Non-disclosure agreements have become common agreements. What are they, and how do they work?
What does NDA stand for?
NDA stands for non-disclosure agreement.
What is an NDA?
An NDA is a binding contract between at least two parties stating that one or more parties will not share certain sensitive information with others. The contract establishes a confidential relationship between the parties.
Organizations often use NDAs to protect sensitive information in contemplation of, during, and after a business transaction. Individuals can also use NDAs to protect their personal information.
An NDA is often a standalone contract. However, parties can also include an NDA provision within a broader agreement.
Is an NDA the same as a confidentiality agreement?
Many people use NDA and confidentiality agreement interchangeably, though there are some differences.
Parties typically use NDAs when one party provides another with sensitive information and requires the recipient to promise not to disclose that information. For example, in private markets, businesses and investment banks will have potential buyers or investors sign NDAs to ensure the business’s information remains confidential.
Confidentiality agreements may be broader and require all the parties involved to keep confidential information a secret from the public, competitors, or other third parties. Parties typically use confidentiality agreements for joint ventures instead of one-way communications.
It’s also important to note jurisdictional differences. NDAs are popular in the U.S., but other countries may use and refer to these agreements differently.
Common reasons to use an NDA
Individuals, businesses, and other entities use NDAs to protect the flow of their sensitive information to other parties.
Scenarios that often call for NDAs include:
- Employment relationships: Employees often have access to proprietary business information that should remain secret from the public and competitors. Employment NDAs are common for tech companies, startups, marketing agencies, and manufacturers.
- Product licensing: Companies that sell or license products and technology want to protect their data from third parties.
- Client relationships: Businesses and professionals may give clients sensitive information during their relationship, and an NDA requires those clients to keep that information secret.
- Prospective investors: Businesses typically disclose critical information to potential investors and require those investors not to disclose the information.
- Inventions: Inventors often use NDAs to protect their intellectual property before they can apply for and receive patents.
- Settlements: Some companies might insist on an NDA to protect the terms of a settlement reached through litigation or arbitration.
Types of NDAs
In a unilateral NDA, sensitive information flows from one party to another. The disclosing party is the one providing confidential information to the receiving party. The contract is unilateral because the recipient is the only party promising to keep information secret.
In a mutual NDA, confidential information can flow both ways, and all parties must not disclose the sensitive information. Both parties can act as disclosing parties and receiving parties. Because of this, a mutual NDA is more likely to be a confidentiality agreement.
How to write a non-disclosure agreement
NDAs should include:
The parties to the contract
There must be at least two parties, and if the agreement is a unilateral NDA, it should define who will be providing and receiving the sensitive information.
The purpose of the NDA
This provision outlines why at least one party shares confidential information with another.
The definition of confidential information
The parties must be specific about what types of information they consider confidential. This definition should not be overly broad, which could be hard to enforce in court, or too narrow, which might not sufficiently protect one or more parties.
The obligation to not disclose confidential information
This provision is the purpose of the NDA. It ensures one or more parties promise not to disclose and to take steps to protect confidential information.
Permitted use of confidential information
Depending on the purpose of the NDA, a party receiving confidential information may need to share it with others. For instance, a potential investor might need to share information with financial advisers or lawyers to make an educated decision on whether to invest.
The degree of care
Parties receiving confidential information must use at least reasonable care or a higher standard outlined in the contract to protect another party’s confidential information. Reasonable care is an objective legal standard and not a subjective term open to interpretation by the parties.
The duration of the agreement
The parties should agree on how long the contract lasts.
The survival period of the obligation
The parties should agree on how long a party receiving confidential information must take steps to protect it and avoid disclosure.
Return of confidential information
This provision is essential if the parties put any confidential information on paper. The contract can also provide details on how companies can return or destroy digital information.
This provision dictates which state’s law applies to the NDA and which a court or arbitrator would use to review the agreement.
Parties often have a provision that stipulates how they would handle a dispute, such as litigation or arbitration. In either case, the parties must also include the jurisdiction and venue.
The parties may include a section that outlines the damages the non-breaching party would be entitled to in the event of a breach, such as direct or consequential damages, specific performance, injunction, or indemnification.
The contract should include lines for the parties’ signatures and describe who is signing on behalf of a company.
The information and obligations parties want to include in an NDA depend heavily on their industry and intent. Asset managers, investment banks, and other businesses use NDAs during private market transactions and often include terms other industries wouldn’t.
Private Equity NDAs
For asset managers and investment banks, NDAs have become routine contracts. Firms enter into dozens of these agreements each year in order to receive or disclose sensitive business information and facilitate due diligence on potential transactions. The larger the manager or bank, the more NDAs they are likely to deal with any given week.
