Mergers and acquisitions can be enormously complex transactions. Parties are sharing, investigating and accessing an incredible amount of information, including trade secrets, which can be vulnerable to misuse if it falls into the wrong hands.
Thus, having a nondisclosure agreement can be crucial for parties navigating this situation and sharing confidential information. And the NDA should fit the following criteria to be effective.
It is specific.
The courts may not enforce contracts with vague or non-specific terms. Recently, for instance, the U.S. Court of Appeals ruled that a nondisclosure agreement between Olaplex, Inc. and L’Oreal was not specific enough to show that L’Oreal violated it after the company withdrew from acquisition conversations.
The NDA allowed L’Oreal to use various types of information to assess their options regarding the acquisition. Olaplex argued the L’Oreal misappropriated trade secrets in violation of their agreement. However, the Court disagreed, saying the contract lacked the specificity to protect trade secrets.
Thus, businesses in similar situations will want to ensure their NDAs are specific when identifying protected information and detailing authorized use.
It establishes firm boundaries.
In addition to being specific, an effective NDA should also clearly define rules, responsibilities and boundaries. Parties should understand:
- What they can and cannot do
- What they can and cannot share
- The length of time parties must keep the information confidential
- Who is authorized to access information
- What they must do with the data if the deal does not move forward
- How they must resolve disputes
These and other rules can be crucial in protecting trade secrets and ensuring an NDA is enforceable.
The only way an NDA can protect a company’s trade secrets is there is one, to begin with. If parties fail to have this or another type of confidentiality agreement in place before engaging in merger or acquisition talks, they have fewer options when someone is accused of misuse.
When your business is in a position to disclose sensitive, valuable information during a business transaction, you should feel assured that it will retain its status and value. Drafting a valid NDA can help you move forward with these complex matters with confidence.