Wednesday, December 4, 2013

Non Disclosure Agreements

The first and most important consideration of a seller of a business should be how to protect the secrets of the business during the sale process. It is very important that sellers seek legal advice before disclosing information about a business to interested parties.

It is disturbing when sellers start negotiating the sale of their business without a signed confidentiality agreement or a non-disclosure agreement being in place. In these unfortunate circumstances it is often not possible to protect a seller from the consequences of misuse of the confidential information relating to the business.

Of course, a copyright infringement can be litigated. Also the misuse of a patent can be litigated. However, it may be more complicated to bring a successful action to protect valuable information which is not subject to copyright or a patent. Valuable information may include: client lists, financial information, pricing formulae, salaries, business plans and information about future plans.

Therefore, a signed confidentiality agreement prior to disclosing information is a must for sellers. We consider the following issues to be mandatory for a well-drafted confidentiality agreement:

  • the definition of confidential information – such definition should be all-encompassing;
  • use of confidential information should be restricted – i.e., a potential purchaser should only use the information for the purposes of its financial offer to the seller;
  • consider restricting access to confidential information – such restriction is very important in the context of a trade sale to a potential competitor;
  • obligation not to copy, store or retain confidential information in any format – in the digital age this has become a difficult issue in practice; sellers may wish to consider establishing an e-data room to restrict and log access to information;
  • obligation to expunge, return or destroy confidential information – in order to police the destruction a seller can obtain a declaration of destruction;
  • remedies in the event of wrongful use or disclosure of confidential information – a well-drafted confidentiality agreement will include an indemnity and possibly refer to injunctive relief; and
  • duration of the agreement – it is important to have a duration in which the confidentiality agreement remains enforceable.
In this article we have considered confidentiality in the context of a business sale. Taking appropriate precautions about confidentiality is also important in the context of employment. The maintenance of confidentiality is also an important part of compliance and risk management procedures.

In the next article in this series, we will consider Memoranda of Understanding, Letters of Intent and Term Sheets.