Catch 22 - Can a Seller Disclose Confidential Contracts to a Potential Buyer?
When a buyer is investigating a business as a potential acquisition target, a key part of its due diligence will be to review any contracts to which the target business is a party.
Background
The buyer will wish to check the key terms of any such contract, for example: notice periods; payment terms; and termination rights, etc. However, many contracts will contain confidentiality provisions preventing their terms from being disclosed to anyone, including a potential buyer of the business. The seller may therefore be caught in a 'catch 22' situation where the buyer needs to review the contract in order to make its decision as to whether or not to purchase the business but such disclosure of the contract to the buyer by the seller would be in breach of the confidentiality terms in the contract, potentially triggering a claim by the counter-party to the contract for damages or termination of that contract.
Case
In a recent case, a seller and a third party entered into a contract containing a confidentiality clause, with the breach of this clause being a non-remediable material breach and cause for termination of the contract. As part of the due diligence process when selling its shares, the seller provided a copy of the contract to the potential buyer. The third party terminated the contract as a result. The seller believed that it was allowed to disclose the contract as it was subject to an implied term that disclosure was acceptable for 'reasonable business purposes', and since the potential buyer would be subject to a confidentiality agreement with the seller.
Decision
The Court of Appeal held that the contract could not be disclosed, and the right to disclose the contract for 'reasonable business purposes' would not include making the disclosure to a potential buyer of the seller's shares. The breach was held to be both material and non-remediable. The third party was therefore entitled to terminate the contract.
Comment
A seller must remember that the disclosure of contracts to a buyer in the ordinary course of due diligence may breach confidentiality clauses within these contracts. It is important for a seller to seek legal advice as to the most practical way to disclose such contracts to a buyer whilst reducing the risk of claims for damages or termination as a result of such disclosure. The solution will vary from case to case as much will depend upon the wording of the contracts, the relationship between the buyer and the contract counter-party (especially if they are competitors) and the value of the contract to the buyer. It will also be important for a seller to seek legal advice on the data protection implications of disclosing any contracts to a buyer.