Why should you enter into a confidentiality agreement before the negotiation of a transaction begins?
When negotiating with the other party (buyer or seller), a confidentiality agreement is typically executed prior to the planned transaction. In practice, you may often encounter the abbreviation \"NDA,\" which stands for the English term “Non-Disclosure Agreement”. But what is the purpose of this agreement, and is it worth executing?
What is a confidentiality agreement?
The subject of the confidentiality agreement is the framework definition of confidential information related to the planned transaction, which you will disclose to the other party for this purpose, as well as the obligation of that party to maintain strict confidentiality regarding this information. Essentially, it is about ensuring that there is no misuse of key or secret information that could harm your company or devalue the transaction itself. If such misuse were to occur, you would subsequently be entitled to a contractual penalty, which is typically stipulated in the agreement, or compensation for damages incurred as a result.
The protection of information provided prior to the conclusion of the contract is generally also safeguarded by law. However, the disadvantage is that the scope of such information is not precisely defined, and there is no specified amount for the contractual penalty in the event of a breach of this obligation. Concluding an NDA helps to mitigate this uncertainty.
What must not be missing from the agreement?
The confidentiality agreement is not specifically regulated by any legal statute, so it is left entirely to the parties to determine their mutual rights and obligations. The agreement should be executed in writing, as otherwise it would be very difficult to enforce the obligations set forth in it against the other party. However, you can include it directly in the contractual documentation (e.g., in the Term Sheet) or conclude it as a separate agreement. When drafting it, it is always advisable to consult a legal advisor with experience in this area to ensure that the agreement serves its purpose. For the agreement to be binding and legally enforceable, the following information must be validly included:
· Scope of information protected by the agreement
· Circle of persons who have access to the information
· Duration of the agreement
· Contractual penalty and other sanctions for breach of the agreement
What information does the agreement protect?
In the confidentiality agreement, it is necessary to carefully define all information to which the agreement is to apply – the scope of this confidential information and its definition is thus entirely in the hands of the parties. However, it is important to ensure that the confidential information is defined sufficiently clearly so that the agreement is valid and enforceable, and the parties are certain about which information this agreement will cover. A too general definition would lead to the unenforceability of the agreement. For example, it is not possible to include all information exchanged during the transaction negotiations, as some of it also consists of publicly available information or information that must be disclosed to government authorities, which by their nature cannot be part of the confidentiality agreement. Such information is often explicitly excluded from the agreement.
Typically, the following information is included in the agreement:
· Trade secrets
· Pricing policy
· Marketing and strategic information
· Manufacturing and technological processes (know-how)
· Documentation for future projects, products, or services
· Information about suppliers, customers/clients
· The mere fact that negotiations are taking place regarding the transaction between the parties
· Price amount
· Other confidential information that is to be kept from third parties
Who can have access to confidential information?
Another part of the confidentiality agreement is the identification of specific individuals or, for example, departments of the company that actually need access to confidential information to prepare for and successfully complete the transaction. It is also necessary to agree on the circle of third parties with whom the other party may share the information (e.g., legal or financial advisors who assist with the transaction). The aim of the agreement is to ensure that all individuals who have access to the information are bound by the obligation of confidentiality. Finally, it is also possible to regulate the technical security of the information – for example, the condition of encrypted access, maintaining a list of individuals, signing an NDA accession, etc.
How long is the confidentiality agreement valid?
The duration of the agreement again depends on the agreement of the parties and will likely depend on the nature of the confidential information. However, the validity of the agreement should never end before all steps of the transaction are completed, and it is advisable to set the duration so that you are protected even in the event that the other party changes its mind and, for example, withdraws from the company.