Doing business of any sort involves a lot of trade secret varieties and confidential information, and in many cases, there is seemingly no way to protect it. Trade secrets, business practices, financials, intellectual property (IP) and other corporate knowledge all contain sensitive information that should remain confidential, and this data needs protection. There is a way, however, to legally guard this proprietary information against misuse: by employing a non-disclosure agreement (NDA).
What Are NDAs?
A NDA is a legal and binding contract that establishes a confidential relationship between two (or more) parties that are involved in a transaction of some kind. A non disclosure agreement is an extremely common type of document that is used in many types of transactions between businesses and individuals. In short, the party signing the NDA agrees that they are entering a confidentiality agreement – a situation where sensitive information is disclosed, which is material that should not be shared with anybody outside of the transaction.
For example, many employers require that employees sign nondisclosure agreements in order to protect the employer’s confidential business information, trade secret options, or practices. Leaking this data may jeopardize the transaction, or have other negative effects on the parties involved, including financial consequences. In some instances, nondisclosure agreements are also referred to as a “confidentiality agreement.” What are NDAs, in a nutshell? In short, an NDA is a legally binding version of “what is said here, stays here.”
The Purpose of NDAs
An NDA is an acknowledgment that the parties involved in the transaction are dealing with sensitive data and that any disclosure between them is not to be shared with outsiders. When two parties enter into discussions about potentially doing some sort of business together, both sides want to protect their own interests and the integrity of the overall deal. A non-disclosure agreement protects the discussion that leads up to the deal and prevents outside factors (such as stock prices, for example) from influencing the negotiations.
How NDAs Are Used in M&As
In a merger and acquisition (M&A) transaction, using an NDA is mandatory. In this instance, the nondisclosure agreement spells out exactly what information is shared between all the parties involved and often limits how the buyer can use the seller’s information. The nondisclosure agreement defines in detail what the confidential information consists of, how it can be used, any legally required disclosures and the details on the return of any information.
3 Types of NDAs
Similar to other types of business contracts, there are a few different varieties of NDAs. These include the following.
1. Unilateral (or non-mutual) NDA
Sometimes referred to as a one-way (or one-sided) NDA, this type of NDA is typically used for employees (or contractors) working for a company. Its purpose is to protect the confidential information that the employee (or contractor) encounters while working at the company. In this instance, only one party is a signatory to the document.
2. Mutual NDA
A mutual NDA is where all parties involved sign the document. Each party involved must abide by the terms of the document.
3. Merger and acquisition NDA
Any company considering any sort of M&A activity is required to sign the document, as any information that leaks out can jeopardize the entire deal.
Things to Consider
In addition, there is a long list of items that should be incorporated into the NDA so that all parties involved are on the same page. These items include the following:
- What information is covered under the NDA?
- How long the agreement is valid?
- Are there any non-compete clauses?
- Who is privy to the confidential information?
When a Virtual Data Room Is Required
Any deal that requires an NDA absolutely needs a secure, online location where all parties involved can store and share (with the appropriate credentials) the documentation for the deal. A virtual data room (VDR) is an online repository that contains all the necessary tools to complete a secure, successful transaction. The tools in the VDR that you choose should include high-level admin controls, document and version management, multiple layers of security and customer support that’s available 24/7.
Confidentiality and Security With CapLinked
CapLinked, an industry leader in the VDR space, can help streamline tasks and save time and effort when it comes to business dealings that require an NDA. To learn about CapLinked’s advanced VDR features, document collaboration controls, customizable permissions and more, start your free trial.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
Sources
Investopedia – Non-Disclosure Agreement (NDA)
Faegre Drinker – M&A 101: Key Concepts in Non-Disclosure Agreements
LinkedIn (Prantap Kalra) – Types of Non-Disclosure Agreements
Virtus Law – What Purpose do NDAs Serve in M&A Transactions?
