How to draft or review a non-disclosure agreement
Before you get too bogged down with reading or amending the non-disclosure agreement itself, you should take the time to work out what information you are going to be disclosing, how confidential it is (certain aspects may be more confidential than others) and why you are disclosing it. This will also help you understand what it will cost you if your confidential information is “let loose”. If the cost is minimal, you might not require a non-disclosure agreement at all. If the cost is moderate, you might well choose to draft your own non-disclosure agreement. If the cost is high, it might be better to have a lawyer draft the non-disclosure agreement for you to make sure it really does protect you. Lawyers also carry insurance, so if they make an error and you suffer loss, the insurer will pay.
The first point to note about how to draft a non-disclosure agreement is that you should never start with a blank piece of paper. You need to start with a sensible template. To allow you to do this, we have made our own template freely available – this is only suitable for the one-way disclosure of information as part of a corporate transaction. This is the type of non-disclosure agreement we are most commonly asked to provide.
You may find the other party to the deal gives you their standard document to sign. It is best to be sure you are fully comfortable with the non-disclosure agreement you have been given and all of its terms before you sign it. Note that non-disclosure agreement are normally biased in favour of the drafting party. So don’t be afraid to ask why a clause is included, what it means and, if you are not satisfied, to ask to have it removed or amended. A non-disclosure agreement is a commercial agreement much like any other and bargaining power counts.
So, what does the document itself look like?
The non-disclosure agreement is likely to include the following clauses:
These are the parties to the agreement. In most cases there will be two parties: the Information Provider and the Information Recipient. Insert their full names and, if relevant, company numbers.
The definition of “Confidential Information”
The non-disclosure agreement will define what is meant by “Confidential Information”. This is probably the most important clause in the agreement. You need to spell out what you mean by Confidential Information. A description or a list is a good way of doing this. The definition must not be too wide in scope; be aware that mixing patently non-confidential information with confidential information will cause all information to be treated as non-confidential and render the agreement useless.
Similarly, it must not be too narrowly defined as this might mean key information is not caught by the obligations in the non-disclosure agreement. Linked to this, you need to consider whether copies, notes and secondary information created by the Information Recipient having seen the confidential information should also be included.
The definition of “Permitted Purpose”
The non-disclosure agreement will also use this key defined term. As the words would suggest, this sets out exactly what the Information Recipient is permitted to do with the information. For example, supposing you ran a drinks manufacturing company and you were in talks with an investor to buy half of your shares, the investor would rightly want to carry out his due diligence and this will involve you sending him a great deal of confidential information about your company. This might for example include the recipe for one of your best-selling drinks. The Permitted Purpose of the information you supply is to allow the investor to decide whether he wants to invest. An investor would therefore not only be obliged to keep the information confidential, but also would only be allowed to use the confidential information for the Permitted Purpose. The Permitted Purpose of course does not extend to the potential investor keeping the information confidential but then using it to manufacture the drink himself.
The confidentiality obligation
This is the main clause. It sets out what the Information Recipient must do and must refrain from doing. Keeping information confidential is a given. However, you should consider stating exactly how it should be kept confidential and who may access it, and add in an obligation to return or destroy it and all copies of it on request. The more specific you are, the easier it is for you to inspect for compliance and to prove a breach. For example, where the Information Recipient is a company, consider limiting access to certain named directors and requiring it to be password protected. Consider whether it can be shared with their lawyers or accountants and, if so, consider limiting this to a need-to-know basis.
Duration of the obligation
It is customary to limit the duration of the obligations to a period that reasonably reflects the shelf life of the information being provided. Anything from one year to five years would be normal, but there is no reason why it could not be longer. As a sanity check though, you should ask yourself how long it would take until you would no longer be concerned by a breach of the (now) “old” information. There would seem to be little point in asking for a longer period of protection than you need.
Briefly, you may find the following clauses also included:
This is a clause that will prevent the Information Recipient from competing with your business, and from poaching your staff or clients.
Break clause/lock in/exclusivity
This is a clause found only in corporate deals where one party is locked in to the negotiations for a period of time during which due diligence takes place. If, at the end of the period, a deal is not then completed, one party may be required to pay the other a break fee. Such provisions are unusual, but are relevant where one party requires the other to prove he is serious about the deal at hand.
This clause sets out who can announce what. Normally, you would expect announcements only to be permitted with the consent of both parties.
This clause would set out who will bear the costs of preparing the non-disclosure agreement. Normally, each party would bear its own costs, but sometimes a party can have sufficient bargaining power to compel the other side to pay its legal costs.
William Robins is a partner of Keystone Law and specialises in helping early-stage companies commercialise their products and raise investment. Email him at firstname.lastname@example.org
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