The recent allegations that Sir Philip Green has used Non-Disclosure Agreements (NDAs) to cover up sexual harassment and racism in the workplace has put these agreements back into the spotlight.
Nonetheless, despite the increased controversy of using NDAs to protect reputation, there remain legitimate and uncontroversial business reasons for their use.
The good
Potential investors typically expect businesses to pitch to them in some form and most will carry out due diligence before they are willing to inject money. Whilst canvassing for investment, you will likely have to disclose information of value to your company, such as pricing, customers, suppliers, your business plans, or methods of working.
NDAs are a common way to protect this valuable information and keep it confidential.
If you use Sparqa’s customisable NDA and guidance, an investor receiving confidential information on your company will:
- acknowledge that the information is confidential;
- undertake only to use the information to investigate whether he wants to invest in company;
- agree not to disclose the information to others except as permitted under the NDA; and
- agree to return or destroy the information on request.
Using NDAs in this way will help protect confidential information disclosed by your business. Nonetheless, it is worth bearing in mind that you will need to be able to explain to an investor why you want them to sign the agreement.
The bad
A potential investor may simply refuse to sign an NDA, forcing you to decide whether or not to disclose the confidential information. In order to protect the information without an NDA, you will have to establish both that the information is confidential and was received under an obligation of secrecy. This will be very difficult to prove.
Even if an investor does sign an NDA, they are not commonly enforced against people who breach them. This is due to the time and cost involved in bringing legal proceedings, as well as the challenges of proving that loss was suffered from the breach of the NDA.
Clearly an NDA is not a perfect mechanism for protecting confidential information. Nonetheless, it does encourage investors to use the information properly and securely, and leaves you in a stronger legal position than if you did not have an NDA in place.
It is therefore key that when asking an investor to sign an NDA you provide them with a fair, balanced agreement, increasing the likelihood that they will sign it. This is what the Sparqa NDA seeks to do.
The ugly
There has been much furore over celebrities using NDAs to prevent individuals going public with allegations that would tarnish reputation.
However, of particular concern is the chilling effect that NDAs can have on reporting illegality to the authorities – something which is not limited to celebs but extends to certain commercial practice.
Recently the regulatory authority overseeing law firms, the SRA, acknowledged that:
“There is widespread reporting of the perception that NDAs, alongside cultural issues within some firms, are resulting in low levels of reporting of inappropriate sexual behaviour.”
NDAs must not be used to stymie reports of serious misconduct or illegal behaviour to, for example, the police or independent regulators.
The SRA strongly condemns such a use of NDAs. However, the regulator also recognises that NDAs “can legitimately be used to protect commercial interests and confidentiality and in some circumstances, to protect reputation.”
Conclusion
NDAs must not be used to discourage reporting of illegal or abusive behaviour. However, UK businesses should not forget that NDAs have many legitimate uses – they remain a significant method of protecting confidential information disclosed during fundraising.
Sparqa offers an easily customisable financing NDA and advice on how to use an NDA when fundraising. We also cover key aspects of preparing your business to raise money, including tax reliefs, drafting a business plan, preparing information, managing your time properly, and instructing advisers.