealing with certain types of participant (eg large corporate or institutional bidders which are serial acquirers, financial sponsors and corporate advisors). You tend not to see them, and they should be resisted, when dealing with trade bidders.

If a retention provision is included, ensure that any right to retain confidential information is related to a bona fide retention policy and that the information remains, at all times, subject to an enduring obligation of confidentiality and use only in accordance with the agreed purpose (which, by now, ought to be redundant in any event).

[1] Netglory Pty Ltd v Caratti [2013] WASC 364.
[2] Harcus Sinclair LLP and another v Your Lawyers Ltd [2021] UKSC 32.


Christopher Brown

Chris advises on public company takeovers and private M&A deals; business and share sales, equity investments and joint ventures.

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