Canada: Taking A Closer Look At Non-Disclosure Agreements

Last Updated: February 22 2013
Article by Amaan Gangji

A Non-Disclosure Agreement ("NDA") is often the first agreement entered into in an M&A transaction. During the initial stages of a proposed transaction the parties will exchange confidential information in connection with the consideration and negotiation of the proposed transaction. An NDA is designed to protect confidential information from being misused and disclosed to the public. Ideally, any party providing confidential information should ensure that an NDA is in place prior to any exchange of confidential information. This applies to transactions of all sizes.

Thinking about what should go into an NDA or reviewing an NDA that comes across your desk largely depends on what side of the deal you are on. Providers of confidential information will be concerned with whether an NDA adequately protects their confidential information, while recipients of confidential information will be concerned with whether the obligations imposed upon them are unduly burdensome or overreaching.

Some of the more salient points to consider are outlined below:

Information Exchange

It is always prudent to consider the relationship between the parties and how confidential information will be exchanged. In most cases, confidential information flows from the vendor to the prospective purchaser. In such circumstances, an NDA that imposes mutual obligations to protect and not disclose confidential information leaves the vendor open to unnecessary liability. After all, if a party isn't receiving confidential information, they shouldn't have any obligation to protect it.

Definition of Confidential Information

Another critical consideration is how confidential information is defined. Providers should ensure that the definition of confidential information sufficiently covers the information and materials that are being provided and, if applicable, should also include information that has been previously provided. Recipients will want to ensure that the definition of confidential information is restricted and specifically excludes information that is generally available to the public or was independently discovered by the recipient.

Provision of Confidential Information

Although a strong NDA protects confidential information, the greatest protection is keeping that information from ever getting out. Providers will want to ensure that they have complete discretion to control the flow of information to recipients. Providers should carefully consider when and how they relay confidential information to recipients. Certain confidential information should wait until a firmer commitment is in place before it is released.

Furthermore, providers should clarify that the confidential information is being provided without any representation or warranty from the provider and that there will be no liability for the provider. Any representations or warranties with respect to the confidential information should more appropriately be found in the definitive agreement.

Use of Confidential Information

Providers of confidential information will want to include language restricting the use of confidential information to the specific purpose of evaluating the proposed transaction and for no other purpose. Language should clarify that no license is being granted to the recipient and that ownership of the information and materials provided remains with the provider.

Agents and Representatives

In evaluating a proposed transaction, recipients of confidential information will often work with agents and representatives. Providers should ensure that these agents and representatives are also bound by the terms and conditions of the NDA. In some cases, it may be appropriate to have certain agents and representatives sign a joinder agreement holding them personally liable for their own breach of the NDA. Likewise, if the recipient of confidential information is a shell company with few assets, it would be prudent to have the parent company or other affiliates also sign the NDA.

Restrictive Covenants

NDAs should carefully consider if restrictive covenants such as non-competes and non-solicitation provisions ought to be included. Such restrictive covenants limit the ability of the recipient of confidential information from competing with, soliciting the clients of, and hiring the employees of the provider of confidential information. Restrictive covenants that are over-reaching and too broad are unenforceable and, accordingly, such provisions must be carefully crafted in light of the specific circumstances. Providers of confidential information will want to protect their territory, employees and client lists, while recipients of confidential information will want to ensure that these restrictions are limited only to what is absolutely necessary.

Term

Providers of confidential information will want to consider if the passage of time would make confidential information any less confidential. If not, which is usually the case, the NDA should have an unlimited term. Conversely, recipients will want to consider limiting the term of the NDA to a specific time period (usually one to five years).

Remedies and Damages

In the event an NDA is breached, the NDA should include language whereby the recipient acknowledges that monetary damages are insufficient and that the provider is entitled to equitable relief. Similarly, language should be included indicating that any financial advantage obtained by the recipient from the improper use of confidential information will be held in trust for the benefit of the provider.

Other Considerations

Other points that should be addressed in an NDA include the return or destruction of confidential information if the transaction does not proceed, non-disclosure of discussions, legally required disclosures and, if personal information will be exchanged, compliance with the Personal Information Protection Act.

Furthermore, in the event that confidentiality provisions are found in a letter of intent ("LOI"), these provisions should be binding and enforceable notwithstanding the nature of the other provisions in the LOI. Ideally, these confidentiality provisions should be broken out into a separate and more comprehensive NDA.

Ultimately, in allowing a prospective purchaser to consider an M&A transaction, the vendor will likely have to provide critical business information to one of its competitors. Failing to sufficiently protect this information leaves the provider, usually the vendor, in a vulnerable position. Without careful consideration of all the possible implications under various scenarios, you may find that NDAs contain provisions that aren't nearly as effective as they were intended to be.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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