What is a Confidentiality Agreement for Board Members?
Confidentiality agreements, sometimes referred to as non-disclosure agreements or NDAs, form part of a legal framework protecting corporate interests, intellectual property, trade secrets and privileged information. These types of agreements have their origin in common law, which has long recognised the scope of the court’s ability to enforce implied restrictions on the use and disclosure of confidential information. The common law tests the scope of the restriction in light of the conduct of the parties and the context in which it arises. It assesses the reasonableness and appropriateness of the restriction in the context in which it arises.
For example, if the information is highly sensitive in nature, the requirements for a valid confidentiality agreement may be lower than for less sensitive information. The level of sensitivity of the information will influence the obligations in the agreement as well as the duration that those obligations will survive termination of the relationship. In recent years, the emergence of increased regulation around privacy has heightened the importance of confidentiality agreements in the boardroom and the workplace. In particular, the introduction of the General Data Protection Regulation and the introduction of the California Consumer Privacy Act 2018, have illustrated the need for a strong and proactive approach to confidentiality obligations in the workplace.
The key purpose of a confidentiality agreement relating to the workplace is to establish the bounds of acceptable conduct by employees and directors towards the protection of sensitive and confidential information. These include , but are not limited to:
Company or corporate confidentiality agreements typically include:
Board member confidentiality agreements are formal contractual obligations that are entered into by individuals joining the board of a company (or a subsidiary) in order to protect the company’s confidential information. Companies increasingly require individuals to enter into confidentiality and/or non-disclosure agreements as a matter of course prior to, or immediately following, their appointment to the board to prevent them from disclosing sensitive information to unwanted third parties or using that information for their own benefit.
As confirmed by the House of Lords in Faccenda Chicken Ltd v Fowler [1985] ICR 68, no single document will satisfy the requirement for confidentiality or non-disclosure of information. Information obtained by an employee concerning a business is only protected against misuse during and after the employment, if (a) it has the necessary quality of confidence; (b) it was communicated and received in circumstances importing an obligation of confidence; and (c) unauthorised disclosure would cause detriment or unfair advantage to the party holding the confidence.
A directors’ confidentiality agreement can complement the director’s statutory and fiduciary obligations that are already imposed under the Corporations Act 2001 and common law. The agreement, however, only binds the company and the director or employee. The Commonwealth, State and Territory laws that regulate fair trading may also impose penalties for such breaches. A director or employee may also be liable for damages where they breach their duties of confidentiality in their capacity as a registered agent or representative of a corporation and this includes directors.
If a director or employee discloses confidential information to a person who has a relationship with the company and that person uses that information in a way that would be a breach of a confidentiality agreement, the director or employee will still be in breach of that agreement.
Main Components of a Confidentiality Agreement
The confidentiality agreement for board members generally includes the following elements:
Scope of Confidentiality. The agreement may define what specific company information is considered confidential. Common items include source code, algorithms, company financial information, customer list and contact information, internal pricing and cost information, supplier information, sales and marketing information, products, tools and techniques, intellectual property rights, and plans for future projects and developments.
Duration. Board members may be asked to keep the specified information confidential for a set period of time, such as five or ten years from the date the person is no longer a director or officer of the company. If the board member signs a non-competition agreement, the duration of the confidentiality agreement may be indefinite. It may also be indefinite if the confidential information has a longer shelf life (e.g., certain types of software source code and plans for products in development). Companies should avoid creating an open-ended confidentiality obligation, such as until the death of the board member (who may expect his or her estate to continue receiving financial benefits from the company even after death). Otherwise, a person could expect to continue receiving board fees or stock option vesting indefinitely after resigning.
Obligations. Agreements may include obligations to return or destroy confidential information following termination or resignation from the board. Confidentiality obligations may apply to persons other than board members, such as family members, advisors, attorneys, accountants and other employees of the company with access to the confidential information. The company may keep a copy of the board resolution authorizing the officer or director to sign the agreement and the executed confidentiality agreement as part of its records.
