This information, by its very nature, is often sensitive and confidential and so the seller should take steps to reduce the risk that the information is disclosed publicly or even misused by the buyer to the detriment of the business. In addition, the mere fact that the seller is in the process of selling his business is often confidential. Most sellers will want to ensure that, for example, employees and customers do not find out about the proposed sale until the right time and then only as part of a managed process.
It is for the above reasons that, as early as possible in a sale process, the seller should require the buyer to sign up to a confidentially agreement, sometimes referred to as a non-disclosure agreement or NDA.
In a confidentiality agreement the seller usually agrees to provide certain confidential information to the buyer and may allow the buyer limited access to other information, officers and advisers. In exchange, the buyer confirms contractually that it will, amongst other things, keep that information, and the fact that the seller is considering selling the business, confidential.
The seller needs to be aware that a confidentiality agreement is never a guarantee that the confidential information (and therefore the business) will be protected. Clearly, if confidential information is disclosed publicly in breach of the terms of a confidentiality agreement the potential damage to the business could already have been done. No court injunction can make public information secret again and a recovery of damages may well be inadequate under such circumstances. In addition, the seller proving that there has been a breach of confidentiality by the buyer can also be difficult.
Nevertheless, we would advise a seller of a business to implement a confidentiality agreement. Not only can the agreement act as a disincentive to the buyer to disclose publicly or misuse the information it receives, a confidentiality agreement also usually sets out a clear and structured process by which confidential information will be requested and provided. The agreement usually, for example, does not permit the buyer to contact any employees of the business to ask questions of them without first obtaining the seller’s consent. A confidentiality agreement also often includes provisions to reduce the risk of a buyer poaching the seller’s employees, customers or suppliers in the event that the sale does not proceed.
We can advise sellers on the benefits of a confidentiality agreement and can draft and negotiate confidentiality agreements on their behalf. We can also advise buyers of businesses with respect to a confidentiality agreement they receive from a seller and negotiate any such agreement on the buyer’s behalf.
For further information in relation to this article, please contact Daniel McCormack.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.