Non Disclosure Agreements


A non-disclosure agreement (NDA), sometimes called a confidentiality agreement, is a legally binding contract, whereby one or both of the parties agree that information exchanged between them will not be shared with outsiders.  NDAs protect confidential business information, inventions or artistic creations revealed during proposals, discussions and negotiations.  It protects against disclosure to third parties of information not already in the public domain, and usually restricts what use the recipient can make of the information.

Recent Ontario Superior Court decisions have made it clear that the misuse of confidential information will not be taken lightly, and NDAs will be strictly enforced.  In
Certicom Corp. v. Research in Motion Ltd., 2009 CarswellOnt 331, RIM was attempting to buy Certicom through friendly negotiations, which in the end were unsuccessful.  During these negotiations, Certicom disclosed confidential information to RIM pursuant to two different NDAs, which were entered into in 2007, and 2008.

The 2007 NDA enclosed a standstill provision, preventing RIM from making a hostile takeover for 12 months.  Six months after the standstill expired, RIM made a hostile bid for Certicom and admitted it had used Certicom’s confidential information in evaluating the bid.  Certicom was successful in seeking an injunction to stop RIM from making any bids on their company unless they consented.

This decision is significant because even though the standstill agreement had expired, the Court held that it still applied.  Justice Hoy found that the standstill and NDA provisions had to be looked at as separate clauses to be interpreted properly, as they provided different protections for different terms.  She stated that “After the standstill provision falls away, Certicom is left with longer-term protection that, among other things, entails the need of proof of disclosure and proof of use of confidential information…After the standstill provision had expired, it was open to RIM to mount a hostile bid, provided that it had not received, and used, any confidential information in assessing the bid.”

This case is consistent with other recent decisions including Gold Reserve Inc. v. Rusoro Mining Ltd., [2009] O.J. No. 533 (Ont. Sup. Ct.). which also involved a hostile takeover bid.  Despite arguments from the defendants, the Court found that it was not realistic to think that recipients of the confidential information could “compartmentalize” their minds so as to isolate and not use the confidential information given to them in previous dealings.

Many experts believe that the Court in both these decisions were concerned about maintaining a level playing field in the securities market.  Both these cases have made it clear that if NDAs are drafted correctly, they will be stringently enforced.

What does this mean for a company looking to acquire another company?  The Court in both these cases wanted to know if procedures were used by the recipients to prevent misuse of the confidential information.

Knowing this, it would be practical to record what was disclosed at meetings and to whom it was disclosed.  If there is ever an argument about the interpretation of the NDA, it would also be helpful to have records of the negotiations that took place in drafting the agreement.  Most importantly, a standard NDA should not be used, but rather it should drafted to meet the specific needs of the companies involved.

Authors: Ken Ritson