The Robins Kaplan Spotlight Vol. 6 No. 4 - Can You Keep a Secret? And Should You?

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One of the perceived benefits of closely held corporations is their ability to keep secrets. Indeed, closely held corporations can legally hide a great deal of information. Family businesses are especially likely to keep certain information “within the family,” so to speak. Publicly traded companies, in contrast, are required to disclose material information, including the number of shares owned, bought, and sold by its directors and officers; its financial condition; the salaries and bonuses paid to its executive; and its risks and potential liabilities, including lawsuits and claims that could materially affect the company. A closely held corporation need not disclose this kind of information publicly.

That’s why closely held family businesses often create a culture of secrecy that can undermine the long-term viability of the company. Therefore, it’s important to understand the conditions when secrecy may be a good thing and when it should subordinate to more transparency.

FOR THESE COMPANY MATTERS, SECRECY CAN BE GOOD—INDEED, NECESSARY:

Attorney Communications. Secrecy is both good and necessary when trying to preserve a company’s attorney-client privilege. All companies, at some point, are going to need legal advice. To ensure that the advice, and the communications involved in giving it, remain privileged, those communications must be kept private and disclosed only to those individuals who have a need to know it. The law can vary by state as to whom can be communicated with and still maintain the privilege, but the point is that a company should not disclose the advice of its lawyers to all employees and certainly not to anyone outside the company.

Trade secrets. Almost all companies keep some level of trade secrets. Trade secrets are defined as information that has either actual or potential independent economic value by virtue of not being generally known, has value to others who cannot legitimately obtain the information, and is subject to reasonable efforts to maintain its secrecy. An obvious example is the Coca-Cola recipe, but any number of objects and matters can be trade secrets: a company’s strategic plan, pricing, and terms of its supplier contracts are just some examples of information often considered trade secrets. But a trade secret will lose that status if a company takes no steps to keep it secret. So, to protect this sensitive information, companies should ensure that it is marked confidential, stored in a secure fashion, and protected so that only people with a need for the information have access to it.

Confidential information. Trade secrets are only one of many types of confidential information. Others include salary information, health information, customer lists, and systems and processes used by a company—essentially anything that one knows only by virtue of being employed at a company. But a company needs to make known to its employees what it considers the company’s “confidential” information and would be well served by issuing clear policies and confidentiality agreements. If a company’s work requires sharing its confidential matters with a third party— such as a supplier or a potential strategic partner—it should require a non-disclosure agreement or, “NDA,” which contractually obligates the other party to maintain the confidentiality of the information disclosed. And, the scope of any such disclosures should be limited only to the information necessary to accomplish the task at hand. Any information or documents exchanged should also be marked “Confidential.”

IN OTHER INSTANCES, SECRET-KEEPING CAN BE COUNTERPRODUCTIVE AT BEST AND HARMFUL AT WORST. CONSIDER THINKING TWICE ABOUT KEEPING COMPANY SECRETS IN THE FOLLOWING SCENARIOS:

Secrets regarding succession planning. While succession-planning decisions need not be broadcast on social media channels, family and other closely held businesses are well served by honestly discussing how the process will look and be undertaken. A company should discern who may have expectations about their future roles in the company, and those expectations should be managed accordingly. While some may feel disappointed with the ultimate decision, allowing some transparency into the process will help ensure a fair decision and minimize the likelihood that the ultimate successor will be undermined by a poorly perceived process.

Secrets kept from your lawyers. As mentioned above, every company will need advice from an attorney at some point. The advice received is only as good as the information conveyed to the lawyer giving it. If a company keeps secrets from its attorneys, the advice will be less helpful and could potentially backfire, depending on the nature of the secret. For instance, if a company has been colluding with its competitors to fix prices but keeps that information from its attorney, then the attorney is likely to recommend a more aggressive strategy than she would if aware of the improper conduct. Moreover, the company’s failure to disclose that information in a timely fashion could void participation in the Department of Justice’s leniency program, which allows the co-conspirator who first self-reports and meets certain criteria to avoid criminal convictions and resulting fines and incarceration. You hired the attorney for a reason; be sure to allow them to best serve you by giving them all the material information they need.

Secrets regarding employee performance. Whether they are performing poorly or beyond your wildest imagination, employees should not be kept in the dark about how you view their performance. It’s especially unfair to the employee to withhold candid feedback on whether they’re meeting expectations, how they can do better, and whether they have a future with your organization. Not only is it the right thing to do from a management perspective, having a clear record of accurate feedback will also mitigate risk of employment claims.

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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