Confidentiality Agreements in Business Sales – Shhhh!!!!!!!!

When a business is selling, confidentiality obligations are an essential.

During the sale process, the disclosure of confidential information to the wrong person could have adverse (potentially, fatal) consequences on a sale and (possibly) the future operation of the business.

Why put a confidentiality agreement in place?

A business’s confidential information is its life force and protecting it is fundamental.

The reasons for insisting on a confidentiality agreement early in a sale process are many but here are a two:

1. You may not want anyone knowing that you are discussing selling with a particular party. Customers and suppliers may potentially react negatively to news that you are discussing selling to someone (for instance, that someone may be a competitor or someone who has treated one of your suppliers or customers badly in the past);
2. During the sale process, confidential information (to one extent or another) will be passed from the seller to the buyer (and to potential buyers) and so it is important to ensure that these parties are bound by obligations to protect your information.

What is to be protected?

A confidential agreement should define confidential information in a general (but enforceable) way to include all information of the seller which is confidential (or which would reasonably deemed to be) and; in particular:

1. All customer and supplier information;
2. All technical / proprietary information;
3. The existence of the confidentiality agreement;
4. The fact that negotiations are taking place regarding a potential sale.

How is it protected?

Contractually

Confidentiality agreements can take numerous forms but here are a few conceptual questions which need to be considered:

1. It is a given, that a buyer will be prevented from using any confidential information it receives except for the purpose of the sale but what other protections should be put in place?:                                                                                                    a. What degree of security (IT security etc.) does the buyer need to apply to the information in their possession?              b. How tight are the obligations to return and destroy information if the acquisition does not proceed?
2. Who can the buyer disclose the information to? A buyer will need to disclose to certain people (employees, accountants and lawyers) but the agreement needs to place strict limits on who can receive the information and must detail under what conditions information can be disclosed.
3. What is the extent of the liability of the buyer? Should the buyer be held liable for both its actions and those who it discloses it to? Is any limit on the maximum liability of the buyer acceptable?
4. How long should the confidentiality obligations last? Needless to say that the obligations will last during the duration of contract but for how long will they endure afterwards if the transaction does not complete – Will they apply without limit of time? For 10 years? For 5 years? This will generally depend on the nature of the business, as the information may be outdated very quickly in certain industries.

Practical Steps

The details within the four corners of the contract are certainly important but do not forget the actual practical process. How is the information being provided? For instance:

1. It may be best to establish a single point of contact;
2. It is best to maintain as much control as possible (possibly through the use of off-site data rooms etc.);
3. Can the information (or certain parts of it) be provided in an anonymised / redacted form giving the buyer sufficient information to evaluate the business while not providing certain crucial information?

Summary

It is important to keep in mind that, ultimately, contractual obligations are not a guarantee that there will be no unwanted disclosures but they are an important part of the defence against such disclosures. If a disclosure is made then the information is out there and no amount of wishing will bring it back. However, an effective confidentiality agreement will give you an appropriate remedy.

Finally, here are some questions to consider regarding confidentiality agreements if you are thinking of selling:

1. Who are you disclosing information to? Is there any reason (whether emotional or logical) to question their trustworthiness?
2. The obligations to protect the information being provided to the buyer and his advisors need to be strong and unambiguous;
3. The strength of the obligations on the buyer and protection of information has to be balanced against the need to give the buyer the ability to evaluate the business;
4. In the event that an unauthorised disclosure is made, you need to make sure that there are obligations to make you are aware of the disclosure and that the agreement gives you an appropriate remedy;
5. Does the process provide sufficient protection?
6. Where are the potential risks?

Steven Wicks is a Corporate Solicitor at Young & Partners. He works from our Dunfermline office and can be contacted on 01383 721621 or at saw@businesslaw.co.uk.