Spread The Word: Don’t Ignore Confidentiality Agreements

By Robert G. Marks & Patrick L. Gregory, McGuireWoods LLP

For every deal you review, you probably sign a confidentiality agreement (also called a nondisclosure agreement or NDA). For every company you sell, you probably should require a confidentiality agreement. However, private equity funds spend surprisingly little attention reviewing and negotiating these short, important agreements. Below are several characteristics of confidentiality agreements that you should consider before signing them.

General Considerations

Prior to discussing details of a proposed deal, a party disclosing the confidential information, such as a potential seller, should protect itself by having the receiving party sign a confidentiality agreement that is separate from any other legal documentation. We suggest a separate agreement because you may need to disclose the confidentiality agreement to enforce your rights or to provide your eventual buyer a copy, and you don’t want others to see the letters-of-intent terms. If a potential seller believes the existence of negotiations themselves to be sensitive information, the agreement should require the potential buyer to keep this fact confidential. The party receiving the confidential information should make this obligation reciprocal.

Parties need to be clear as to what the receiving party is allowed to do with the confidential information. Usually, parties should have a provision stating that the information may be used for assessing the proposed deal, and may not be used for any other purpose. The agreement must also specify which associates of the receiving party may be given the information. Permitted recipients should be all of those necessary to adequately assess the proposed deal, and might include directors, officers, employees and consultants.

Confidential Information Definition

The agreement must state which information is protected by providing a definition of “confidential information.” One of the two major approaches to this task is defining confidential information as all tangible material marked as such, and all intangible information given within a certain period of time. Here, intangible disclosures should be confirmed by the disclosing party in writing. While this definition helps provide clarity as to which material is protected, it can also be problematic. If a potential seller fails to mark sensitive information confidential, it could face disastrous consequences.

A better approach is to define confidential information as “all information provided by the potential seller.” This definition is more comprehensive and offers better protection to the disclosing party, yet is also less burdensome. With either definition, a bidder should attempt to exclude certain types of information, including public information, material information that later becomes public, information that the potential purchaser already knows prior to the agreement, and information received from a third-party source that is not itself in breach of a confidentiality agreement.

Employee Solicitation

While trying to evaluate the proposed deal, a potential buyer may be in contact with the potential seller’s employees. Thus a potential seller may wish to protect itself with a provision prohibiting buyer solicitation and/or hiring of its employees for some period of time. Potential buyers dislike such provisions because of the risk they may accidentally solicit or hire the employees. One way to address this is to allow general solicitation, but prohibit direct solicitation of individual employees.

Length Of Agreement: Definite Or Indefinite?

Opinions vary on the question of how long confidentiality agreements should remain in effect. Buyers understandably wish to limit the term, and as a result, most have one-year or two-year terms. For financial numbers, which tend to get stale fairly quickly, this seems reasonable. However, for trade secrets, it is harder for a bidder to argue the protections should ever go away. Accordingly, parties may wish to bi-furcate the terms for different types of information.

Copies And Derived Materials

Most confidentiality agreements require that the bidder return or destroy, and direct its agents to return or destroy, all copies of confidential information received and any derivations thereof. Sellers should specify that copies include paper, computer, photo and any other form of fixation. Unless there is a regulatory reason otherwise, sellers requiring copies to be destroyed is reasonable, as long as the definition of confidential information is reasonable.

A more difficult question surrounds derivations of confidential information. Consider a situation where a bidder’s deal with company A fails, and a confidentiality agreement has been signed covering derivations. If the purchaser is interested in buying company B, a company in the same line of business as company A, the purchaser may well need to use its analysis of company A in order to assess company B. Or, at the very least, it would appear that the purchaser used its analysis of company A in order to assess company B. Company A might object that the analysis contains confidential information protected by the agreement. Thus, purchasers must consider how to separate their analysis of a company from confidential information provided by the target, before they agree to such provisions.

What If There Are Co-purchasers?

Until recently, private equity funds were increasingly cooperating and buying companies together in club deals. When signing a confidentiality agreement, a potential purchaser must consider whether it will later want to join forces with another bidder. If a confidentiality agreement is in place, it could hinder the purchaser from sharing information such as diligence and projections with a co-purchaser.


