© Winston & Strawn London 2008. These notes are provided free of charge as a convenience to attendees of the Bootlaw series of seminars. They relate to the laws of England and Wales only. They do not purport to offer advice, or to be fit for any particular purpose. For this reason, they are supplied with no warranty, express or implied, of any type. We accept no liability for their use and you should obtain independent legal advice in connection with the issues discussed. We hope you understand why we cannot accept liability for the use of these notes when we are not aware of the circumstances of their use. Please contact Barry Vitou if you have any questions about their use and application. You are granted a limited licence to copy the documents for internal use in your organisation only, and you undertake to keep the copyright notice and disclaimer portions of the document intact (if applicable).
Barry Vitou Speaking Notes 24 September 2008
Termsheets
Our basic thinking behind running these seminars can be quickly how to get more from your lawyers for less. How do you save money? First: KISS When I say First Kiss I mean "Keep it simple stupid". Complexity increases cost and makes something harder to understand. So put yourself in the shoes of the person receiving your message. In terms of messages for start ups; for most things start up there is a pretty well trodden path to structuring deals. And, the easier you make it the cheaper it will be. Think KISS again. Second: Information Our objective through Bootlaw is to provide information. So when it comes to bootstrapping your business you can spot key legal issues and engage with your lawyers as cheaply as possible. When you do this you'll get much more value for money from your lawyers. This is because you'll be asking them to concentrate on the hard stuff and not waste their time and your money doing the easy stuff. We're going to do this by demystifying law. So you can do things for yourself with confidence and save money by coming to us for the areas where we can add value. I'm not saying don't ever call us; in fact we'd love to hear from you. I am saying use us for the hard stuff and do the easy stuff yourself.
Using termsheets as an example, over the years I have been asked to prepare lots of termsheets from scratch. If you have the time to do this yourself, and according to Clay Shirky everyone does because we all watch TV, then this is a waste of money. So, why ask us to do it? It will probably take me 3 to 5 hours to prepare a termsheet from scratch. You could prepare the first draft. Time saved, at least a couple of hours may be three, or say between £700-£1000. Please involve your lawyers at termsheet stage, it makes life much more efficient later and they will have useful insight and wisdom to offer. Your lawyers can also add the necessary legal boiler plate to protect you and "save your bacon".. But use us efficiently, you prepare the commercial terms and run them past us; ask for your lawyers views on the deal; ask for his/her views on strategy and tactics (chances are that they will have some thoughts) and ask them to add any missing legal boiler plate. Total time for this around two hours, or say £700. Time saved £1000. If you go down this path you'll get more valuable advice and it will be cheaper. What is a termsheet? or an MOU or a Letter of Intent or a Heads of Agreement? They are all the same thing. What is it for? Well you've been talking to another business about doing a deal. It doesn't really matter what its for, for the purposes of tonight. It could be for anything. Basically a termsheet is piece of paper where two businesses write down the basic commercial terms they have agreed to do whatever it is they want to do. How long should it be? Any ideas? In my view if its more than two pages you’re missing the point. That’s because the point of a termsheet is to get to the key commercial terms quickly and worry about the details later. Binding or not binding? As many of you know, generally speaking a key feature of a termsheets is that they are not supposed to be enforceable documents. With some exceptions which I'll get to in a minute. While a the commercial terms of a termsheet will generally not be contractually binding they will be morally binding. U turns on terms contained in termsheets can be fatal to a deal.
Many tend to assume that the word termsheet is synonymous with a non binding agreement. But this isn't so. As a result it is extremely important that somewhere in the termsheet (assuming that you want a non binding deal – see below) it says that the deal is: "Subject to Contract" In other words include wording along the lines that the agreement/letter etc. is non binding or that there is no intention to create binding relations. NB if it doesn't say this or words to this effect you could unintentionally create a binding agreement. This will generally be a bad thing, because the legal protections contained in the full agreement, for example warranties and indemnities, provisions surrounding termination, agreements on employees, competition, and the detail will be missing. From a very basic standpoint you should always, even in a non binding termsheet, for example insert a jurisdiction clause and this should always be binding provision. In some circumstances a fully binding termsheet, in other words where everything in the termsheet is binding, can be intended. It can be a good thing when you are absolutely clear that you intend to conclude a binding agreement ie the terms are in your favour and you have concluded that you don't need the boilerplate protection! What’s in a Termsheet? There are a few basic rules: • • • • Generally speaking they are "Subject to contract" (excluding the legal boiler plate you'd talk to us about) Get down the basic deal Identify any conditions to the deal State the principle leave out the detail For example it is perfectly acceptable in a termsheet to say: "The final legal agreement shall contain warranties and indemnities of a type usual in a transaction like this." • • State the exception and leave out the norm. Insert some timelines for achieving milestones
• • •
Insert a deadline Agree process for moving ahead Think very carefully and perhaps speak to your friendly lawyers before making significant concessions or moving out of your comfort zone. So, for example if you prospective partner wants all disputes dealt with in his home town in outer Siberia, think carefully. Use your lawyers for insight
•
In addition to the commercial terms you would also be well advised to include some terms which are binding to protect the parties. These include • • • • confidentiality (which Danvers is going to deal with), costs for example who pays for work during the MOU relationship before the binding agreement and exclusivity arrangements and compensation for breaking them Governing Law etc.
