Confidentiality and non-disclosure agreements in business sales

When selling a business, it becomes necessary to disclose several pieces of commercial information which would remain confidential from competitors under ordinary circumstances.

Confidentiality agreements, commonly known as non-disclosure agreements (NDAs), serve as legal instruments defining the parameters of information protection. These agreements establish a framework to ensure that confidential information shared during business negotiations remains private, for example:

• Confidential customer or supplier information
• Details about innovative technology and processes
• Employee details and personnel files
• Financial data and reports
• Information about new product launches
• Sensitive databases or data sets
• Strategic business plans

Non-disclosure agreements in business sales

An NDA serves as an agreement between the seller and the buyer, outlining the terms and conditions for sharing information.

The NDA will establish the terms of the agreement and clearly specify what is considered 'confidential information'. It is essential to ensure that both parties understand what information must be kept confidential and what can be shared.

The agreements should outline the specific information considered confidential, the duration of confidentiality, and the consequences of breaches. Ensuring the enforceability of these agreements is crucial in upholding the trust between parties and safeguarding sensitive data.

Considerations before signing a non-disclosure agreement

It's worth noting that non-disclosure agreements are often biased towards the seller as the party who drafts the document. Therefore, if you are the party buying a business, reviewing the clauses included in the agreement and carefully considering their implications is critical. 

For example, imagine a potential buyer exploring acquiring a startup tech company. During the preliminary negotiations, they hastily signed a non-disclosure agreement provided by the seller without a thorough review.

Unbeknown to the buyer, a non-compete clause within the NDA restricts them from engaging in similar business activities for five years within a set radius of the company's headquarters. Such a clause may severely limit their ability to continue their existing business plans and hinder expansion into key markets. 

Seeking advice from a specialist solicitor is essential and will help you understand why certain clauses are included and what their application could mean.

In terms of the costs, a non-disclosure agreement typically includes a costs clause that outlines who will bear the expenses of preparing and agreeing to the document. Generally, each party will bear its own costs in relation to agreeing to the NDA.

Accessing confidential information 

A non-disclosure agreement will detail the process for accessing confidential information, often limited to specified individuals and with appropriate security measures in place.

Many companies now use what is known as a "virtual data room" (VDR). In this secure online repository, confidential and sensitive information about the business being sold is stored and shared with potential buyers. The purpose of the data room is to facilitate due diligence, which is the process where potential buyers investigate and evaluate the company they are considering acquiring.

The data room contains a wide range of documents and information related to the business being sold. This can include financial statements, contracts, legal documents, intellectual property information, employee records, and other data needed for understanding the business's operations and financial health.

Access to the data room is typically restricted and controlled through secure login credentials. Each time a document is viewed, it is recorded - including who viewed it, when it was viewed, and how long it was viewed- to ensure complete transparency and accountability.

What are the consequences of breaching an NDA?

It is vital to ensure that confidentiality and non-disclosure agreements are clear and free from ambiguous language or loopholes. Such issues can lead to disputes and compromise the intended protection. 

In the unfortunate event that a buyer violates the confidentiality agreement by sharing information without permission, legal action can be taken against them, including suing them for breach of contract.

The UK's legal framework is designed to provide a robust foundation for businesses to operate securely. For example, the Contracts Act 1999 governs contracts and agreements and provides essential guidelines for companies engaging in transactions where protecting sensitive information is paramount.

The Intellectual Property Act 2014 also holds particular relevance in protecting the security of trade secrets that confer a competitive advantage, including making copying registered designs a criminal offence.

Non-disclosure agreements serve as a preventative measure, but in the event of a breach, your solicitor can advise you on taking legal action against the offending party.

Tailored non-disclosure agreements and business sales advice

Disclosing certain pieces of commercial information that would typically remain confidential from competitors becomes necessary while selling a business.

Our specialist solicitors offer tailored advice on confidentiality and non-disclosure agreements to protect your interests during business sale negotiations. 

Contact us for expert assistance in navigating these processes and safeguarding your business for the future. We have offices in London, Brighton, East Sussex, and Cumbria, and we advise on business sales locally and nationally.