Over the coming weeks, our corporate transaction series will follow the key stages of a hypothetical share acquisition. We hope that this will provide some food for thought and highlight some key issues to be considered by anyone considering acquiring or selling a business themselves.
In our first instalment of the series, we look at the importance of using a non-disclosure agreement to protect against the disclosure of your businesses confidential information.
What are Non-Disclosure Agreements?
A non-disclosure agreement (NDA) or confidentiality agreement, is a contract between parties whereby the disclosing party agrees to disclose information on the basis that the recipient party will maintain the confidentiality of that information. NDA’s are frequently used between parties to protect commercially sensitive information. It may be that the information is especially valuable to the company, or that it would be particularly disastrous if a competitor got hold of it. In such circumstances, it may not be enough to rely upon a relationship of confidence; businesses will usually want a contract in place to provide protection. Furthermore, it serves as a useful tool for indicating the seriousness of the parties’ intent.
When should an NDA be implemented?
It is vital to consider the appropriateness of using an NDA before it is too late and the relevant information has already been disclosed – it is much more difficult to retrospectively protect that information once it has been released and to ensure the information does not reach the public domain. When using an NDA the parties should be clear about what obligations the agreement will impose: what is the precise scope of the confidential information; in what circumstances may the recipient make use of this information; will an indemnity be included in the event of a breach?
What are the costs involved?
The cost of obtaining an NDA will usually pale in comparison to the potential losses a business can face if a relationship of confidence breaks down. If the parties have not contracted around the confidential disclosure then the only avenue open to a business may well be a claim for breach of confidence. This can leave the claimant with a heavy burden of proof to establish the various requisite conditions required for a breach. Conversely, the breach of an NDA will be actioned through a breach of contract claim. In such a case, if the agreement has been clearly drafted to reflect the parties’ intentions then the evidential burden of establishing a breach will favour the claimant.
If you are contemplating the sale or purchase of a business, please contact Simon Porter in BakerLaw’s Company and Commercial department at firstname.lastname@example.org or call 01252 730754 to discuss further.