Maintaining confidentiality is paramount in today’s highly dynamic and competitive business landscape. Protecting this information is particularly important when considering a business purchase or sale. In these transactions, outside entities will request access to proprietary information without being party to any existing contractual obligations to maintain confidentiality.
In a previous blog post, we outlined the key considerations for business owners to consider when selling a business. One of these essential factors to consider was the use of non-disclosure agreements (“NDAs”) to protect confidential information. This blog post will take a closer look at these agreements and how they operate.
Mutual vs. Unilateral Non-Disclosure Agreements
Non-disclosure agreements can either be mutual or unilateral. These types of NDAs operate differently, which will impact the consequences for the parties to the agreement.
Unilateral Non-Disclosure Agreements
Unilateral NDAs are agreements where only one party discloses confidential information to another party or parties. In this scenario, the disclosing party seeks protection for its proprietary information while allowing the recipient to access the information for a specific purpose, such as selling a business. The restrictive covenants only apply to the recipient party.
Mutual Non-Disclosure Agreements
Mutual NDAs (also referred to as bilateral NDAs) involve a reciprocal exchange of confidential information between two parties. Both parties share their respective confidential information and agree to keep it confidential. In some circumstances, information is shared by establishing a “data room,” which is a secure digital space that stores the necessary confidential information to be accessed by the other party or parties. Mutual NDAs are often used when both parties disclose sensitive information to evaluate potential business partnerships, collaborations, or joint ventures.
Distinguishing Between Agreements
The key distinction lies in the obligations of the parties involved. In a unilateral (one-sided) NDA, the recipient has the duty to maintain confidentiality. Conversely, in a mutual NDA, both parties are bound by the same obligations.
It is important to ensure that the type of NDA matches the parties’ intentions and that the obligations therein reflect the transaction type.
What is the Purpose of a Non-Disclosure Agreement?
The defined purpose of the NDA, and the associated restrictions, articulates the scope of the agreement and the situations under which confidential information can be protected. While it is important for various factors, such as the parties having a common understanding of why the agreement is being entered into, it is also essential in its enforceability. The defined purpose will explain the situations in which confidential information can be used, as seen in Certicom Corp. v. Research In Motion Limited.
In this case, Certicom and Research in Motion entered into discussions regarding a potential acquisition. As part of the negotiations, the companies executed an NDA, which limited the use of confidential information to assessing “some form of business combination between the Parties.” The following year, the companies entered a second NDA, which included the same restriction, but in the context of an ordinary business transaction. No agreement was reached for an acquisition or merger, but soon after, Research in Motion launched a hostile take-over bid for Certicom.
The issue before the Court was whether the confidential information subject to the NDAs could be used to assess the viability of a hostile take-over bid within the defined purpose of the NDAs. In doing so, the Court considered whether a hostile take-over bid could be interpreted as “some form of business combination.” If it were, then Research in Motion would not be in breach of the NDAs. However, the Court disagreed with this interpretation. Justice Hoy noted that a hostile take-over bid is a business combination only if Certicom consents. Therefore, using confidential information for the bid breached the purpose of the agreements, and the Court issued a permanent injunction against Research in Motion.
This case demonstrates the importance of diligent drafting of the purpose of the NDA. Care should be taken to limit the circumstances in which confidential information can be used to protect the parties’ interests.
What is Confidential Information?
Confidential information must be adequately defined to enjoy the benefits of protection under an NDA. This is often a difficult exercise, as too broad a definition can prevent specific information from being protected, while too specific a definition will exclude important information. The definition is often refined on a case-by-case basis, but there are important considerations for every confidential information definition.
Regardless of the scope of the definition, the NDA can only protect against disclosure if the information is rightfully confidential. As such, it would be ineffective as a result of the following disclosures:
- when confidential information is required to be disclosed by any applicable law (this is often the dispute involving securities legislation);
- when confidential information has already been disclosed to the public;
- when confidential information has been received from another source other; and
- when confidential information was developed independently from any scenario enumerated in the NDA.
If it can be demonstrated that any of the above scenarios have taken place, the NDA would be very difficult to enforce. Therefore, regardless of the scope of the definition, these exclusions will apply.
Contact the Corporate Lawyers at Bader Law for Advice on Business Sales and Acquisitions
Purchasing or selling a business is complicated and can result in significant risk and liability if handled incorrectly. Corporate transactions involve various legal issues to consider, and the disclosure of confidential information is one of many. Selling a business also involves considering the fate of existing employment contracts and the company’s real estate assets.
At Bader Law, our team provides business services that address every element of a merger or acquisition. With over a decade of experience advising businesses and their owners, we have gained a reputation for trust and excellence. To ensure that your business continues to grow and succeed, our experienced business lawyers consider the complete picture when looking to identify and mitigate potential risks. Contact us online or at (289) 652-9092 to schedule a confidential consultation.