Top Tips to Consider When Buying a Business.
When you start the process of buying a business, it’s common to feel overwhelmed by the complexities, especially when it comes to the legal details. At WSP Solicitors, we’re known...
What is a non-disclosure agreement (NDA)?
An NDA or confidentiality agreement is a formal written agreement between parties whereby the disclosing party agree to disclose information on the basis that the recipient party will maintain the confidentiality of that information. Depending on the nature of the business and the progress of negotiations, the information to be disclosed could be highly sensitive, including trade secrets and other vital business information on customers and suppliers.
NDAs can be tailored to your specific commercial transaction, you are able to protect information which is recorded in some form and marked as ‘confidential’, information that has been shared in meetings and presentations and can specify the extent to what information is to be shared with required third parties, such as employees and professional advisors. Usually, an NDA limits the confidentiality period for 3 to 5 years. After that time or once the information is made public, the confidential information can be disclosed and the NDA cannot be enforced.
However, some information could be required to be kept confidential forever. Examples of these are:
- non-patentable know-how;
- lists of customers; and
- personal information about the individuals involved in a project.
NDAs can be one way or mutual. You can use a one-way NDA if only you are disclosing information and a mutual NDA if both parties are.
Why are they required?
NDAs are frequently used between parties to protect sensitive information in the negotiation process. It may be that the information is especially valuable to the company, or that it would be detrimental if a competitor got hold of it. It is important that you protect your business as it is much more difficult to retrospectively protect information once it has been released and is in the public domain. In most cases, there is no obligation for a party to go through with an investment or purchase therefore an NDA serves as a useful tool for indicating the seriousness of the parties’ intent and also acts as a deterrent.
An NDA also provides a contractual right to sue the other party should there be a breach of its terms. However, this should not be treated as complete protection, as an action for a breach of an NDA can be difficult to enforce, expensive, time-consuming and it is difficult to quantify damages. It is always sensible to disclose only the minimum amount of information that is required for the transaction and perhaps hold back or redact any especially sensitive material. If you suspect that your business partner may be about to breach the NDA, you can get an injunction, i.e., a court order preventing them from breaching the agreement, to stop this from happening.
When would I need an NDA in place?
Drafting and signing an NDA at an early stage of the transaction is important to protect sensitive information so that all information exchanged is protected from the beginning, it is suggested that an NDA is entered before reviewing certain marketing material and/or beginning due diligence. Some parties may have an NDA already drafted by their solicitors, so it is important to have your own solicitor review and negotiate the NDA to input anything you want to include, make sure that your business is protected and the NDA is not too restrictive or vague.
Are NDAs legally binding in the UK?
If an NDA meets the requirements for contract formation it will generally be legally binding in the UK. If you or the other party reside outside of the UK, the NDA will need to state which law governs the agreement, which courts can be enforced and make sure that no party has exclusive jurisdiction. The main issue with entering an NDA is whether the agreement is enforceable. When looking at the enforceability of an NDA you need to consider:
- Is the information confidential? If the information is in the public domain, you cannot protect it.
- Does the confidential information belong to you? If the confidential information doesn’t belong to you then you can’t control its circulation.
- Is the information in the public domain? Your agreement may not protect you if the recipient of the confidential information can show the information was already publicly available or that they got the information from another source.
- Prior information. Any information you share with a third party prior to signing an NDA won’t be covered, this is why it is important to have an NDA in place as early as possible.
- Can you prove a breach of confidentiality? It can be difficult to prove a party has breached the NDA and disclosed information.
- Use of the non-disclosure agreement. It is not appropriate to use an NDA to prevent appropriate disclosure such as illegal activity.
- Is the agreement clear or over-reaching? The definition of what information is confidential must not be too wide-reaching or vague or result in compliance being too onerous or restrictive. All definitions and exceptions included in the NDA should meet your requirements and be appropriate to the type of trade secret you are sharing.
- Can the breaching party pay? The party in breach may have limited funds to pay damages for losses suffered.
- Restraint of trade. An NDA may not be valid if deemed anti-competitive or unreasonable in scopes, such as including a non-compete clause or restrictive covenant.
How can a solicitor help me and my business?
WSP Solicitors offers a full range of Commercial Legal Services, including assistance with NDAs. If you have any queries on the drafting and content of an NDA or wish to ensure that your company is sufficiently protected, please get in touch today. You can contact us here or on this page. Alternatively, you can call us on 01453 847200.
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