Electronic Non Disclosure Agreement
An electronic non disclosure agreement (NDA) prevents a third party from revealing confidential information about your company.3 min read
An electronic non disclosure agreement (NDA) prevents a third party from revealing confidential information about your company. It is just as legally binding as a paper version of the same agreement. It usually goes through several rounds of revisions as the parties negotiate the terms and conditions of the agreement. An NDA is sometimes called a confidentiality agreement.
Purpose of an NDA
In a merger and acquisitions (M&A) transaction, the buyer and seller will exchange an NDA. This prevents the individual or entity who is considering a purchase of a company from sharing information learned during the course of the sale process. The NDA is usually executed by the buyer but sometimes is created and executed by the seller.
When a company outsources work to a freelancer, that individual is often required to sign an NDA. This prevents the freelancer from disclosing confidential information received to complete the project in question.
Aspects of a Non-Disclosure Agreement
The disclosure of information section indicates the parties to which information will be disclosed and the purpose for doing so, such as in the course of a partnership or transaction. In most cases, the party who receives the information will be able to share it with advisors, lawyers, and employees, but not necessarily. One party is designated as the "Receiving Party" and the other party as the "Disclosing Party." For cases in which the buyer has limited assets, a guarantor may also be named.
The NDA defines the information to be considered confidential, whether this includes information, data, notes, and meeting minutes that are not already publicly available. You should make sure the agreement indicates that all documents exchanged with the other party will be considered confidential; some agreements indicate that only agreements marked as confidential will be treated as such.
You can exclude certain information from the confidentiality agreement without negating the agreement. Exceptions typically include:
- Information disclosed to or lawfully possessed by the receiving party before the agreement was signed
- Information that was already in the public domain
- Information that was already disclosed to the receiving party by a third party who was not bound by an NDA
For M&A transactions, the NDA agreement should include language that indicates the confidential information should be used only to evaluate the potential transaction and not for any other purpose.
The destruction of materials provision requires the receiving party to destroy electronic or physical data covered under the agreement if the project or negotiation ends. This may not apply to internal records and electronic backups, however.
The NDA must exist only for a limited time period, typically one to two years, as stated in the agreement. Some agreements terminate when the project or transaction in question is complete.
Restraint provisions keep the recipient and its subsidiaries from soliciting employees from the other party. These provisions may also prevent the disclosing party from approaching customers of the receiving party.
The NDA must note which state body the agreement is governed by and the court in which disputes will be heard if necessary. This is called Governing Law and Jurisdiction.
The language of the NDA must clearly indicate that it is a legally binding agreement and state the objectives of the agreement, such as to explore the feasibility of a business investment. It should be distinguished from a binding agreement to purchase the business.
The implications for breach of confidentiality provision allows the disclosing party to apply for relief, such as specific performance, if the contract is breached.
The Role of Electronic Signatures
Under state and federal law, an electronic signature is treated the same way as a handwritten signature. This is covered by the Federal Electronic Signatures in Global and National Commerce (ESIGN) Act for interstate or foreign transactions and the Uniform Electronic Transactions Act (UETA) at the state level for other types of transactions. These laws state that a contract cannot be declared legally invalid simply because it is electronically signed and/or provided in an electronic format.
Electronic signatures are mainly used with contracts and both parties must agree to use the electronic signature. Documents that must be notarized cannot use an electronic signature.
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