Sell | 10 March 2018

Protecting confidential information in a sale

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If you are considering selling your business, you should ensure that you have made adequate protections for your business confidential information.

One important step is to enter into confidentiality agreements (also known as a non-disclosure agreements or NDAs) before letting any potential buyers, their advisors or representatives have access to your business’ confidential information.

As we’ve said in our Article How do I protect my idea when sharing it?, best practice is not to give more information than is essential. Even if you have a confidentiality agreement in place, it cannot protect your information if the person you disclose it to breaches that agreement and discloses or uses it in a way that is not allowed under the agreement. However, in a sale transaction, potential buyers of your business will want to fully understand your business and see information that you might not ordinarily disclose to a third party. A more comprehensive confidentiality agreement is needed to protect your business.

What provisions should I include in a confidentiality agreement for a sale transaction?

Think about the following:

•  Who is the potential buyer? If the potential buyer is a competitor, you should be very cautious about what information is shared with them and consider whether some information should only be shared after you’ve seen a more formal statement of intention from the buyer.

•  Be Specific – Be very clear what information is covered by the agreement and what it can be used for. Be sure to include the actual discussions around the sale as well as any information you disclose as it may be damaging for your business if news about a potential sale is released publicly. Be careful not to disclose information (including the contracts) between your business and other third parties that are themselves protected by confidentiality obligations.

•  Restrict access to the information – don’t let the potential buyer show the information to just anyone it wishes. Limit the disclosure to key representatives of the potential buyer who need to know to advise on the sale. Make sure that the buyer assumes responsibility for all these representatives, whether they are employees or external advisors or otherwise.

•  Restrict who they can speak to within your business – include non-solicitation clauses in the agreement so that the potential buyer does not poach your employees.

•  Return of confidential information –set out what happens if either party decides not to proceed with the sale and get written confirmation from the buyer that they have returned or destroyed all confidential information you shared with them.

•  Keeping the information confidential – The confidentiality agreement will probably only remain in force for the duration of any discussions about the potential sale. If the buyer is a competitor or your information is particularly sensitive or does not have a shelf life, you may want to require any potential buyers to maintain its confidentiality indefinitely. Otherwise, consider what an appropriate period might be. We often see confidentiality obligations that last for 3-5 years after the confidentiality agreement has expired.

•  Data Room Security – if you use a data room to give the potential buyer access to your confidential information, ensure you have adequate controls in place around the access to, and security of, the confidential information in that data room.

If you’d like to know more about confidentiality agreements generally, please see Confidentiality Agreements: what you need to know.