Protecting confidential information in disposal transactions
It is important to examine how sellers are protected against unauthorised use of confidential information disclosed to prospective buyers during the latter's legal due diligence process in either a disposal of business or shares transaction
Date: December 2008
Nicholas Lim
KhattarWong
It is important to examine how sellers are protected against unauthorised use of confidential information disclosed to prospective buyers during the latter's legal due diligence process in either a disposal of business or shares transaction. Some key areas in which a seller should consider when to prepare a confidentiality agreement (as a preliminary agreement) warrant further delineation.
Broadly, three types of information should be protected: (a) The existence of discussions or negotiations and their status; (b) the existence of the confidentiality undertaking and its detailed terms and conditions; and (c) detailed commercial information provided to buyers to evaluate transactions.
Before disclosing any confidential information, sellers should consider: (a) Whether they are legally restricted or by any third party contractual obligations from disclosing the information; (b) whether the buyer requires the information and to what level of detail; and (c) when the information should be disclosed. This forgoing requires balancing to ensure that buyers have sufficient information to price transactions competitively and that the seller's disclosure process is controlled, cost-efficient and does not violate third-party non-disclosure obligations.
General law of confidence
Singapore's general law of confidence requires that buyers receiving confidential information from sellers to not unfairly use such information. To succeed in a claim for breach of confidence, seller must prove: (a) The information itself is confidential (known to a very limited group of people and is valuable to the seller); (b) the information have been communicated in circumstances importing an obligation of confidence (for example, where the parties are negotiating a definitive sale and purchase agreement); and (c) there must be an unauthorised use of the information (e.g. buyer uses the information other than for considering the merits of the transaction) (see Vestwin Trading Pte Ltd and Another v Obegi Melissa and Others [2006] 3 SLR 573; [2006] SGHC 107).
Confidentiality agreements
A seller will often rely on its legal adviser to prepare a written confidentiality agreement requiring buyers maintain confidentiality for disclosed information and to use such information solely for considering transactional merits. Formal written confidentiality agreements have several advantages over mere reliance on the law of confidence:
(a) Clear contractual obligations leave no doubt the information supplied is proprietary, confidential and valuable.
(b) They focus the seller's mind on what can or requires to be disclosed, and what procedure should be followed to manage risk of unpermitted disclosure and unauthorised informational use.
(c) They deter buyers from disclosing such information to third parties or making unauthorised use of it without certain safeguards.
(d) Lastly, they can also be used to extend (or perhaps vary) the obligations the general law of confidence would otherwise impose, to suit the needs of the parties and the transaction.
Key provisions of confidentiality agreements
Confidentiality agreements typically contain the following key provisions:
(a) Definitions of what constitutes 'confidential information'.
(b) Core obligations necessary to keep the said information secret, and requiring it not be disclosed to third parties and to not use such information for purposes beyond transactional evaluation;
(c) Obligations limiting direct contact with sellers or targets (not to make any unscheduled visits to its premises, or approach or contact its employees, officers, agents, customers, suppliers, shareholders and advisers (except for certain agreed individuals) with requests for, or intending to discuss confidential information (such requests should preferably be via an agreed channel or through a central person).
(d) Obligations to return on demand any information provided (including copies) if negotiations break down and to destroy any reports, analyses, notes or the like, prepared by buyers that contain or are derived from confidential information.
A seller's considerations
In preparing a confidentiality agreement, sellers should consider the following (which is not an exhaustive list):
(a) Who will be bound by confidential undertakings: Confidentiality agreements are enforceable only against parties to the agreement. However, realistically, buyers invariably involve others in the process of evaluating targets and will inevitably pass confidential information to them.
To protect themselves, sellers should ensure the extended body of 'third party recipients' keep information received - whether directly from the seller or indirectly through the buyer - confidential. One way to achieve this is by requiring buyers to ensure that each recipient has signed a confidentiality agreement directly with the seller or at least provide back-to-back undertakings to the buyer to keep all confidential information secret.
Where a target is sold at auction and there are a number of prospective buyers, sellers should consider joining the target as a party to the confidentiality agreement to allow the successful bidder post-acquisition - through the target - to take preventative steps against informational misuse concerning the target by the unsuccessful bidders and their advisers.
(b) When highly sensitive information can be disclosed: In practice, enforcing a confidentiality undertaking or proving ensuing losses can be costly to sellers. Once the information is out in the market, it runs the risk of losing its essential nature. Strategically timing the dissemination of sensitive information - to ensure it is not disclosed until the last possible moment (prior to contract signing) or in various stages) is critical to sellers.
(c) Duration of confidential agreements: Confidentiality undertakings are often drafted without fixed terms and or a termination clause; the agreements are in force so long as the information remains confidential. However, if other undertakings are given in the context of the confidentiality undertakings, for instance, non-competition or non-solicitation undertakings, careful consideration is required as to the duration and scope of those other undertakings to minimize the risk that they are held to be unenforceable for being an unreasonable restraint of trade at common law.
The key to limiting the risk of unauthorized use of confidential information begins with the seller: Sellers should limit disclosures to information that materially helps buyers to make competitive bids; limit the time period for due diligence; and require buyers show their interest in completing transactions promptly. Sellers usually devise appropriate information dissemination processes with lawyers, based on other external factors such as the integrity and market reputation of buyers.