INTRODUCTION

Growth is the essential part of every businessman’s life and every businessman intends to not to limit or restrict himself/ herself to a particular field and wishes to expand its area of operations.

Whenever business of any company grows, they intent to increase their control in the market by taking over other businesses. Business expansion could be in form of vertical or horizontal i.e. acquiring company in same line of business or acquiring companies of other industry respectively. However, acquiring the business is only the one side of the coin, sometime it also happen that business goes into such a situation where a part of business, which need more specialisation, is to be sold.

Further while entering into sale or purchase of business, there are many confidential information and documents on the basis of which decisions are taken by the businessmen.

Thus, it becomes important to protect the rights with regard to sharing of confidential information in the interest of such business transaction, else in the absence of Non Disclosure Agreement (NDA), Seller would not have any legal right over the potential buyer from refraining him from using or disclosing valuable and confidential Information of Seller. One must know the essential clauses to be inserted in the Non Disclosure Agreement for Business Purchase or acquiring any business so as to preserve and protect atleast the basic right of the parties involved.

IMPORTANT CLAUSES OF CONFIDENTIALITY AGREEMENT

1. Define Confidential Information: It is very essential for the Owner (Seller) to decide nature of document which would be considered as Confidential Information by the owner of information/ documents. For instance:

• • Business Plans;
  • Business Financials;
  • Customer and supplier name and details;
  • Employees details;
  • Substantial contract details;
  • Details of product line;
  • New technology and innovation

2. Use of Confidential Information. The provision for non disclosure should be stated specifically that Information shared are confidential in nature, information shall not be disclosed to anyone. Also it is utmost important to mention the purpose of usage of confidential information by the potential buyer.
3. Term: The agreement shall also specify the duration for which the Parties shall be bound by the agreement. One cannot bind a person for the entire life. The duration needs to be for a specific period.

For Example:

“This Agreement shall come into effect on the date hereof and shall remain valid and binding on the Parties for a period of 12 (twelve) months or until such time as definitive documents for the Proposed Transaction have been executed, unless terminated prior to the expiry of the aforementioned period by the mutual agreement of the Parties. The obligations of Consultant with respect to any Confidential Information disclosed by the Disclosing Party to Recipient pursuant to this Agreement shall survive for period of 1 year from the expiry or termination of this Agreement.”

4. Exception: There are certain cases when disclosure of information shall not be constructed as breach of Agreement:
   • Information which at the time of disclosure is already in the public domain; or
   • Information which, after disclosure, becomes a part of the public domain by publication or otherwise, except in breach of this Confidentiality Agreement; or
   • Information which either party can establish was in its possession prior to disclosure or was subsequently and independently developed by employees of or behalf of either party without use, direct or indirect, or information required to be held confidential hereunder, and who had no knowledge of the Information disclosed; or

However, it is pertinent to note down that even in above cases, information and document needs to be shared on “Need to Know” basis and prior intimation, if possible, needs to be given to the client by the consultant.

5. No Representation, Warranty or Guarantee: The information so disclosed shall not construe any representation, warranties or Guarantee on behalf of the Seller or Disclosing Party and the Receiver shall rely on such information at its own discretion.
6. Properties of the Parties: All Confidential Information disclosed pursuant to the Confidentiality Disclosure Agreement shall be and remain the property of the Disclosing Party. It shall not be in any manner considered as granting or conferring any rights whatsoever (including without limitation any intellectual property rights), whether expressly, impliedly or otherwise, in respect of the Confidential Information to the Receiving Party.
7. Return and cancellation of Documents: The Owner shall ensure to handover all the original documents to the receiver on receipt of full and final payment. The Receiver is entitled to receive all documents and assets of business without being tampered.
8. Unauthorised Disclosures: In case receiver disclose some information which should not be expected from him, then in such a case, he must inform such unauthorised disclosure to the Owner of information, so that timely remedial action can be taken.
9. Notices: The address of both the parties where all communication/ notices to be delivered to the Parties needs to be stated specifically in the agreement.
10. Breach of Agreement: The agreement should state the consequences of breach of business confidentiality agreement by the Parties. Also the circumstances wherein it shall not be construed as breach of agreement.
11. Indemnification Clause: In case of breach of terms and conditions of the Non Disclosure Agreement, the indemnification clause ensures recovery of loss incurred from the Party under default.

