Author/contributor
Mary Messihi
Partner
Key Takeaways:
- Confidentiality agreements (NDAs) are legally binding contracts that protect proprietary information when it is shared with third parties.
- NDAs are standard during due diligence for major business transactions, including mergers, acquisitions, and investments.
- An effective agreement precisely defines the confidential information, parties, permitted uses, and remedies for a breach.
- To maintain their legal status, trade secrets require indefinite protection within an NDA, not a fixed term of confidentiality.
In business, secrets are currency. Whether it’s a groundbreaking invention, a carefully guarded customer list, or a unique operational strategy, confidential information can provide a critical competitive edge. And the only true way to keep a secret is not to tell anyone.
As Benjamin Franklin famously observed, “three may preserve a secret, if two of them are dead”. If you must share secrets, it is best to do so within the framework of a legally binding confidentiality agreement.
These legal agreements, also known as non-disclosure agreements (NDAs), provide a legal framework for secure information sharing, offer critical protection.
Confidentiality Agreements and Due Diligence
Confidentiality agreements are often employed at the due diligence stage of a potential transaction or arrangement. Due diligence is undertaken to verify material facts, financial data, and any other relevant information during a merger, acquisition, or investment process.
Every company has secrets that it views as valuable or that provide a competitive edge. These may include inventions, concepts, operational procedures, client or customer lists, recipes, or anything else the corporation believes has critical value. Businesses must protect these secrets to maintain that edge.
A confidentiality agreement is a contract that requires one or more parties to protect that information and governs how it is to be handled. These agreements can be found in various settings, but they are particularly prevalent in the business and non-profit sectors.
When Is a Confidentiality Agreement Needed?
Any time your company shares proprietary data, whether engaging a marketing consultant, reviewing vendor proposals, or launching a joint online promotion, both sides should execute a clear, written confidentiality agreement. It sets the ground rules before pricing models, technical specifications, or customer metrics change hands.
A well-drafted agreement removes doubt about what each party must protect; defines time limits and permitted uses; and codifies security steps, return-or-destroy obligations, and non-solicitation restraints. Written terms carry more weight than oral promises, satisfy “flow-down” duties in upstream contracts, and preserve trade-secret status that could evaporate after an unguarded disclosure.
The document anchors trust and permits decisive collaboration. Without it, you risk dilution of competitive advantage, breach of third-party commitments, and costly disputes over who said what. We craft streamlined confidentiality agreements that balance speed, cross-border enforceability, and the commercial freedom you need to close the deal.
Key Provisions of a Confidentiality Agreement
1. Definition of Confidential Information
The definition of confidential information is critical in any confidentiality agreement, as this defines the material to be protected. Parties may negotiate whether that information only relates to information being shared in connection with the transaction at hand or all information shared, and when that information was shared. Does protection extend to the receiving party’s notes regarding the transaction or only that portion of those notes referencing the confidential information?
2. Parties to the Agreement
An appropriate description of the parties to the agreement must also be present. In most NDAs, the disclosing party is the one sharing confidential information, typically the seller or its representative, of a target company to be acquired. The receiving party is the recipient of the confidential information, often a potential buyer or investor. It’s important that these parties not be defined too broadly or narrowly to avoid inadvertent consequences. For example, if a company’s definition includes its affiliates, the contract may inadvertently extend unintended or unenforceable obligations in the agreement to those affiliates.
3. Representatives
The confidentiality agreement also specifies to whom the receiving party may disclose the confidential information during due diligence and strategic discussions. Naturally, a party may need to share that information with employees, but what about consultants, limited partners or potential financing sources? The definition of a “representative” is often negotiated to include other necessary parties.
4. Term of Obligations
The duration of the various obligations under any legal agreement must be clearly enumerated for compliance purposes. Most parties resist perpetual obligations for myriad reasons, but in negotiating confidentiality agreements, it’s important to understand that placing a time limitation on protecting trade secrets can compromise their legal protections as trade secrets. Common ground can often be found in agreeing to protect trade secrets that are clearly identified as such, if trade secrets must be shared at the due diligence phase.
