Keeping it confidential
Posted on 29/09/2014
A recent case demonstrates some practical issues relating to confidentiality provisions, both from the perspective of those bound by their terms and also those attempting to rely on the benefit of the confidentiality obligations.
The case concerned a company which had been set up by three doctors to carry out clinical drug trials. The doctors held the majority of the shares and an outside investor took a minority stake. The shareholders’ agreement between the parties contained a typical confidentiality provision under which (amongst other things) all commercially sensitive information, relating to the affairs of the company, had to be treated as strictly confidential. The provision went on to permit a party to disclose confidential information to its professional advisers, provided the adviser complied with the confidentiality provision.
Relations between the parties deteriorated and attempts to reach an agreement for the acquisition of the investor’s shares by the doctors failed. The investor then engaged a corporate finance adviser to market its shares to third parties. As is usual in any such process, the adviser disclosed information about the company to prospective buyers which included information in a ‘teaser’, a modified business plan and various statements about the company’s business and prospects.
The company subsequently brought a claim against the investor for breach of the confidentiality provision. The court held that the investor was permitted to disclose confidential information to the corporate finance adviser: the two directors of the adviser were an accountant and a solicitor who were clearly professional advisers within the meaning of the permitted exception in the confidentiality provision. However, the adviser (on behalf of the investor) then disclosed confidential information to prospective buyers. This was a breach of the confidentiality provision and therefore the investor was liable to the company for any reasonably foreseeable loss suffered as a result of that breach.
There were two main ways in which loss could have been caused to the company as a result of the breach:
firstly, the information could have cast doubt on the financial stability of the company, its ability to continue trading or the commitment of the doctors. If clients or prospective clients were concerned about rumours of financial or managerial instability, they would raise this with the company and therefore it should be relatively simple for the company to provide direct evidence that any decision not to use the company’s services had been influenced by the disclosed information. In fact, the company provided no such evidence; and
secondly, the information could have given the company’s competitors an advantage, enabling them to offer better terms and win business which would otherwise have gone to the company. The court accepted that it would be very difficult to obtain direct evidence of this type of loss but agreed that causation could be inferred from circumstantial evidence. Again, however, there was insufficient evidence to justify doing so in this case. Whilst there had been a reduction in the company’s business, this could be attributed to other matters such as price increases, loss of key staff and general market conditions.
The court therefore held that the company had failed to establish that it had suffered either type of loss as a result of the investor’s breach of the confidentiality provision and accordingly awarded nominal damages of only £1.
Difficulties in enforcing confidentiality provisions
Whilst confidentiality provisions are important and can offer valuable protection, the case demonstrates the difficulties that a party can face in practice when attempting to rely on them. Firstly, they must prove a breach has occurred – that confidential information (as defined) has been disclosed to someone it shouldn’t have been – and then they must prove that a loss has been suffered as a result of that breach.
Problems for potential sellers
The case is also a salutary warning to shareholders subject to a confidentiality provision who may wish to sell their shares. Such a provision would almost certainly prevent them from disclosing information about the company to prospective buyers, making it almost impossible to sell those shares without the board agreeing to a marketing process. The court held that this was not contrary to business common sense particularly where, in this case, any unreasonable refusal to consent to such a process by the board would have triggered deadlock provisions in the shareholders’ agreement, leading to the winding up of the company. The board would therefore have had a clear incentive to act reasonably when considering a request to commence a sale process.
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 Richmond Pharmacology Ltd v Chester Overseas Ltd & ors  EWHC 2692 (Ch)