Are Confidentiality Agreements Enforceable When Selling A Business?

The answer to that question is “it depends”.  Although I hate getting that answer when I ask a question‚ in this case‚ it really depends on three things (i) the information being disclosed; (ii) how you treat the information being disclosed; and (iii) the contents of the confidentiality agreement.  As to numbers “(i)” and “(ii)” if the information could not be obtained through any other means and the discloser of the information treats the information as confidential‚ a court will generally view that material as proprietary to the discloser and will consider it worthy of protection.  However‚ without an enforceable confidentiality agreement in place‚ a court will generally (under most circumstances related to a sale of a business) not consider the discloser’s argument that the information must remain confidential.

The fact that you are aware that you should have a confidentiality/non-disclosure agreement signed is a great first step.  However‚ in order to make sure that the agreement is enforceable to the fullest extent possible‚ you must make sure that the confidentiality agreement and/or the non-disclosure agreement state the following:

1. The reason for the disclosing the information – in this case‚ the purpose of the disclosure would be to provide information to a prospective buyer of your business.
2. The proper description of the recipient of the information – you must make sure that the person who is signing the agreement is the same person or party that is receiving the information.  This can be tricky when dealing with multiple parties and multiple entities.
3. Including previously disclosed information – in certain instances‚ you will have already provided some information to the prospective buyer before they sign the non-disclosure agreement.  Reference should be made that any information previously provided is included as part of the “confidential information” covered under the agreement. 
4. Properly describing the “confidential information” – each business will have different types of information they wish to keep confidential.  The more specific the list of “confidential information” is‚ the more likely a court will enforce it.
5. Maintenance of confidential information – you need to ensure that the recipient of the information has adequate controls and uses due care for maintaining the information as confidential. 
6. Return or destruction of materials – the agreement should specifically state that any information provided to the recipient must be returned or destroyed following its use.
7. Injunctive relief – the agreement must state that‚ in the event of a breach‚ that you‚ as the discloser of the information‚ would be entitled to injunctive relief.  Injunctive relief‚ would allow you to obtain a court order stopping the recipient from further violations and could help limit the extent of the breaching disclosure. 
8. Legal fees – enforcing the non-disclosure agreement can be an expensive process.  The agreement should provide that‚ in the event of a breach of the agreement‚ the breaching recipient should be responsible for paying your legal fees.
9. Best efforts to limit others – depending on the size and complexity of the transaction‚ it may not be practical to have every person the buyer may convey this information to‚ to sign a separate agreement.  You should have the person signing the agreement agree to use his or her “best efforts” to cause your agents to observe the terms of the non-disclosure agreement.  It should also state that the person signing on behalf of the company will be responsible for any breach of the non-disclosure by those third parties.

Although confidentiality and non-disclosure agreements have a bad reputation when it comes to the enforceability of them‚ there are steps you can take to increase the odds of enforceability.  Many confidentiality and non-disclosure agreements are provided by business brokers at the outset of the transaction.  This is the point where you should call an attorney and have him or her review the contents of the non-disclosure agreement.  Although the broker forms are sometimes okay to use‚ they may need to be modified to ensure that they would be enforceable in the event you need to stop someone from utilizing the information.  There are also additional steps you can take to limit the possibility of disclosure which are discussed in Keeping Your Business Information Secret When Selling Your Business.  For more information about the process of selling your business‚ you can order a free copy ENDWISE the guide to selling your business with peace of mind by clicking the link below. 

By Brian Lincer March 19, 2014