Select 2016 A matter of trust? A practical guide to negotiating your NDA

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1 Select 2016 A matter of trust? A practical guide to negotiating your NDA Amanda Onions, PSL Counsel Hannah Logan, Senior Associate 13 October 2016

2 Introduction Negotiating NDAs Drafting NDAs What happens if there is a breach "In almost every profession whether it's law or journalism, finance or medicine or academia or running a small business people rely on confidential communications to do their jobs. We count on the space of trust that confidentiality provides. When someone breaches that trust, we are all worse off for it." Hillary Clinton Hogan Lovells 2

3 What is confidential information? The law of confidence covers a broad range of confidential information and different factual circumstances Information which is of commercial value Information which is not of value but which has 'the quality of confidence' Manufacturing and production processes; financial information; client or customer lists; pricing; technical formulae; ideas and proprietary knowhow In an M&A scenario it will be all of the above Confidential information 'must not be something which is public property and public knowledge' SaltmanEngineering Co. Ltd v Campbell Engineering Co. Ltd [1960]3 All ER 413 Hogan Lovells 3

4 Defining confidential information Before or after date of NDA Who needs to supply information? Fiduciary duties? Form and manner Standard exclusions but also: Public domain at time of disclosure or after (but not in breach) Independently created (e.g. market reports) Information already obtained (but not in breach ) Confidential information in a mutual exchange for example, PE funds' involvement in an auction Hogan Lovells 4

5 Before beginning to draft Consider How sensitive is the information to be disclosed? What are the advantages and disadvantages of disclosing it? Should the information be disclosed at all? Hogan Lovells 5

6 Who should draft the NDA and what form should it take? No rule of thumb Tuypically drafted by the party relying on it (e.g. seller) May be easier to settle negotiation of the terms in a bilateral confidentiality arrangement Is it about cost? What form should an NDA take? Should it be in writing? Should there be consideration? Hogan Lovells 6

7 Who is bound? Party to the NDA individual/corporate UK/non-UK? if a seller: company or investment bank? if a buyer: position in the corporate structure? Disclosers the 'owner' of the confidential information affiliates of the disclosing party advisers Recipients affiliates of the recipient categories of persons (operating partners, consultants, members, partners) and level in structure advisers funders Hogan Lovells 7

8 Recipients duties - how can the information be used? The discloser will want to minimise the way that the information is used. Permitted purpose evaluating and negotiating transaction arranging financing for transaction Protection from third party 'leaks'? express list of 'affiliates' recipient may limit its liability by ensuring that only those third parties who actually receive information will be 'affiliates' Auctions The successful bidder will want protection from disclosure of sensitive information about its new asset The recipients obligations should therefore be to both the seller and the target or the seller should be expressly permitted to assign its rights Hogan Lovells 8

9 Keeping confidential practical tips Who are the recipients? Agree a list of discloses and recipients What is confidential? Labelling Encryption and password protection Confidential Information Don't assume: - recipients won't necessarily understand their obligations - define recipients - manage the exchange and provide guidance Data rooms Limit to hard copy Control copies Keep records Hogan Lovells 9

10 Liability for actions of recipients and permitted purpose Obligation to procure compliance - minimum Liable for breach of third party recipient or affiliate? Obligation limited to instructing to keep confidential? Liability falls away if recipients directly sign up or adhere? If so, all obligations or just confidentiality? Hogan Lovells 10

11 Back to back NDAs NDA Obligations on B A Disclosure B C Disclosure agree to keep and procure to be kept all confidential information procure that third parties are bound by similar obligations be held responsible for breaches and unauthorised disclosure. No back to back. Hogan Lovells 11

12 Risks to not having a back to back In the absence of a clear back to back, the courts have: found that B ought to have entered into a back to back with C; B could be liable in respect of the information it disclosed to C and that which A disclosed to C directly; More onerous a simple obligation to procure that a third party is bound by similar obligations of confidentiality may be construed, as here, as imposing more onerous obligations on the receiving party than might be anticipated back to back agreement may therefore be prudent for the receiving party Third party on notice The obligation in the original NDA to notify the third part (in this case C) of the confidentiality, can of itself put that third party on notice so that an action for breach can be brought Hogan Lovells 12

13 Duration and Termination The disclosure period The non-disclosure period no maximum can be until information becomes public an unlimited non-disclosure period is likely to be resisted Risk if the NDA is silent on term and termination Drop dead date if deal signs Hogan Lovells 13

14 Exceptions and exclusions Commercial reality check Information which is not confidential already public already known by the recipient information required to be disclosed by law (though should be limited) Law, regulation and rules of professional bodies Exceptions Statutory obligations Data Protection Act 1998, Employment Rights Act 1996, Proceeds of Crime Act 2002 Public interest Hogan Lovells 14

15 Non solicit/restricted contact Non- solicit - key directors/employees or limited to direct contact during the pre transaction discussions? Non compete - customers/suppliers Carve outs for portfolio companies or fund's other activities or "knowingly" Limited period and customary carve outs Contact excluded or just not in connection with transaction? Contact with regulators? Commercial DD Hogan Lovells 15

16 Termination of discussions Return or destruction remember practicalities whose election to decide? timing and trigger for action carve outs hard drives internal policies (of recipients) rules of professional bodies investment committee papers Hogan Lovells 16

17 Remedies Injunction most effective remedy but the agreement may already be breached Not possible to make the information private again Hard to prove the breach Damages may not be adequate even if a claim is successful Once there has been a breach, competitors are likely to exploit it regardless of the remedy under the agreement Ensure adequate procedures in place Hogan Lovells 17

18 Checklist Who will be bound? don t forget affiliates who will be liable for an affiliate or third party breach Is a back to back necessary? a question for the recipient as much as for the discloser What is the confidential information? from whom and when? Listed company considerations? Is a non-compete necessary? often controversial and tricky to get right What about a non-solicitation? tipping off employees to the potential for a transaction What law should apply? critical differences between jurisdictions When does it end? Hogan Lovells 18

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