While a purchaser will not want an agreement that is too restrictive, it is possible for a target to be too lenient with its confidential information. If a company has been loose in its confidential information with other potential buyers, those companies may have knowledge that could be used against the actual purchaser after closing. Purchasers should consider that if a company is being lenient with them, it has likely been lenient with others. It is advisable that a purchaser ask to see the confidentiality agreements signed by the target.

Signature Requirements

While a seller should require that the information only be given to those necessary for the buyer to assess the deal, this requirement is sometimes taken to an extreme. This occurs when an agreement demands the individual signatures of employees or agents. Such a provision creates a situation where an employee or agent of the buyer may be individually liable to the seller. This type of relationship often should be avoided. A better approach is to have the purchaser be liable for the actions of those to whom it discloses the confidential information.

Disclaimers Of Information Accuracy And Completeness

Confidentiality agreements often include disclaimers as to the veracity and completeness of the information the seller provides to the buyer. Clearly, data rooms and diligence are not a legally binding way for the seller to make representations to the buyer. Definitive purchase agreements are for that. However, buyers are using the information to make a bid for the company. One compromise is to require the seller to state its good-faith belief in the accuracy, and perhaps the completeness, of the information. Another compromise is for a seller to specify that the disclaimer does not apply to knowing misstatements.


The parties to a confidentiality agreement should look ahead to what problems might arise if a breach were to occur. One important issue to consider is which court would hear the parties’ arguments. If the jurisdiction is unfamiliar to a party, it may be at a disadvantage if a legal battle occurs. Some jurisdictions may tend to favor one party’s side of the issues versus another. Also, some courts are closer to a party’s headquarters than others, and a party may want to avoid a long trial in a far-away court that could interfere with its business operations. A seller can prevent this problem by including a provision specifying which court should hear any disputes, and waiving rights to move legal action to courts in different jurisdictions.

Remedies In The Event Of A Breach

While a seller should decide beforehand what court jurisdiction its confidentiality agreement should be subject to, sellers should also consider what type of relief they would want if the confidentiality agreement is breached by the purchaser. Courts have some difficulty determining the value of confidential information, making it difficult to predict what damages a court might award, if any. Sellers may be able to protect themselves from this uncertainty by including two types of “equitable relief” in their confidentiality agreements: injunctions and liquidated damages.

Injunction provisions allow a party to seek a court order preventing another party from taking certain actions. For example, if a purchaser began using information it obtained in violation of the confidentiality agreement, a seller could seek an injunction against the buyer’s use of this information. While pursuing a traditional lawsuit can often be prohibitively expensive, with an outcome that might not be decided until years down the road, an injunction can sometimes offer fast and effective protection to the offended party.

Liquidated damage provisions may similarly provide more certainty concerning what a seller should be awarded if a confidentiality agreement were to be breached. These provisions specify the dollar amount of damages to be paid to an offended party in the event of a breach.

Both of these equitable relief provisions should acknowledge that the seller is entitled to such relief if a breach occurs or is threatened. They should also state that the harm from such a breach would be irreparable, and that monetary remedies alone would be insufficient. Sellers should include language stating that they do not have to prove actual injury or post any type of bond in order to be entitled to these remedies. These provisions are commonly included in confidentiality agreements, and while judges always have discretion regarding whether or not to grant equitable relief, a seller will have an easier time obtaining an injunction or liquidated damages if the confidentiality agreement specifically provides this language.


A seller must ensure that the confidentiality agreement adequately protects its vital secrets, while purchasers must be careful not to agree to restrictions they will later regret. Confidentiality agreements should help parties discuss their potential deal, rather than hinder them from doing so. For this reason, such agreements should be easy to understand and assist a successful deal’s completion.

Robert G. Marks is a partner at McGuireWoods LLP and the author of the book, “Securities Purchase Agreements Line by Line: A Detailed Look at Pro-Buyer and Pro-Seller Variations within a Purchase Agreement.” Reach him at rmarks@mcguirewoods.com. Patrick L. Gregory is an associate at McGuireWoods LLP; reach him at pgregory@mcguirewoods.com.