COMMERCIAL & BUSINESS LAW

Confidentiality Agreements and NDAs: What Australian Businesses Need to Know

Businesses regularly need to share sensitive information with potential purchasers, investors, contractors, employees and commercial partners. A properly drafted confidentiality agreement can help control how that information is used, who can access it and what happens when the commercial discussions end.

By Katie Chan

Confidential information can be one of a business's most valuable assets.

Customer lists, pricing structures, financial results, supplier terms, business processes, intellectual property, growth plans and proposed transactions can all provide a commercial advantage.

Yet businesses often need to disclose that information to other people.

A business owner considering a sale may need to provide financial information to a prospective purchaser. A company seeking investment may need to disclose its business model and projections. A business engaging a contractor may need to provide access to customer information or proprietary systems.

A non-disclosure agreement (NDA) — also commonly called a confidentiality agreement — is a legal contract designed to protect sensitive information when it needs to be shared.

IP Australia recommends having an NDA in place before disclosing sensitive information to people such as potential business partners, employees, contractors, advisers, investors or potential purchasers.

What Is a Confidentiality Agreement?

A confidentiality agreement establishes contractual obligations concerning information disclosed between parties.

It can specify:

what information is confidential;
why the information is being disclosed;
what the recipient may do with it;
who else may receive it;
how it must be protected;
what information is excluded;
how long confidentiality obligations continue;
what happens when discussions end; and
what remedies may be available if the obligations are breached.

An NDA does not prevent information from physically being disclosed.

Instead, it establishes legally enforceable obligations governing how the recipient may use and disclose that information.

Is an NDA the Same as a Confidentiality Agreement?

Generally, the terms NDA, non-disclosure agreement and confidentiality agreement are used to describe the same type of commercial arrangement.

The title is less important than the actual terms.

A two-page document called an NDA may impose very broad obligations.

A detailed document called a confidentiality agreement may deal with exactly the same subject matter.

What matters is understanding:

What information is protected?

Who is bound?

What can they do with the information?

How long do the obligations last?

When Should a Business Use an NDA?

Confidentiality agreements can be useful whenever commercially sensitive information needs to be provided to someone outside the business.

Common situations include:

selling a business;
purchasing a business;
due diligence;
approaching potential investors;
negotiating a joint venture;
discussing a new business opportunity;
engaging contractors or consultants;
working with manufacturers or suppliers;
developing technology;
sharing intellectual property;
engaging key employees; and
exploring a potential commercial collaboration.

IP Australia specifically identifies potential business partners, employees, contractors, manufacturers, distributors, advisers, investors and potential new owners as situations where an NDA may be appropriate.

Put the NDA in Place Before Disclosing the Information

Timing matters.

Ideally, the confidentiality agreement should be signed before sensitive information is provided.

Once commercially sensitive information has been disclosed without appropriate protections, it may be considerably harder to control what happens to it.

For example, imagine a business owner sends a prospective purchaser:

three years of financial results;
its complete customer list;
supplier pricing;
profit margins;
staff information; and
details of a planned expansion,

and only afterwards asks the purchaser to sign an NDA.

The information has already been disclosed.

IP Australia recommends securing a signed NDA before telling or showing another party sensitive information.

This is particularly important in business sale transactions.

What Information Can an NDA Protect?

The definition of Confidential Information is one of the most important parts of the document.

Depending on the business, it might include:

financial statements;
budgets and forecasts;
customer lists;
customer data;
supplier information;
pricing;
profit margins;
business plans;
marketing strategies;
trade secrets;
formulas and recipes;
business processes;
software;
source code;
designs;
inventions;
research;
intellectual property;
contracts;
employee information;
acquisition opportunities;
proposed transactions; and
other information not generally available to the public.

Australian Government guidance identifies client lists, pricing information and trade secrets as examples of information that businesses may protect through confidentiality provisions.