5. Permitted Use and Disclosure
The confidentiality agreement must state the intended use of confidential information and the general protections over such use.
Legal and regulatory agencies may require companies to disclose the confidential information at their disposal. The confidentiality agreement must state the terms of such disclosure and under what circumstances a situation will be regarded as a legally required disclosure of the confidential information to protect the parties from liability.
6. Return or Destruction of Information
A key provision of a confidentiality agreement is how to handle the return or destruction of the confidential information. This is often dependent on triggering circumstances and subject to negotiation between the parties. Some parties argue that, in this day and age, returning information is impractical or even impossible, so they insist on the option to destroy the information.
Still, can information truly be destroyed when some parties are required to maintain routine electronic back-ups? If not, the parties may find comfort in agreeing to include language forbidding the recipient party from unnecessarily accessing or using the data retained pursuant to routine or standard back-up procedures or required to be retained by legal or regulatory agencies.
7. Jurisdiction and Governing Law
In the event of a dispute, these clauses provide certainty about how and where it will be resolved. The governing law provision dictates which state’s laws will be used to interpret the contract. This is a strategic choice, as contract law differs from state to state, and parties often select a state like Delaware or New York for their well-established bodies of commercial case law.
The jurisdiction provision, also known as a forum selection clause, specifies the physical location, such as the federal or state courts in a particular city or county, where any lawsuit must be filed. This prevents one party from suing the other in an inconvenient or unpredictable forum. Together, these provisions are not mere boilerplate; they are strategic tools that affect the cost, convenience, and potential outcome of any future dispute.
8. Remedies for Breach
What if a party breaches the terms of the confidential agreement? A shared understanding upfront as to what constitutes a fair remedy in the event of a breach can help avoid a drawn-out legal battle down the road, as the cost of violation can often be difficult to quantify or establish. A remedies provision may expressly grant the ability to seek equitable remedies, as well as enumerate the potential repercussions of a violation.
Read more: Don’t let the complexity of non-disclosure agreements intimidate you. Discover the top 10 provisions and explain why NDAs are essential.
9. Final Thoughts
Protecting confidential information is no longer a matter of choice, but a necessity. Confidentiality agreements provide a vital safeguard, allowing businesses to collaborate and innovate without jeopardizing their valuable secrets. By clearly defining what constitutes confidential information, outlining the responsibilities of all parties involved, and establishing clear consequences for breaches, a well-crafted NDA fosters trust while minimizing risk.
Whether you’re a multinational corporation engaging in a merger or a startup seeking funding, prioritizing confidentiality agreements is an investment in your company’s future success.
FAQ About Confidentiality Agreements
What is in a confidentiality agreement?
A confidentiality agreement is a contract specifying how sensitive information will be handled. It defines what is confidential, identifies the parties, and lists who (representatives) can access the data. The agreement outlines the permitted use of the information, the duration of the confidentiality obligation, and the procedures for its return or destruction. It also includes the governing law and jurisdiction for handling disputes and enumerates the specific remedies available in the event of a breach.
Is a confidentiality agreement legally enforceable?
Yes, a confidentiality agreement is a legally enforceable contract. When a party breaches its terms, the other party can seek legal recourse. For the agreement to be enforceable, its terms must be clear, reasonable in scope, and supported by valid consideration. Courts can award monetary damages for a breach or, more commonly, grant equitable remedies like an injunction to stop any further disclosure or misuse of the protected information, making it a powerful business tool.
What are examples of confidentiality?
Examples of confidential information span all areas of a business. They include proprietary technical data like software source code, product designs, and manufacturing processes. Commercial information is also frequently protected, such as customer and supplier lists, marketing strategies, and non-public financial data. Even operational secrets, like unique business methods or the formula for a product, are protected as confidential information to help a company maintain its competitive advantage in the marketplace.
What is the difference between an NDA and a confidentiality agreement?
While the terms NDA and confidentiality agreement are often used interchangeably, a key distinction lies in their scope and typical use cases. An NDA is a more specific term, often used for one-off situations like evaluating a potential business deal or partnership, while a confidentiality agreement can be broader and encompass ongoing relationships like employment or long-term business partnerships.