(April 12, 2012): You are considering a business transaction. The other party will be disclosing confidential information to you and asks that you sign its “standard form” Non-Disclosure Agreement. Before signing a Non-Disclosure Agreement, you need to carefully review whether it is in your best interests to enter into such a document. Here is a list of questions you should consider when reviewing a proposed Non-Disclosure Agreement. The list has been compiled from the perspective of the Recipient of the confidential information. Keep in mind that a “standard form” Non-Disclosure Agreement is usually slanted to the benefit of the disclosing party. Non-Disclosure Agreements can come back to haunt the Recipient and should be carefully reviewed. For best results, ask your counsel to review the Non-Disclosure Agreement as well!
- How is confidential information defined? The Recipient should seek a narrow definition and one that is precise.
- Does the agreement contain standard exceptions to what constitutes confidential information?
- The Non-Disclosure Agreement should have a stated term (e.g., one year).
- Does the agreement contain non-compete provisions and are they appropriate?
- Does the agreement contain non-solicitation provisions and are they appropriate?
- Is the agreement mutual where appropriate?
- Consider whether the agreement impairs, or could impair, the conduct of your current business now or in the future.
If the Non-Disclosure Agreement has a vague definition of confidential information, no exceptions to what is considered confidential, no termination date and broad non-compete and non-solicitation provisions … let the buyer beware and review the Non-Disclosure Agreement especially carefully. Be prepared to further negotiate the terms of the Non-Disclosure Agreement. As you negotiate the Non-Disclosure Agreement, ask yourself (or do) the following:
- Can the confidential information be defined to include only written materials that are marked “confidential”?
- Does the definition of confidential information specifically reference only proprietary, non-public information?
- Conversely, does the definition of confidential information exclude (1) information that is or becomes generally known to the public, (2) information in your possession before or after the date of the Non-Disclosure Agreement that is not subject to a confidentiality restriction, and (3) information that is independently developed by you?
- Does the Non-Disclosure Agreement describe specifically and precisely the nature of the confidential information to be disclosed?
- Keep records of what confidential information is actually received.
- Take steps to insure your employees and representatives are aware of and comply with the Non-Disclosure Agreement.
- The agreement should allow the recipient to disclose information as may be required in a legal proceeding or as required by applicable law or regulation.
- Does the Non-Disclosure Agreement contain a term and/or termination provision that is reasonable and appropriate? What is the “economic life” of the confidential information?
- If you are to receive material, non-public information from a company whose securities are publicly traded, be aware of and comply with applicable “insider trading” regulations.
- Be aware that the agreement will likely prohibit disclosure and use of the confidential information other than for the stated business purpose.
- Does the agreement include a “non-compete”? Is a non-compete appropriate for your business transaction? Is it overly broad, such as by prohibiting contacts with “all customers” or “prospects”?
- Within the definition of confidential information, check if the agreement includes items or work product that are derived from the confidential information – make sure the “derivative work” provision is not overly broad.
- A provision providing for specific enforcement and injunctive relief is commonplace in an Non-Disclosure Agreement; any provision for incidental or consequential damages should be carefully reviewed.
- Does the Non-Disclosure Agreement include a “non-solicitation of employees” provision? Is this appropriate given the nature of the business transaction being considered? Does the non-solicitation contain carve outs for general advertisements for employment or a situation where the employee initiates the conversation regarding employment?
- Should the agreement be “mutual” in nature – i.e., should your counterparty be making agreements for your benefit as to confidential information, non-competition, or non-solicitation? Depending of the business transaction being considered, perhaps the agreement should be a two-way street.
Over the years we have seen examples of Non-Disclosure Agreements that are over-reaching and have caused a Recipient unnecessary complication after the fact. In summary, when signing an Non-Disclosure Agreement as a Recipient, carefully review the Non-Disclosure Agreement as a contract that may be important not only to the disclosing party, but to your current and future business as well.
Andy Lynch has significant experience in reviewing Non-Disclosure Agreements and negotiating business transactions. In addition, Andy is skilled in advising clients on both sides of a deal about the potential risks and consequences of the purchase or sale of a business. Andy can also help with corporate compliance and governance. Andy can be reached at (202) 298-8750.