The definition needs to be broad enough to protect the business without becoming so vague that the recipient cannot reasonably determine what information is subject to the obligation.

Should Everything Be Confidential?

Not necessarily.

A well-drafted NDA commonly excludes information that:

is already publicly available through no breach of the agreement;
was lawfully known to the recipient before disclosure;
is lawfully received from another person without confidentiality restrictions;
is independently developed without using the confidential information; or
must be disclosed by law.

The precise exclusions depend on the transaction.

Without appropriate exclusions, an NDA can purport to restrict information that is not genuinely confidential.

What Is the “Permitted Purpose”?

An NDA should usually explain why the confidential information is being provided.

This is sometimes called the Permitted Purpose.

For example:

To evaluate the proposed acquisition of the business.

Or:

To assess a potential investment in the company.

Or:

To evaluate a proposed commercial collaboration between the parties.

The recipient can then be restricted from using the information for purposes unrelated to that transaction.

IP Australia recommends describing the reason information is being shared rather than unnecessarily setting out the actual secrets within the NDA itself.

That distinction is important.

The agreement protects the confidential information — it should not itself unnecessarily reveal it.

One-Way vs Mutual NDAs

Confidentiality agreements can be one-way or mutual.

One-way NDA

A one-way NDA is appropriate where only one party is expected to disclose confidential information.

For example, a business owner may provide information to a potential purchaser who is primarily receiving rather than contributing confidential material.

Mutual NDA

A mutual NDA may be appropriate where both parties expect to disclose sensitive information.

For example, two businesses exploring a joint venture may each disclose:

financial information;
technology;
customer information;
intellectual property; and
business plans.

IP Australia's NDA resources expressly distinguish between one-way agreements, where one party provides confidential information, and mutual agreements, where both parties do so.

The agreement should reflect the actual flow of information.

Who Can the Recipient Share the Information With?

A prospective purchaser or investor may legitimately need to share information with advisers.

For example:

solicitors;
accountants;
financial advisers;
financiers;
employees involved in the transaction; or
consultants conducting due diligence.

The NDA should specify who may receive the information and on what basis.

It may require the recipient to ensure those people:

need the information for the permitted purpose;
understand its confidential nature; and
are subject to appropriate confidentiality obligations.

This prevents the NDA from becoming commercially unworkable while still controlling further disclosure.

NDAs When Selling a Business

Confidentiality is particularly important when a business is being sold.

A potential purchaser may request access to highly sensitive information before deciding whether to proceed.

This can include:

profit and loss statements;
tax information;
customer information;
employee details;
lease documents;
supplier agreements;
pricing;
margins;
intellectual property;
business plans; and
operational information.

The risk can be greater if the prospective purchaser is an existing competitor.

An NDA can restrict the purchaser from using the information for purposes other than evaluating the proposed acquisition.

It may also prohibit disclosure of the fact that the business is for sale.

Confidentiality During Due Diligence

Once a purchaser progresses to due diligence, considerably more information may need to be disclosed.

An NDA can provide the contractual framework under which that information is provided.

However, the seller should still control the due diligence process.

Information may be released progressively rather than providing unrestricted access to everything immediately.

Particularly sensitive material might only be disclosed:

after the purchaser demonstrates genuine interest;
after commercial terms are agreed;
through a controlled data room;
to nominated advisers; or
at a later stage of due diligence.

An NDA is one layer of protection. Sensible information management remains important.

NDAs and Prospective Investors

A company seeking investment may need to disclose significant information to potential investors.

This can include:

revenue;
profitability;
forecasts;
intellectual property;
product development;
customer metrics;
growth strategies; and
future commercial opportunities.

Whether an NDA is appropriate can depend on the circumstances and stage of the investment process.

Where confidential information is disclosed, the business should consider what genuinely needs to be provided and when.

Confidentiality should form part of the broader investment process rather than assuming every person expressing interest should immediately receive unrestricted access to sensitive business information.

Employees and Contractors

Employees and contractors can also gain access to important confidential information.

