As states such as California, Massachusetts, Illinois, Oklahoma and North Dakota have lessened the ability of its employers to restrict employee mobility through noncompete agreements, some companies have reacted by attempting to tighten such restraints on hourly - and even unpaid - workers. Check out this interesting thought piece on why these efforts are often misguided or short-sighted.
It is difficult to go anywhere in Buffalo these days without hearing about the confidential nondisclosure agreement distributed by the Ralph C. Wilson Jr. Irrevocable Trust to prospective buyers of the Buffalo Bills. Even the Washington Post is blogging about whether rock-star (and Buffalo’s Public Enemy Number One) Jon Bon Jovi violated the terms of the Trust’s nondisclosure agreement.
This, of course, raises the question: what, exactly, is a nondisclosure agreement?
A nondisclosure agreement (“NDA”), also called a confidential disclosure agreement, confidentiality agreement, or secrecy agreement, is a legal contract between two or more parties that specifies confidential information that the parties wish to share with one another. An NDA restricts information critical to a deal from being circulated beyond those who must have access to it for the purpose of a particular transaction. NDAs are typically signed when two or more companies or individuals are considering doing business together and need to understand certain details of each others businesses to evaluate a potential business relationship.
Nondisclosure agreements are frequently demanded by sellers of a business or entrepreneurs who feel they need a signed NDA before revealing their company’s data or ideas to potential buyers or investors. A typical seller of a business or purveyor of an idea worries that others will steal his or her trade secrets or use sensitive financial data to unfairly compete against the seller or entrepreneur.
Potential buyers of or investors in a business often seek to avoid signing NDAs unless absolutely necessary. Many potential buyers are chilled by the prospect of entering into an NDA for fear that it will limit his or her ability to conduct the fulsome due diligence necessary to make a large purchase or partner with other sources of capital required to finance a purchase. This appears to be the case with respect to the 60 or so reported parties who requested copies of the Wilson Trust’s NDA. Of those 60-odd parties requesting the NDA, it widely reported that only eight prospective buyers actually submitted bids after executing the NDA.
Although it is difficult to know the precise details surrounding the confidential Buffalo Bills bidding process run by Morgan Stanley, it is clear that a vast majority of potential bidders found the terms of the Wilson Trust’s Nondisclosure agreement too onerous. The Trust’s NDA reportedly prevents possible buyers from sharing such confidential Bills information as financial statements, sales data, budgets and studies “with any other person, including other potential bidders and equity or debt financing sources … regarding a possible transaction” with the Bills. Not being allowed to communicate with “other potential bidders” prevents suitors from discussing even the possibility of joining forces to buy the team. Anyone interested in approaching as a minority owner would have to be rebuffed under the NDA’s strict terms.
So why would the Wilson Trust require potential bidders to sign such an onerous NDA if it had the potential to deter so many suitors? Again, it is difficult to know with certainty given the cloak of secrecy around this high-stakes and politically-charged transaction. However, in general, there are several instances when an NDA is not only appropriate to your business transaction, it is absolutely necessary.
For example, if your business wishes to hire someone to perform services for a fee and doing so would include disclosure of confidential or proprietary information, that consultant will expect to sign an NDA. He or she has no legitimate reason to refuse. Any hesitation on his her part to do so is a red flag. Similarly, when dealing with suppliers or when hiring employees with access to your company’s data such as client lists, financial data, or future business strategy, an NDA should be executed by anyone with access to such data. In sum, any time you offer your business’ confidential data to the public, you should seek to obtain an NDA beforehand.
So what does this boil down to for business owners who may find themselves in this position? Well, in keeping with our theme, let’s borrow a bit from the man Bills fans love to hate, Jon Bon Jovi.
The best advice for sellers of a business and entrepreneurs looking for potential investor-partners is to have a lawyer with experience in the area of NDAs draft you a not overly Complicated nondisclosure agreement. If you are the trusting type that will just Keep the Faith that potential buyers will protect your company’s confidential information, you may find yourself swallowing a big dose of Bad Medicine.
Protect your valuable data from those who may be more interested in themselves than in your business. Enter into any such negotiations without a non-disclosure agreement in place, and you’ll be Livin’ on a Prayer.
Kevin Burke is a partner in the Civil Litigation and Labor and Employment Practice Groups at Lippes Mathias Wexler Friedman LLP in Buffalo. He can be reached at email@example.com