Confidentiality Agreements - You Need One Before Your Company Shows Its Assets


So, you're putting your company up for sale. You or an advisor that you've retained are inviting potential buyers to have a look. Before you open the books or provide company contracts and records for review, you need to have each potential buyer sign a Confidentiality Agreement with your company and its principal shareholders under which the buyer will agree to keep all information disclosed to it about your company confidential in the event that no transaction is ultimately entered into.

The Confidentiality Agreement will cover all confidential and proprietary assets that your company has, including all customer and supplier lists and information, pricing and costing information, contracts, labour and employment agreements, intellectual property information such as product formulae and processes, trade secrets, patents, trademarks and copyrights and all financial statements and other financial information. It should cover these items both for the company itself and for any subsidiaries that it has. The fact that any discussions or negotiations are even taking place with respect to a potential transaction is also usually something that the buyer agrees not to disclose (unless you have made public that a sale process is underway).

The agreement needs to provide that the buyer may only disclose your information to any of its representatives and advisors who are assisting it in connection with the proposed transaction and that the buyer will ensure that all such representatives and advisors will also keep the information confidential.

There are some common exceptions to the confidentiality obligation which the agreement should provide for such as information which becomes generally available to the public other than as a result of disclosure by the buyer or its representatives, information which a buyer is ordered to disclose by court order and some other exceptions in certain situations.

The agreement should provide that the buyer will indemnify you against any damages resulting from any breach of the agreement and that the buyer agrees that you are entitled to obtain an injunction against any potential or further breach.

Frequently the agreement will provide that all contacts and communications by the buyer regarding the company and its business and assets must be directed through a specified person or advisor on your side to ensure that the release of information is controlled as you consider appropriate.

The agreement will also contain various standard legal terms such as the right of the company to terminate discussions at any time and that the company will have no liability as regards the use by the buyer of the information disclosed.

If the company is dealing with a competitor as the potential buyer, you may also want to include a provision that if the transaction does not proceed, the buyer will not solicit or, even better, will not employ any employees of the company for a set period of time after negotiations end. This will protect the company against poaching of employees who the buyer became familiar with through the sale process.

One overall caution about Confidentiality Agreements as with many other important agreements - they are necessary to have in place but you don't want to have to actually sue for breach of one. It may be impossible to put the toothpaste back in the tube if one of your competitors takes your confidential information and uses it improperly. As a result, you should also be cautious about the extent of confidential information disclosed to a potential buyer during the negotiation process until you are sure that it is serious about proceeding with a transaction - you may want to ensure that information is disclosed in stages, dependent on the commercial sensitivity of the information, even where an appropriate agreement is in place.


Topics:  Confidential Information, Confidentiality Agreements, Trade Secrets

Published In: General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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