The clause on the use of NDAs: avoiding an involuntary termination
Parties to a confidentiality agreement (also known as a nondisclosure agreement or NDA) will often spend hours negotiating a standstill provision or a no-circumvention clause, with the recipient of the information taking a great deal of time. care to avoid undue restrictions on its ability to participate in transactions related to the target company.
What is often overlooked, however, is that the use clause – a standard feature of almost all transaction-related NDAs – can have the same effect as a standstill or no-circumvention clause if it is not carefully drafted.
If an NDA allows you to use confidential information only for specific purposes, that means you cannot use it for other purposes. For example, a provision allowing you to use confidential information “only for the purpose of considering an equity financing transaction negotiated with Company X” effectively prohibits you from using the information in connection with any other transaction involving the Company. company X.
So, if a month after signing the NDA, a third party offers you the option to buy the debt of Company X, you may not be able to do so. You might argue that the only information you used in the decision to buy debt was information received from the third-party seller, but if Company X wants to block the transaction, they can claim that you inevitably also have used the confidential information she disclosed to you in making your decision to buy debt – and therefore you are in violation of the use clause in the NDA you signed with them earlier. It can be difficult to prove that a particular fact did not play a role in your decision-making process.
But what if the use clause of your NDA with Company X allows you to use the confidential information for “any transaction related to Company X?” In this case (subject to any other NDA restrictions, such as a no-circumvention provision prohibiting other transactions involving Company X), you should be able to use Company X’s confidential information. as part of your decision to buy its debt from the third party, as it would be a transaction “linked” to company X, even though it is not the specific transaction that company X showed you when you signed the NDA.
The choice of words is important
As you can see, small changes in the wording of the usage clause can either open up – or exclude you – opportunities related to a target business. If an NDA allows you to use confidential information only to consider a transaction “with” Company X, you will likely need to enter into a negotiated agreement “with” Company X. In the leading case of Martin Marietta Materials, Inc. v . Vulcan Materials Co., the Delaware Court of Chancellery held that a provision of the NDA under consideration – allowing the use of confidential information only for the purpose of evaluating a possible business transaction “between” the parties – meant that the information could only be used in connection with a transaction that was “contractually agreed or agreed to by the boards of directors of the two companies”.
What about a use clause that contemplates a transaction “involving” company X? Does it just mean that company X must be the subject of the transaction or that company X must be involved in the negotiations?
The article that precedes the word “transaction” can also be very important. If a broker brings you a confidential opportunity regarding Company X and your NDA allows you to use the confidential information to evaluate “the” trade, it probably means the specific trade the broker is showing you. If, however, the NDA allows you to use the information as part of “a” transaction related to Company X, you have more flexibility.
Even something as simple as compounding can make a big difference. Are you authorized to use the confidential information as part of a “transaction” related to Company X or as part of a “transaction” related to Company X? If the word is capitalized, it will likely be defined specifically elsewhere in the agreement – as an example, your agreement may include language such as “For the purposes of this agreement, ‘Transaction’ means a negotiated sale of certain assets of the society. Conversely, ‘transaction’ with a lowercase ‘t’ could mean any type of business deal related to Company X.
Interaction with other provisions
The definition of “Transaction” is one of many typical provisions of a confidentiality agreement that should be read carefully in conjunction with the use clause and other terms of the agreement. Although a broad definition of “Transaction” may allow you to use confidential information in a wide variety of circumstances, before seeking to broaden the definition of “Transaction” you should consider how this term is used elsewhere in the world. agreement. If there is a non-circumvention provision prohibiting your participation in an Opportunity that competes with or substitutes for the “Transaction”, too broad a definition could end up prohibiting your participation in Opportunities that would otherwise have been available.
From the perspective of the entity receiving the confidential information, the ideal confidentiality agreement may be an agreement with a very specific definition of “Transaction” and a very broad use provision that does not refer to “Transaction”. Or allows the use of confidential information. information “in connection with the Transaction or any other transaction related to Company X.”
Assuming you are able to negotiate a wide use provision, pay attention to language that effectively grabs many benefits. Some NDAs include a prohibition (either under the use clause or elsewhere in the agreement) from using confidential information in a manner “detrimental” to the disclosing party. Any number of uses of confidential information could be considered detrimental to the disclosing party in one way or another, and a disclosing party who does not want you to participate in a particular transaction may argue that your participation would be to its detriment and therefore in violation of the NDA.
If the disclosing party insists on a restrictive use provision, there may still be ways to mitigate its effects. If there is a specific transaction or transaction category that you want to make sure you are not barred from due to the use provision, you may consider inserting wording confirming that the agreement is not. not intended to disallow this transaction or field. .
For example, if your NDA counterparty is seeking funding for its widget manufacturing business, you can insert an acknowledgment by the discloser that you are actively involved in the widget lending market and that the NDA will not prevent you from lending to widgets. competitors. The discloser will probably want to qualify this by confirming that you will not disclose any of their confidential information in relation to these loans, which is reasonable.
“Better overall knowledge” and “Residual knowledge” provisions
Another way to limit the effects of a restrictive use covenant is to insert a “best overall knowledge” provision that distinguishes between a) specific facts about the target business or transaction and b) the broadening your general understanding of the industry in which the target operates, which will be the inevitable consequence of your review of confidential information. The discloser will expect the former to be subject to the use clause, but may be willing to admit that the latter is not.
In practice, it can be difficult to determine if a particular piece of information is specific to a target or if it simply serves to improve your overall knowledge of the industry, but in the event of a dispute, the presence of this type of clause in an NDA should at least help to demonstrate that the use clause was not intended to be interpreted as being completely restrictive.
A related concept is a “residual knowledge” clause, which will generally be worded to allow you to use the “residue” of confidential information held in your spontaneous memory for your own purposes. Depending on the exact language of the clause, you may have considerable latitude to use confidential information for purposes unrelated to the transaction presented to you.
Non-disclosure and restrictions on use
From a technical perspective, it is important to keep in mind the distinction between the non-disclosure provisions of an NDA and the use clause. The standard list of exceptions to the definition of “Confidential Information” will sometimes be written as an exception to the confidentiality provisions of the agreement; for example, “your confidentiality obligations hereunder will not apply to information that is or becomes publicly available, information that you receive from a third party, etc. The parties may have intended the “confidentiality obligations” to cover both nondisclosure and non-use provisions, but strictly speaking confidentiality and use are two separate concepts. In the example above, you may not be contractually authorized to use information that subsequently becomes publicly available for purposes other than those authorized by your NDA. The easiest way to solve this problem is to ensure that standard exceptions are incorporated into the definition of “Confidential Information”, rather than having a separate paragraph dealing only with exceptions to confidentiality obligations.
The non-disclosure / non-use distinction should also be kept in mind when considering the term disposition. Occasionally, a disclosing party may require an extra long NDA term to prevent its trade secrets from being made public. The discloser may not be as concerned about your use of their confidential information for your own purposes after the contemplated transaction is completed or abandoned and therefore may be willing to accept a shorter term for your use obligations than your obligations not to. disclosure.
We have seen that the use clause and its interaction with other provisions of a confidentiality agreement must be carefully considered. Small adjustments to the wording can open up new business opportunities or effectively put you at a standstill. If you are not careful with the use clause, too much knowledge can indeed be a dangerous thing.