Under the non confidentiality agreement with the Potential Buyer, Indemnity clause helps to protect the Disclosing Party from the wrong doing of other Recipient Party under the Agreement. In case of breach of duty on the part of each Party, the Party committing the default shall indemnify the other party and make good the loss suffered.

12. Disputes resolution : In case of any dispute between the Parties, option to resolve either through arbitration or through judiciary should be incorporated to in the agreement in order protect the right of the Parties
13. Termination: Condition wherein the Agreement can be terminated by the either Party to the Agreement to be mentioned specifically and consequences thereof also to be captured.
14. Cost for dispute: Provision for reimbursement of expenses for resolving dispute can be added so as to avoid unnecessary dispute and also time and cost involved.
15. Jurisdiction: The jurisdictional area where one can take legal aid needs to be stated in the Agreement. This helps to save the time of ascertainment of jurisdiction and avoids delay in seeking the aid.
16. Waiver: Unless mutually agreed in writing by the Parties, no action of any of the Party shall be construed as to waive of any of the right entitled pursuant to this Agreement by the Parties.
17. Non Solicitation: Such a clause shall restrict and prohibit the Potential Buyer from having access and approach to the precious client and employees of the Seller from soliciting those clients and employees for its own work.
18. Non-Compete: Such a clause to be crafted in the Agreement so that potential Buyer can restrict the Seller from doing the same or similar kind of business for certain time period and it also helps to restrict the seller from approaching the old clients, supplier and employee for certain time period. It is pertinent to mention that this clause needs to be crafted very carefully else in most of the cases, court may interpret and consider it as against the Article 19(1)(G) of the Indian Constitution and section 27 of the Indian Contract Act, 1872.
19. Severability: In case when certain clause of the agreement becomes inoperative, for the time being in force, then in that case only that portion which is invalid shall be severed from rest of the agreement without affecting the validity of the entire agreement.

NDA for Business Sale: Essential FAQs

1. Why is an NDA critical when selling or acquiring a business?

Entering into the sale or purchase of a business involves sharing many confidential documents on which key decisions are based. In the absence of a Non-Disclosure Agreement (NDA), a seller would have no legal right to refrain a potential buyer from using or disclosing valuable and confidential information. An NDA ensures that the rights of the parties are protected during the interest of the transaction.

2. What specific information is typically covered in a business sale NDA?

It is essential for the seller to define the nature of documents considered confidential. Common examples include:

• • Financials & Plans: Business plans and financial statements.
  • Operations: Details of product lines, new technology, and innovations.
  • Stakeholders: Customer and supplier details, as well as employee information.
  • Legal: Details of substantial existing contracts.

3. How long should the confidentiality obligations last?

An agreement cannot bind a person for their entire life; it must specify a duration for which the parties are bound. For example, an agreement might remain valid for 12 months or until definitive transaction documents are executed. Survival clauses may also extend obligations for a specific period (e.g., one year) after the agreement expires or terminates.

4. Are there any exceptions where disclosure is not considered a breach?

Yes, disclosure is generally not a breach if the information:

• Was already in the public domain at the time of disclosure.
• Was already in the receiver’s possession or independently developed by them without using the seller’s information.
• Was received from a third party who had the right to disclose it.
• Is required by law to be disclosed, provided the seller is given written notice and an opportunity to object.

5. What is the difference between “Non-Solicitation” and “Non-Compete” clauses?

• Non-Solicitation: This prohibits the potential buyer from approaching or soliciting the seller’s precious clients and employees for their own work.
• Non-Compete: This restricts the seller from doing the same or similar business for a certain period. It also helps restrict the seller from approaching old clients or suppliers.

Note: Non-compete clauses must be crafted carefully, as courts may find them in violation of the Indian Constitution or the Indian Contract Act.

6. How does an “Indemnification Clause” protect the disclosing party?

In case of a breach of terms, the indemnification clause ensures the recovery of losses incurred from the party in default. The party committing the default must indemnify the other and “make good” the loss suffered. This helps protect the disclosing party from the wrongdoing of the recipient during the transaction.

7. Who remains the owner of the confidential information during the process?

All confidential information remains the exclusive property of the disclosing party. Sharing this information does not grant or confer any intellectual property rights, expressly or impliedly, to the receiving party. On receipt of full and final payment for the business, the owner ensures all original documents and assets are handed over to the receiver.