An Overview of NDAs

Non Disclosure Agreements (NDAs, also called CAs for Confidentiality Agreements) are contracts that stipulate that information received from a counterparty will only to be used for the purpose as defined in the NDA and that it will not be used as a basis for competitive tactics or shared freely with others.  NDAs are signed in cases of divestitures but also for joint ventures and other collaborative and strategic relationships.  The term of an NDA is typically 1 to 3 years and the appropriateness of the term depends very much on the rate of change in the company and the industry in which it operates. 

NDAs may include non solicitation and/or non circumvention clauses.  Non-solicitation clauses can apply to customers and/or employees.  Non circumvention clauses protect entrepreneurs with great ideas from well capitalized parties acting on the idea without acknowledging or compensating the entrepreneur.

Every NDA will include clauses that describe when the agreement does not apply; such as (i) if the information falls into the public domain, other than as a result of a disclosure in violation of the agreement; or (ii) if the information is already known to the recipient at the time of its disclosure; or (iii) if it is independently obtained or developed by the recipient.  The reasons for these are fairly self evident.  You can’t stop a person from acting on information that they already know or is publicly available (that everyone else can act on). 

NDAs may need to be adjusted for different jurisdictions and for certain counterparties.  For example, NDAs usually address what the recipient should do with the information once one party determines the process is over.  This may include returning or destroying the information; however, in certain jurisdictions companies will want to retain a copy of the information in case it is required to be disclosed pursuant to applicable law, regulation or legal process.  Private equity and venture capital groups typically add a clause to protect their ability to invest in, or operate companies in the same or related fields of business as that engaged in by the company.

Certain companies will not sign NDAs at all (at least not in the initial stages).   IBM will not review blind teasers (i.e. a summary without disclosing the company name) and requires all introductory information to be marked "non-confidential".  Microsoft’s policy is that NDAs are executed on the condition of aligned business group(s) willing to sponsor an engagement.  These companies see so many proposals and are in so many businesses that they have simply decided that it is not worth the expense of processing NDAs at an early stage.

So, do NDAs really protect you from counterparties using the provided information against you? And if someone contravenes an NDA, can you prove it?  Can you sue them.. yes, will it be worth it?  Rarely.  My view is you should always put an NDA in place before you share information but then use caution and share only select information that will not potentially harm your business.  Don’t view an NDA as a bullet proof vest.  Continue to be guarded particularly in the areas of new business partners, potential new customers and key employees.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.