When drafting confi dentiality agreements, often the focus is on protecting confi dential or proprietary information from disclosure so that it does not become known to competitors and is not used by the recipient to the commercial disadvantage of the disclosing party. However, care should also be taken to draft confi dentiality agreements that also preclude the recipient from trading in securities on the basis of the confi dential information provided.
While the law is not entirely settled,5 in order to preclude not only a recipient’s disclosure of confi dential information, but also a recipient’s trading in securities on the basis of confi dential information, confi dentiality agreements should specifi cally limit the use of the confi dential information to certain defi ned purposes (such as evaluating a possible transaction) and specifi cally preclude the trading of securities on the basis of any confi dential information. Simply requiring the recipient to keep the information confi dential may not be suffi cient. The addition of a specifi c clause whereby the recipient agrees to not trade on the basis of the disclosed confi dential information should serve as not only a reminder that the information being disclosed may constitute material nonpublic information, but also as deterrent to misuse. Furthermore, having a clear provision in the confi dentiality agreement prohibiting trading on the basis of the confi dential information will provide the disclosing party a contractual right of action against the recipient in the event of misuse of the confi dential information for securities trading. This contractual claim would be separate and apart from any securities law claim that may be brought.