NDA - Non-Disclosure Agreement in german law (Non-Disclosure Agreement)

Non-disclosure agreement: NDA in M&A and company acquisitions in Germany

Every company acquisition and many M&A measures in Germany are preceded by more or less extensive exchanges of information between the buyer and seller. The buyer of a german company naturally wants to learn as much as possible about the company to be acquired before the purchase agreement is concluded; in german practice, the seller must therefore even provide possible trade and business secrets of his company. However, the purchaser also frequently receives information about the purchaser in the course of an M&A transaction which is not publicly known in Germany and is not intended to be disclosed to the public at a later date, for example in the course of negotiations on a return investment. If a german company purchase agreement is then not signed, it must be ensured that the recipient of the confidential information does not use it inappropriately, or worse, for competitive activities. This is where confidentiality agreements come into play in german practice.

Another agreement that is concluded in the run-up to a company acquisition in german law is the so-called Letter of Intent. Further information on the Letter of Intent can be found here: Letter of Intent (LOI)

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What is a NDA in german practice?

Under german law, a certain confidentiality obligation applies to contract negotiations even without an express agreement (Gesetz zum Schutz von Geschäftsgeheimnissen - GeschGehG for short). Nevertheless, for reasons of legal certainty and provability, but in particular to meet the specific needs of the parties in individual cases, a non-disclosure agreement (NDA) should be agreed in advance of an M&A transaction and company acquisition in Germany.

What must be the content of a confidentiality agreement in Germany?

The content and scope of a german confidentiality agreement depend in particular on whether the potential buyer is a strategic investor or even a competitor, or a financial investor who is more interested in a solid future return. The closer the competitive relationship with the prospective buyer, the more extensive the confidentiality agreement should be.

An essential part of any confidentiality agreement is the definition of what information is to be treated as confidential between the parties and how it may be used. To this end, it is also necessary to identify the potential recipients of the confidential information in order to be as comprehensively protected as possible.

In german practice, the core of any confidentiality agreement is the formulation of the obligation to treat the information received confidentially and a regulation on the consequences in the event of violations. Furthermore, a confidentiality agreement should contain mechanisms for dealing with information received if the company purchase agreement is not signed.

In individual cases, it may also be advisable to include a so-called non-solicitation clause in the confidentiality agreement. In the course of due diligence in Germany, the prospective buyer will regularly not only review the key economic figures of the company, but will also be able to identify those employees who are critical to the survival of the company's business activities. It may therefore be necessary to ensure that the prospective buyer does not poach those employees who are of considerable importance to its own business activities (key employees) after the transaction has failed.

In german law the NDA is often used to prepare a company acquisition and a company valuation. Since due diligence is time-consuming and cost-intensive, many prospective buyers insist on an exclusive negotiating position for a limited period of time. This is to prevent the company in Germany from being sold to another interested party, which would render the results and costs of the due diligence null and void. For this reason, breaches of exclusivity agreements are sanctioned with a so-called break-up fee in favor of the prospective buyer. The prospective buyer tries to hold himself harmless by a corresponding amount of the payments to be made by the seller and to be reimbursed for his previous (un)costs.

What is considered confidential information under german law?

In principle, information is subject to a confidentiality obligation if one of the parties defines it as confidential and thus includes it in the confidentiality agreement. The seller of a company in Germany naturally has a strong interest in providing as much information as possible and thus in defining the term confidential information as broadly as possible.

In german practice, the seller is therefore well advised to include in the confidentiality agreement all information which he makes available or has already made available to a prospective buyer during the transaction. It is irrelevant whether the information qualified as confidential is provided in writing, electronically or orally.

Even if the parties wish all information to be exchanged to be treated as confidential, it has become established german practice to specify the information that is to be covered by the confidentiality agreement in order to clarify the matter and facilitate proof in the event of a dispute. A common definition of confidential information can be formulated as follows:

Sample german contract clause (Confidentiality Agreement NDA) - Confidential Information

"Confidential Information for purposes of this Agreement shall mean any information, memorandum, analysis, compilation, study, document, know-how or other information (whether communicated orally, in writing, electronically or otherwise) received by either Party from the other Party with respect to or in connection with the Project, and any memorandum, analysis, compilation, study, document or other documentation (written or otherwise) prepared by either Party or its representatives based on or in connection with Confidential Information from the other Party and/or containing such information.

Confidential Information for purposes of this Agreement also includes the fact that Confidential Information has been brought to the attention of the existence and content of this Agreement, including the fact that discussions regarding the Project are taking place between the Parties and the status of such discussions."

If a competitor is interested in purchasing the company in Germany, it may be useful to also include a definition of competitively sensitive information that will not be made available until well into the transaction process. In particular, this should include information on

• prices
• discounts
• pricing
• current or expected offers
• customer specific information
• costs
• capacity utilization

are not only considered confidential, but also particularly sensitive.

Which information is not to be considered confidential in german practice?

Typically, information that is

• Is already otherwise publicly known at the time of disclosure,
• Becomes public knowledge after the confidentiality agreement has been entered into without a breach of the confidentiality agreement
• Has been disclosed to the prospective buyer on a non-confidential basis by the seller
• Have been made available to the prospective buyer by a third party
• Prepared by the prospective buyer without reference to the confidential information

have been explicitly excluded from the german confidentiality obligation.

What does a confidentiality obligation and secrecy obligation mean under german law?

The confidentiality obligation is at the heart of any confidentiality agreement in Germany.

The parties are regularly obligated not to disclose the existence of the transaction as such, the content of negotiations between the parties, or the existence and content of confidential information to third parties or otherwise make it public.

However, the prospective buyer will regularly want or even have to share the confidential information with employees and colleagues within its own company, and often also with external advisors in the context of a due diligence. Therefore, the disclosure of the confidential information to certain groups of persons or companies is often permitted in german practice. The more specifically these third parties are designated in the confidentiality agreement, the better.

The basic rule can be that confidential information may only be disclosed to those persons who are absolutely necessary for the evaluation of the transaction in Germany. Appropriate regulations should then ensure that the recipient of the confidential information must ensure that the persons to whom he or she permissibly passes on the confidential information are bound by an identical confidentiality obligation.

In addition to the obligation to keep the information confidential, the recipient should be required to use the information received only for the purpose of reviewing and evaluating the transaction in accordance with the german confidentiality agreement.

Does a confidentiality agreement have to be notarized in Germany?

No! There is no legally prescribed form for the conclusion of a confidentiality agreement under german law. The most common form in german practice is probably the written form. If the parties agree that written form should apply (so-called voluntary written form), it is sufficient if the parties exchange signed copies by e-mail (Section 127 (2) BGB).

How long is a non-disclosure agreement (NDA) valid in german law?

In german practice, the term of the confidentiality obligation can be up to three years from the signing of the confidentiality agreement.

If the german company purchase agreement is concluded between the parties to the confidentiality agreement, this often itself contains a provision on further confidentiality and in this respect supersedes the agreements in the confidentiality agreement with the successful purchaser.

In the event that negotiations between the seller and the prospective buyer fail, the confidentiality agreement should contain provisions on how the confidential information exchanged is to be handled in german practice. The recipient is regularly obliged to return or destroy the information received. Special attention must be paid here to personal data contained in confidential information, as the General Data Protection Regulation, or "EU-DSGVO" for short, provides for special regulations on the deletion of corresponding data in Germany.

Information defined as confidential that cannot be returned or destroyed if the transaction fails is regularly subject to a confidentiality obligation that extends beyond the term of the confidentiality agreement or is even unlimited.