Exceptions/Exclusions. Certain basic categories of information may be excluded from the confidentiality agreement. For example, the restrictions may not apply to information that is already in the public domain or that becomes publicly available through no fault of the director or a person who received the information from the director. Other exclusions may include information that is already in the board member’s possession and was not received under an existing confidentiality obligation. Information that is independently developed by the board member without the use of the company’s confidential information or material and information acquired by the board member after the director leaves the board.
Why Confidentiality is Vital for Board Members
Board members play an important role in organizations and are privy to a considerable amount of confidential information. Not only are boards considered part of management from a liability standpoint, boards have the oversight rights and responsibilities to ensure that organizations are conducting themselves appropriately and lawfully. To that end, the board will resolutely protect proprietary information and trade secrets and tightly control confidential financial, operational, marketing, and technology information.
But it goes beyond that. Board members owe fiduciary duties of care and loyalty to the organization to which they serve as a member. An organization may be liable for a breach of these duties, so boards should be vigilant in making sure that they protect the company from any risks that could come from board member departures and the infiltration of confidential information by competitors. Nonprofits are not immune from these types of risks, and the board of a nonprofit organization will want to protect the organization from the potentially devastating impact of disclosing information to competitors or to the public at large.
Consequences of Violating Confidentiality
Violating the written confidentiality agreement is, at a minimum, a breach of contract and grounds for ending the person’s service on the board. Many statutes and regulations make it a crime to disclose confidential information or to do so with the intent that someone else will. For example, if you knowingly take a picture or make a recording of an executive session, you are committing a misdemeanor crime under KRS 61.810(2)(c). Posting what you may not realize is a closed meeting on a social media site, is likely to constitute a violation of numerous statutes. Violating these confidentiality obligations could also open the door to private lawsuits , attorneys’ fees under the Kentucky Open Records Act for the public agency, or fines by the Office of the Attorney General for willful violations of the law.
Organizations may seek several remedies for such a breach. The board member may be requested to resign. The board may take a vote to remove him or her from the board. The organization may send a cease and desist letter requesting the violator to sign a retraction be circulated to recipients. The organization may seek injunctive relief if the stop the spread of any incorrect statements. It would be difficult to prove monetary damages from the violation. Finally, the violator may be exposed to threat of criminal prosecution, as mentioned above.
How to Effectively Enforce Confidentiality Agreements
To avoid conflict and confusion, confidentiality agreements cannot be stand-alone documents. Such agreements should be part of a package of policies and procedures within an organization. Ideally, the process should involve a comprehensive Internal Control Manual and a Code of Ethics that discusses the general obligations of board members to safeguard confidential information. Board members should be educated in the use of confidentiality agreements and they should be required to sign these agreements at least annually. All parties involved in developing, reviewing and approving confidentiality agreements are candidates for additional training.
Effective board member confidentiality agreements must clearly define the scope of confidentiality obligations. Key topics should include:
Agreements should provide a list of penalties for breach, such as:
Agreements should be subject to Board member review and subject to periodic review and revision by the appropriate organization official.
Agreements should normally include a section which provides that board members have a right to full disclosure of all organizational information except for that which is….
Agreements should be clear about who owns the confidential information and compositions developed by board members during the course of their service.
Agreements should also prohibit departing board members from using confidential information for a period of time since over board members may use or disclose confidential information after they leave the organization.
Agreements should also describe the process for resolving disputes that arise under a confidentiality agreement, which should include arbitration or some other forum acceptable to all parties.
Confidentiality Clause Examples
What follows are a couple of examples of confidentiality clauses that could be used in a board member confidentiality agreement. Some boards may decide that using both is the best option.
In consideration of the position as board member, confidential information will not be given to anyone outside of the board. Confidential information includes all information about the organization not generally known to the public , including but not limited to the organization’s business plans, strategic plans and strategic initiatives.
At times, a board member will need to sign a non-disclosure agreement as well, especially for information that may be shared with the board related to investments or joint ventures, or information that may be shared outside of the general scope of your board member duties and responsibilities. An example of a non-disclosure agreement is below.
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