This may include:

customer databases;
internal systems;
pricing;
trade secrets;
marketing plans;
financial information; and
proprietary processes.

Confidentiality obligations may be included within an employment or contractor agreement rather than requiring a separate NDA.

Australian Government contract guidance recommends identifying the confidential information that needs protection so the parties understand what is subject to the obligation.

The appropriate structure depends on the relationship and nature of the information.

Protecting Trade Secrets

Some business information derives its value precisely because it remains secret.

Examples might include:

formulas;
recipes;
manufacturing processes;
algorithms;
business methodologies;
proprietary datasets; and
confidential technical know-how.

IP Australia identifies trade secrets as an unregistered form of intellectual property protection and notes that confidentiality agreements can be used as part of maintaining secrecy.

This differs from registered intellectual property rights such as patents and trade marks.

Maintaining confidentiality can therefore be fundamental to the commercial value of certain information.

Confidentiality and Intellectual Property Are Different

An NDA does not necessarily determine who owns intellectual property.

This distinction is important.

Suppose Company A provides confidential technology to Company B so they can collaborate on a new product.

The NDA may prohibit Company B from disclosing Company A's technology.

But what happens if the parties jointly develop new technology during the project?

Who owns it?

Who can commercialise it?

Can either party licence it to someone else?

Those issues require appropriate intellectual property provisions.

IP Australia recommends considering both existing or “background” IP and any new IP created through a commercial collaboration.

Confidentiality and ownership should therefore be addressed separately.

Customer Lists and Business Information

Customer information can be particularly valuable.

An NDA may restrict a recipient from using customer information except for the permitted purpose.

But businesses should remember that confidentiality obligations are only one part of the legal framework.

Depending on the information involved, privacy laws, contractual obligations owed to customers and other legal requirements may also affect whether and how information can be disclosed.

A confidentiality agreement does not override those obligations.

How Long Should Confidentiality Last?

There is no universal period that suits every NDA.

The appropriate duration depends on the nature of the information.

Some information may lose commercial sensitivity relatively quickly.

For example, a proposed transaction may become public once completed.

Other information — such as a proprietary formula or genuine trade secret — may retain commercial value for many years.

IP Australia notes that NDAs can potentially operate indefinitely and recommends monitoring any expiry dates included in agreements.

The duration should therefore be considered in relation to the actual information being protected.

What Happens When Discussions End?

Not every proposed transaction proceeds.

A prospective purchaser may withdraw.

An investor may decide not to invest.

A proposed joint venture may never be established.

The NDA should address what happens to confidential information in those circumstances.

Depending on the arrangement, the recipient may be required to:

return documents;
destroy information;
delete electronic copies;
cease using the information;
confirm destruction; or
continue protecting information retained for legitimate legal or compliance purposes.

These provisions are particularly important where substantial due diligence material has been provided.

Can an NDA Prevent All Disclosure?

No.

An NDA should usually recognise circumstances where disclosure may be legally required.

For example, a recipient might be compelled to disclose information:

under legislation;
pursuant to a court order;
to a regulator; or
through another legally binding process.

The agreement may require the recipient, where legally permitted, to notify the disclosing party before making the disclosure.

An NDA cannot simply contract out of every statutory disclosure obligation.

What Happens if an NDA Is Breached?

A breach can potentially result in contractual remedies.

The appropriate remedy will depend on the circumstances, the terms of the agreement and the loss or threatened harm.

In some cases, financial compensation may be relevant.

In others, preventing further disclosure may be considerably more important than recovering money after the information has already spread.

That is why confidentiality agreements commonly contemplate the possibility of urgent relief where appropriate.

The practical difficulty is obvious: once genuinely secret information has become public, it may be impossible to make it secret again.

Prevention and careful information control are therefore important.

Is an NDA an Agreement or a Deed?

It can potentially be structured as either, depending on the circumstances.

Many NDAs are ordinary contracts.