High-volume, routine contracts like NDAs often challenge large organizations because all parties involved want to execute NDAs within days, not weeks. To achieve this short turnaround time, businesses either need adequate internal resources or a NDA outsourcing provider, such as an outside law firm or alternative legal services provider.
Common private equity NDA provisions
Companies for sale may include a non-solicitation provision to prevent anyone participating in the deal from trying to attract or hire the target company’s employees.
Definition of representatives
Companies often share information with outside advisers during their due diligence efforts. The definition of representatives determines who is bound by the confidentiality agreement.
When an outside party becomes involved in a transaction, the original parties can require it to sign a joinder to the NDA. This way, the third party becomes bound by the confidentiality agreement.
This provision may limit a potential buyer’s right to contact parties other than those representing a seller during the due diligence and sale process. This section usually includes exceptions for contact that takes place during the regular course of business and due diligence.
Parties may include this provision when the target is a public company. This section covers the buying and selling of the company’s securities, soliciting proxies, influencing board members, and attempting to gain control of the company through a third party with certain exceptions.
In this provision, the buyer agrees not to attempt to acquire the target company through any party other than the designated seller. The clause might also state the buyer can’t use the confidential information in a way that would harm the seller’s general business operations.
This provision prohibits exclusive financing agreements, ensuring the buyer can’t finalize financing from any one lender and block a potentially better deal.
Do asset managers need NDA lawyers?
Any business or individual wishing to enter into an NDA or confidentiality agreement would be wise to hire an experienced transactional lawyer. An NDA lawyer will know what to include in the contract based on their client’s needs and the risks associated with the transaction.
Many leading asset managers and investment banks work with Ontra to execute their private equity NDAs. Ontra offers a Contract Automation solution that includes artificial intelligence and a distributed network of experienced lawyers. Because Ontra’s legal partners have executed over 600,000 contracts, they have unique insights into market terms, which can speed up negotiations and shorten turnaround times.
How to make an NDA legally binding
To be legally binding in the U.S., an NDA has to follow the fundamentals of U.S. contract law, which means there must be an offer, acceptance, mutual assent, and consideration.
An offer includes a proposed set of terms, which the other party can negotiate (make a counteroffer) or accept. Mutual assent requires all the parties intend to enter into a binding agreement, and consideration requires all the parties to give up something. Lack of consideration can make the NDA unenforceable in court.
Depending on the situation and jurisdiction, the law might not require the parties to put the NDA in writing. That said, it’s vital that the individuals or businesses put their agreement in writing to avoid confusion and ensure they can enforce the agreement in court, if necessary. Oral contracts are difficult to establish and enforce.
U.S. courts also require the NDA to be reasonable and unambiguous. Jurisdictions vary in how they determine reasonableness, which means the contracting parties should be aware of the law and precedent in the controlling jurisdiction when negotiating the agreement. They should also avoid vague definitions and provisions.
Do non-disclosure agreements expire?
Most NDAs have an endpoint, although they can last indefinitely. The contract itself might state a definitive duration, and the parties’ obligation to keep confidential information a secret can survive beyond the contract term. This ongoing obligation is called a survival period and may last several years.
How long is a non-disclosure agreement applicable?
An NDA will apply to the parties based on the time stated in the contract. Across industries, anywhere between one and five years is common for an NDA. In the private markets, a duration from one to two years is customary, though certain circumstances warrant a longer duration. Neither party wants the NDA duration to be too short or too long, though the parties will often disagree and have to negotiate an appropriate time limit.
What happens if someone breaks an NDA?
If a party breaches an NDA, the consequences depend primarily on the scenario and the damages the disclosing party incurred. Realistically, breaching an NDA can ruin a personal or professional relationship. The parties may simply part ways.
In more severe scenarios, the disclosing party might sue the party responsible for the breach. If the disclosing party can establish the recipient party’s breach of contract and damages, the court may order the defendant to pay a certain sum of money or enjoin it from taking a particular action. The parties can also choose to settle for a sum.
The disclosing party might also have other causes of action than a breach of contract. Depending on the circumstances, they may have the right to sue based on trade secret misappropriation, unfair competition, or copyright infringement.
It can be difficult for the parties or a court to quantify damages in these cases. As a result, some parties define the damages a party is entitled to if the other party breaches the NDA by setting a total amount or providing a formula. A damages clause typically influences the settlement or court award.
Ontra is an alternative legal services provider in the United States. We are not a law firm, and do not provide any legal services, legal advice, or referral services. We do not provide any legal representation to clients, nor do we participate in any legal representation of clients. The contents of this article are for informational purposes only. For assistance, please consult your legal advisers.