Non-Disclosure Agreement (NDA)

A Non-Disclosure Agreement is an agreement that requires the parties to keep exchanged information confidential. In a transaction, interested parties sign it before receiving confidential documents. This protects the seller's sensitive company data.

More is governed than confidentiality alone: the circle of people who may be informed, the restriction of use to assessing the transaction, the duty to return or delete information if talks end, the duration of the obligation, often two to five years, and confidentiality about the existence of the talks themselves. Two additional clauses matter most economically. A non-solicitation clause prohibits approaching the target's employees for a defined period, since otherwise a competitor could use the process to recruit staff. A no-contact clause prohibits direct approaches to customers, suppliers and employees outside the agreed process.

Where competitors are interested parties, a competition law dimension is added, because exchanging competitively sensitive data such as prices and customer terms can be unlawful even under a confidentiality agreement. Such information therefore belongs only in a ring-fenced data room for a separate clean team. The practical weakness lies in enforcement, because a breach is hard to prove and the loss hard to quantify. Trade secrets within the meaning of the German Trade Secrets Act can, however, remain protected beyond the agreed term.

Such agreements also regularly state that the agreement alone creates no obligation to enter into a transaction. Where the target is listed, the recipient becomes an insider on receiving the information and is subject to the dealing prohibitions of the Market Abuse Regulation. Contractual penalties are used but are often contested in negotiation.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.