In some situations, the parties may choose to document confidentiality obligations by deed.

The appropriate form depends on matters including the obligations being created, consideration and the broader transaction.

The choice should be deliberate rather than assuming a document is stronger merely because it is called a deed.

What Does “Commercial in Confidence” Mean?

Businesses often place words such as:

CONFIDENTIAL

COMMERCIAL IN CONFIDENCE

on documents, emails and presentations.

Doing so can be useful.

IP Australia recommends marking confidential materials shared with third parties as confidential even where an NDA is already in place.

However, putting “Commercial in Confidence” on a document is not the same thing as entering into a confidentiality agreement.

The label can help demonstrate how the business treats the information, but it does not itself set out:

who is contractually bound;
what they may do with the information;
permitted recipients;
duration;
return or destruction obligations; or
contractual consequences of misuse.

This is an important distinction for businesses relying solely on confidentiality labels.

An NDA Is Not a Substitute for Sensible Information Security

Signing an NDA does not mean a business should then provide unrestricted access to every confidential document it holds.

Practical protections remain important.

These may include:

limiting information to what is genuinely necessary;
restricting access to nominated people;
using secure data rooms;
watermarking documents;
disabling downloads where appropriate;
keeping records of information disclosed;
releasing particularly sensitive information later in the process; and
revoking access when discussions end.

IP Australia recommends storing and monitoring NDAs and continuing to identify confidential materials appropriately.

Contractual protection and practical information security work together.

Common Problems With Confidentiality Agreements

Problems can arise where an NDA:

defines confidential information too vaguely;
defines everything as confidential regardless of its nature;
fails to identify the permitted purpose;
allows disclosure to too many people;
does not deal with advisers or employees;
has an inappropriate confidentiality period;
does not address return or destruction;
fails to deal with intellectual property separately;
identifies the wrong legal entity;
is signed after the information has already been disclosed; or
has been copied from another transaction without considering the actual circumstances.

A short NDA is not necessarily inadequate, and a long NDA is not necessarily better.

The document needs to fit the transaction.

Confidentiality in Shareholder Arrangements

Shareholders commonly have access to sensitive company information.

A shareholders’ agreement may therefore contain confidentiality provisions dealing with:

financial information;
customer information;
intellectual property;
business plans;
board information; and
proprietary systems.

Those obligations may continue after a shareholder exits the company.

Where a prospective new shareholder is given confidential information before investing, a separate NDA may also be appropriate before they formally join the company.

Before Signing an NDA

Whether you are providing or receiving confidential information, consider:

What information is actually confidential?

Why is it being disclosed?

Is the NDA one-way or mutual?

Who can receive the information?

Can advisers access it?

What information is excluded?

How long do the obligations continue?

What happens when negotiations end?

Must information be returned or destroyed?

Are intellectual property rights dealt with separately?

Is disclosure required by law appropriately addressed?

Is the agreement being signed before the information is released?

The answers should reflect the actual commercial transaction rather than relying on a generic template.

Protect the Information That Gives Your Business Value

Confidential information can represent years of work.

Customer relationships, pricing models, intellectual property, business systems and strategic plans can all contribute to the value of a business.

There will be times when that information needs to be shared to pursue an opportunity.

The objective of a confidentiality agreement is not to prevent commercial discussions. It is to allow those discussions to occur within an agreed framework for protecting sensitive information.

Confidentiality Agreements and NDAs on the Gold Coast

KMB Legal assists businesses and business owners with confidentiality

agreements, NDAs and commercial contracts across the Gold Coast

and Queensland.

We can assist with preparing and reviewing confidentiality agreements for

business sales, due diligence, commercial negotiations, shareholders,

contractors, investors and other business arrangements.

The agreement can be tailored to the information being disclosed

and the particular commercial transaction rather than relying on a

generic document.

Free 30-minute initial telephone consultation.

BOOK A TELEPHONE CONSULTATION

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