27 August 2015

Confidentiality in Business Sales

In his latest blog post, Richard Frogson, partner and specialist in corporate law, takes a look confidentiality/non-disclosure agreement and how to protect confidential business information during the sales process.

If you are thinking of selling your business then one of the key issues to consider at the outset is how to protect the valuable confidential information of the business during the sales process. Whether that information relates to product design, price lists, supplier or customer information, or the fact that a sale is being considered, a seller will have some information it wishes to protect.

Of course, some information the business holds will itself be subject to confidentiality restrictions and care should be taken to avoid disclosing such information.

The starting point for protecting confidential information will often be putting in place a confidentiality or non-disclosure agreement (NDA). NDA's provide a contractual undertaking from a prospective buyer to keep the confidential information disclosed secret and not use the information other than for the purposes of the negotiations.

Whilst civil law may provide some protection of confidential information without a written agreement, the advantage of a written NDA is that it demonstrates that the parties recognise the confidential nature of the information and acknowledge the confidentiality obligations. It will greatly assist a seller if enforcement action is required and will focus the minds of both the buyer and seller in relation to the information to be disclosed.

However, whilst extremely useful, NDA's cannot themselves guarantee that information will be kept confidential. Whilst an injunction may be available to prevent a future breach, it relies on the seller knowing, and being able to prove, such future breach is about to occur. If the NDA has already been breached then an injunction (other than to prevent further breaches) will be of no use and whilst damages may be obtainable, they may not be an adequate remedy.

Therefore, in addition to an NDA, a prudent seller will adopt additional precautions in order to protect confidential information. These could include:

  • researching potential buyers to ensure they are genuine and are likely to have the funds to proceed with the acquisition before any disclosures are made;

  • providing information only in hard copies marked "confidential";

  • keeping an accurate record of the information provided;

  • providing information to one person nominated by the buyer (where lawyers are involved this should ideally be through lawyers who will keep records of the information);

  • providing the more valuable information towards the end of negotiations or on completion of the sale;

  • encrypting information sent electronically;

  • setting up a physical data room where access to information is monitored and removal of information restricted;

  • setting up a virtual data room where access is restricted, information is watermarked and security settings are applied to documents depending on their sensitivity;

Hopefully the sales process will lead to the successful sale of the business but in the event that the proposed sale does not proceed, the seller should ensure that all confidential information previously disclosed is returned or destroyed (a well drafted NDA should provide for this).

As always, if you would like any further information please do get in contact with me or one of my colleagues - we'll be happy to help.

[This blog post first appeared in Business Intelligence magazine]

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