Finally, I should also mention Scoping Agreements. Sometimes we are asked what clients should do when they are about to sign a big contract which requires up front work scoping out the job or ramping up to scale for the work before the main contract is inked. How do you manage this? do you ask for a loan etc. the answer is no. We'd suggest that you negotiate some up front consultancy perhaps for scoping out the job and use the money from that to prepare for the main deal. Any questions?
© Winston & Strawn London 2008. These notes are provided free of charge as a convenience to attendees of the Bootlaw series of seminars. They relate to the laws of England and Wales only. They do not purport to offer advice, or to be fit for any particular purpose. For this reason, they are supplied with no warranty, express or implied, of any type. We accept no liability for their use and you should obtain independent legal advice in connection with the issues discussed. We hope you understand why we cannot accept liability for the use of these notes when we are not aware of the circumstances of their use. Please contact Barry Vitou if you have any questions about their use and application. You are granted a limited licence to copy the documents for internal use in your organisation only, and you undertake to keep the copyright notice and disclaimer portions of the document intact (if applicable).
Danvers Baillieu Speaking notes 24 September 2008
Non-disclosure Agreements (NDAs)
INTRODUCTION The number one, most valuable asset of any technology company is its intellectual property rights. IPR is the foundation of your business, whether it is in your head, on your hard drive or out on the web – whether it is in the form of code or your business process – whether it is registered or unregistered – it is the most important thing that you own. Your IPR includes patents, trademarks, copyright, designs and knowhow. Protecting your IPR from your competitors is vital and you should be familiar with the steps involved in registering trademarks, inserting copyright notices into written code and text or even filing for a patent. Know-how, however, cannot be registered or it might be undesirable to attempt to register it, as patents involve some disclosure and will eventually expire. Remember: if you don’t want to see your IPR running around out there in the big wide world, keep it firmly zipped up! WHEN TO USE NDAs The first question you should ask yourself when presented with a non-disclosure agreement is: do I trust this person or this company enough to hand over the map which shows the location of the buried treasure? If the answer to this question is “no”, then you need to think very seriously about what you disclose – if anything – how you disclose it and even whether or not you want to do business at all. In terms of protection, what am I talking about? For example, I recall one particular large corporate deal where as a lawyer acting for the publicly listed buyer on a takeover of a publicly listed target, who was also a competitor of my client, I was allowed to review key commercial contracts to check their terms, but the vital pricing information was redacted – literally blacked out – from the agreement and only disclosed at the last minute before contracts were signed.
Of course, in this transaction, stringent, bullet proof non-disclosure agreements were in place but the target took the commercial decision that it wanted to keep certain information completely safe. Another common technique in big commercial transactions is that all the information is held in a locked data room and access is tightly controlled, with no copying of documents. Although a complete pain in the neck for the advisors, this is a virtual necessity where listed companies are involved and the data could be price sensitive. On the other hand, if you possess genuine confidential information which is defined as having “the necessary quality of confidence about it, namely not something which is public property or public knowledge” …and it is disclosed “in circumstances importing an obligation of confidence” – which is a judge’s way of saying it has been stamped with the word “Confidential” on it - it will have intrinsic IPR which is protected by law whether or not you have an NDA1 in place. Actually, the legal test used in this particular case was “a reasonable man standing in the shoes of the recipient of the information would have realised that upon reasonable grounds the information was being given to him in confidence”. But all you need to remember is that the courts in this country recognise the duty of confidence whether or not you have an agreement. Do I need an NDA? Well, yes, I think you do – and there are some good reasons to do so: 1. You really are handing over confidential information and you want to protect it. Today’s trustworthy business partner can become tomorrow’s fierce competitor and contrary to what some people might tell you – you can enforce an NDA. Where an NDA has been breached, a court may award unlimited damages or there is a real danger of a breach, impose an injunction restraining the possible breach. So you don’t have to rely on your common law rights, it is much better to have a nice neat agreement in place. 2. An NDA creates the right impression and avoids any doubt. An NDA clearly signals to the other party that you regard your information as confidential and so it is not open to him later on to say that he had no idea. Maybe this is a sub-category of number 2, but the signing of an NDA can help move your discussions along to the next phase – pre term sheet, but post meeting up for coffee. To continue the metaphor started earlier, it means you are moving to second base. 3. From the point of view of patent protection you want to ensure that anything which might be patentable is kept confidential. Broadly speaking, in the UK and Europe, you need to apply for a patent before you disclose a new invention although in the US
1
Coco v A N Clark (Engineers) Limited [1969] RPC 41, at 48
