Maintaining Confidentiality of Negotiations
The seller and the buyer will naturally discuss the business and each other during their negotiations. In order to make the decision to buy the business, the buyer needs to know and fully evaluate information about the business, its assets, its major customers and contracts, its financial and operating history, its employees, any claims against it and so on. Often this information will be unique to the business, may give the buyer a competitive advantage, may be the primary reason why the buyer is interested in a particular business, may be trade secrets of irreplaceable value to the seller and may not be readily available to the public.
The seller will need to disclose and provide business information to the buyer, but the seller should not disclose such information to the prospective buyer without having adequate protection against improper usage of the information if the sale does not close. The seller may also need some proprietary or confidential information about the buyer, particularly in a transaction where the seller is financing some of the buyer’s payment for the business purchase. Both parties are best advised to include confidentiality covenants in any Letter of Intent and/or to have a Confidentiality Agreement before providing information during negotiations.
The parties should address concerns about press releases and other public announcements during negotiations and after closing. Most parties do not want too many other persons to know if negotiations fail or the sale does not close. Generally, the parties should reach agreements on such issues before negotiations are too far underway.
Even before a prospective buyer is identified, the seller should first determine what business information really is confidential, needing protection, and what business information is already known in the industry and through public sources. Some information about the target business is public, obtainable through UCC and title/lien searches of the records at the Secretary of State, through court dockets, and through Internet searches, and properly should not be considered as confidential to the target business.
Confidential information should be identified before it is disclosed, or else the providing party may have waived any right to protect it. Simply stamping such information as “confidential” before it is provided may help to identify it.
The Confidentiality Agreement should clearly identify what business information is confidential and should provide that each party should make reasonable efforts to advise the other whether any particular information is considered to be confidential. Each party should covenant to hold the information in strict confidence and to take all reasonable precautions to protect the information. Access to the information should be limited to the seller and the buyer, their officers, employees, agents and contractors and to their respective attorneys, accountants and other advisors, that is, to those persons who really have a legitimate need to know the information in order to consummate the transaction. Usage of the information should be limited to internal evaluation about the transaction, exclusively for the purpose of enabling each party to assess the merits of the transaction, should not be used by the receiving party to improve its current or future circumstances unless the sale closes and should not be used for any other purpose or disclosed to anyone not a party to the negotiations unless legally required to do so.
The Confidentiality Agreement should provide damages or injunctive remedies upon any breach of the confidentiality covenants. It should contain provisions for resolving any disputes about what confidential information is covered. It should apply to the parties and their successors and affiliates. If the sale does not close, it should also cover what happens to the confidential information, materials and documents which have been provided during negotiations and how long the confidentiality must be maintained.