Why You Must Invest With Caution In NDAs [UPDATED]

Non-disclosure agreements are becoming a tricky business for organizations, as disclosing parties continue to capitalize on the delicate nature of the agreements, at the expense of their partners in the contracts. Indeed, clients that fail to take a keen interest of the content in the agreement have ended up in big trouble after pursuing alternative interests, with the information provided.

The most recent example involves a broker (the disclosing party), and a private equity firm (the intended user of the secret information disclosed). The broker (plaintiff), filed a case against the PE firm (defendant) in a New York court, citing infringement of the agreement by the latter. The broker had signed the NDA seeking financing for a corporate client to implement a business idea in the cash management industry.

According to a report published on a Harvard Law School Forum for Corporate Governance and Financial Regulation, the agreement had categorically stated that the PE firm would only use the confidential information disclosed by the broker in exploration of a potential business venture that would involve the broker and the clients of the broker.

Having considered several transaction opportunities that involved the broker, the plaintiff was of the opinion that the PE firm (defendant), went on to pursue and complete one of the potential business ventures purportedly identified by the broker,  without involving the broker and its client.

The case was based on the grounds that the PE firm had used the confidential information shared about the cash management industry wrongfully, with an intention of evading the fees entitled to the broker over the insights provided. On the other hand, the PE firm, responded by claiming that the NDA, “only covered a transaction that actually in fact involved the broker, and that the broker’s proposed broad reading of the use restriction represented an “unreasonably indefinite obligation” on it not to enter the cash management industry.”

Nonetheless, the court ruled in favour of the broker after it pointed that the PE firm was required to abide by the explicit provisions of the NDA, and therefore, by using the confidential information shared in the NDA, the firm was guilty of violating the agreement. However, the court, just like a similar case we featured in one of our articles, found that there was no necessary prohibition barring the PE firm from pursuing other transactions in the cash management industry.

Firms intend to use NDA information to execute hostile takeovers and trades, and many are now beginning to feel the heat in the resulting consequences. The New York case comes only a short while after the Vulcan case, that involved Martin Marietta Materials, Inc. (NYSE:MLM) and Vulcan Materials Company (NYSE:VMC), where the former was issued with an injunction that ruled out the possibility of the hostile purchase of Vulcan Materials (NYSE:VMC) shares.