you have a year to apply after the first disclosure. If you end up being challenged over when you first publicly disclosed a new invention it really could not hurt to have a few NDAs floating around which prove that you were keeping it all under wraps on a particular date. 2 WHAT IS AN NDA? So you’ve established that you are going to hand over confidential information to your potential business partner BUT that you are first going to enter into an NDA. An NDA can come in many different shapes and sizes, many of which can be downloaded from the internet for a small fee; in fact, I googled “Non-disclosure agreement” and the second non-sponsored entry was a link to this PDF. [refer to handout] It is titled “Basic Nondisclosure Agreement” – which it is. It’s pretty good – although quite short, and a bit American style. However, let’s assume that you’ve also downloaded this same document and you want use it for some upcoming negotiations – or even your potential business partner has downloaded it and has presented it to you. What do you need to look out for. First off, the agreement is one-way. This might be OK, but sometimes it will be necessary to have a mutual agreement, and sometimes it might not be necessary, but the person on the other side may just insist on it – some people are just like that and it is not worth having the argument. In this agreement the parties are defined as the Disclosing Party and the Receiving Party. You could probably make this agreement mutual simply by playing around with the definitions at the start – and say “each a Disclosing and Receiving Party as the context requires”. Clause 1 is called “Definition of Confidential Information”. This is the most important clause, in my view, and it is the one where the most mistakes are made. If it is possible to define precisely the information you want to protect you should do it here – or put it in a schedule and refer to the schedule here. In this example, the Disclosing Party is under an obligation to stamp all confidential written documents with “Confidential or some similar wording”, and notify the other party in writing if confidential information has been given orally. This is preceded by catch all wording which states: “Confidential Information shall include all information or material that has or could have commercial value or other utility in the business which Disclosing Party is engaged”. The drawback of this approach is that the catch all is incredibly broad and vague and then the requirement to stamp all documents is either going to be forgotten about when documents are
In relation to the question that was asked about dating documents, although you should not back date documents to appear they were signed before they really were signed, you can agree to give retroactive effect to an agreement. Equally, for patent protection purposes, if you did give out confidential information but did not enter into a specific agreement, you may still be able to argue that it was not publicly disclosed – although this may come down to a question of evidence.
2
sent over – or is just going to be a pain in the neck – and you are never going to follow up on the oral information. For example, if you are disclosing information about your whizzy software to a third party developer, you could say, “Confidential Information shall include all information or material related to the xyz.com semantic recommendation engine including all source code and algorithms” – precise, short and to the point, and all the confidential stuff is covered. However, this does require a bit of thought on your part before you send the NDA out to the other side – but in my view, this is time well spent. Clause 2 deals with exclusions. For the most part, this states the obvious. Information cannot be confidential if it has already been made publicly available. It always amuses me that you see PowerPoint presentations by companies, sometimes up on the web, with “Confidential” emblazoned on the front or last page – or sometimes on every page. I don’t know about you, but to me, unless you are strictly controlling who gets to see your presentation, you are putting it in the public domain – which immediately means it cannot be confidential. This clause deals with that concept and ensures that you are not under an obligation to keep confidential material which is already in the public domain. You might also see this clause augmented by a permitted disclosure clause, which would allow the recipient to disclose information if ordered to do so by a court or other authority. Public companies are particularly keen on this as they often have disclosure obligations in relation to their stock market listing. If you see such a clause, you should use your commonsense and weigh up the likely downsides to your company, but on the whole they are hard to resist, as public companies pretty much have to have them in. If you feel really strongly about it, the usual route out is to have a clause which allows you to get involved in the process of challenging the ordered disclosure either to prevent it or to ensure that the disclosure is made in a limited way. Generally speaking, English Courts will protect genuine confidential information from public dissemination, so if it is in evidence, a judge might order that the hearing is in private and that the court file is sealed. Moving on then to clause 3. This is an adequate clause setting out what the Receiving Party can and can’t do with the Confidential Information. The part dealing with the information being passed to third parties could be amended a bit. Under English law the assumption is the employees are bound by a duty of confidence and you could just ask the Receiving Party to confirm that other third parties had entered or will enter equivalent agreements, as this example does. However, if the material is particularly sensitive, you might want to beef this up a bit and impose further practical restrictions on copying or other warnings given to staff and third parties. Equally, as a practical matter, you need to think how you might handle confidential information if it is disclosed to you. Do you have somewhere in your office where it can be locked up or can electronic information be stored safely and securely? Hopefully, you are way ahead of me on this.
