You’re Proposing to Disclose Confidential Information to a Company that Might Be Acquired by One of Your Competitors. What Do You Do?

Consider this scenario: Acme is contemplating entering into a confidentiality agreement with Widgetco under which Acme would provide confidential information to Widgetco. But Acme is concerned that Widgetco might be acquired by a competitor of Acme, resulting in Acme’s valuable confidential information getting into the competitor’s hands. What can Acme include in the confidentiality agreement to address that concern?

Termination on Change of Control

Here’s something I wouldn’t include:

Each party shall notify the other party at least 10 days before consummating a Change of Control to a Competing Provider or an Affiliate of a Competing Provider. If such a Change of Control occurs, the other party may terminate this agreement by giving written notice to the party that consummated that Change of Control.

It’s a tidied-up version of a provision I saw today. The problem is that the notion of terminating a confidentiality agreement is confusing and unnecessary. For one thing, a party can bring to a close whenever it wants the period during which it discloses confidential information. And a disclosing party wouldn’t want to cut short the period during which the recipient has to keep information confidential. For more on this, see this 2011 post.

Prohibiting Transfer by Change in Control

An alternative approach would be to prohibit the recipient from transferring its obligations under the confidentiality agreement, including by getting acquired. That would seem effective. But if the relationship between Acme and Widgetco is trivial to Widgetco compared with the prospect of being acquired, Widgetco and its acquirer might regard breach of the confidentiality agreement as a cost they’re willing to pay to do the deal.

Doing Nothing

Here’s what my form of confidentiality agreement says regarding permitted disclosure:

Any individual to whom Acme discloses Confidential Information in accordance with this agreement may disclose that Confidential Information only to any Representatives of Widgetco who require that Confidential Information to evaluate the Proposed Transaction, on condition that before Confidential Information is disclosed to any individual in accordance with this section 4 the Recipient notifies that individual of the confidential nature of the Confidential Information.

So if Acme abandons the proposed transaction because Widgetco was acquired, it would constitute misconduct if Widgetco personnel were to disclose Acme’s confidential information to the acquirer’s personnel. Acme could specify that Widgetco is liable for inappropriate conduct by Widgetco personnel. Acme could even insist that the relevant Widgetco personnel enter into confidentiality agreements with Acme. Depending on the nature of the confidential information, Acme might decide that such measures constitute enough protection.

Anticipating a Possible Acquisition

If Acme is concerned about Widgetco being acquired, it could incorporate in the confidentiality agreement provisions that address that address that possibility. For example, it could insist on special procedures for handling its confidential information, for example that Widgetco keep a log of everyone who is given access to the information.

Requiring return or destruction of information might help, but such measures can be of limited effectiveness, given that these days most information is distributed electronically.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.