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