The obligation to destroy or return information is standard, but rarely invoked. Again, you want to think about the practicalities here more than the legal aspect. How could you police this? Maybe there is a technical solution. Again, if you are on the receiving end, think about your internal processes and how you would be able to comply with a request to return documents or information. [In relation to the question about protecting information given out in brainstorming sessions, it would be ideal to agree beforehand what the other side can or cannot do with the ideas generated – possibly you want to think about charging for your time, maybe at a premium if the ideas are used but you are not retained as envisaged. Equally, it is sensible to hold back information on how such ideas could be implemented, so a bit of forethought as to how you conduct such a session is sensible. If you do give out information orally which is confidential, it is sensible to follow up quickly with a email or letter – or even a memo to the file which can be copied to your friendly lawyer…] One further issue which could be dealt with here is a general reservation of rights in respect of IPR, in other words just clarify that no IPR is being licensed or transferred as a result of the information being handed over. Clause 4 deals with timing. Some NDAs have a long stop date of 5 or even 10 years. Most confidential information in the tech sector goes out of date and therefore loses its confidential nature after about 5 or 10 minutes. So for technology IPR, 5 years is probably more than adequate, but you want to be sure when this period runs from – is it the date of the agreement – when you sign it or the date that you stop sharing confidential information? It does not matter, as long as you know what you are agreeing. Clauses 5 to 8 are boilerplate. They are all a bit too American style for my liking as an English lawyer, but would broadly work. There is one really important clause missing here – [t shirt competition] There is no dispute resolution or choice or law clause. Everything I have said this evening relates to English law and you should ensure that ALL your contracts are clear as to the choice of law and the venue for dispute resolution, otherwise you can spend a great deal of time and money – particularly if you are dealing with a foreigner – arguing over both law and venue. I’ve no idea what French law says about the enforceability of NDAs but I have been asked to review NDAs subject to the laws of France – absolutely pointless – try to keep them under English law. Housekeeping Great. So now you know what to look out for in the NDA. My least favourite request from a client is to get that call – oh there’s a problem with that contract you prepared for us a few months ago – the other side are not delivering, can you let us know what we can do about it. Fine, I say, you never sent me a copy of the signed version, could you let me have that, as there were lots of last minute changes – and – I don’t say this – a bunch of blanks that you were supposed to fill in before signing the damned thing… Oh, says the client, um… just look at the last one you sent us.
Perfect. I now know that the contract was probably never signed, so my advice begins – “assuming your contract was duly executed…”. There is no point in going to all this effort and then not signing it. Equally, don’t sign it AFTER you’ve handed over the treasure map. Be insistent that it is signed before you start talking, even if it means reconvening on a different day. Equally, if presented with an NDA, be pragmatic, be commercial. I hope, by now, you are all experts and will be able to review one with confidence and with a bit of commonsense. If the agreement appears to be ridiculously onerous, don’t sign it. But if a $10m contract depends on it, take a view, maybe have a quick chat with your lawyer over the phone, but whatever you do, don’t miss out on a chance to do an important deal because you have to send it off to your lawyers who can’t get back to you for a week because they are all sunning themselves on their yacht in the Caribbean – all I would add to that, is that my blackberry is permanently switch on. And when you do sign an NDA. Don’t lose it! Keep them all in a neat lever arch file, ideally with numbered tabs and an index, so when you are going through due diligence with an investor, who you’ve boasted to about all the discussions you’ve been having, you can simply pull the file off the shelf and voila. Instant proof that you have been diligent and responsible in protecting your IPR. And as I have already mentioned, think about how you will police the NDA once information has been handed over – either as the recipient or as the disclosing party. So just to recap. • If you don’t want your IPR out in the wild, keep it in your pants, or somewhere equally safe and warm. • Use your business acumen and only give business secrets to people you trust. • Review NDAs by yourself and don’t send them to your lawyers unless you have to – by all means involve your lawyers in preparing a company standard version, but know how to amend it yourself – and I hope you all do by now. • Do your housekeeping: Sign your NDA before handing over the map to the location to the hidden treasure, don’t lose the signed version, and monitor where the information is going.