Selling a company is a complex process that requires care and preparation by the owner to mitigate the risks and protect confidential data. In the negotiation stage, the target company is expected to disclose information regarding key areas of interest to the potential buyer and to the company's legal and financial advisors. It is a seller's responsibility to organise and manage the information and access to it. 

During the negotiations and subsequent due diligence conducted by the buyer, the risk occurs that the potential buyer is an unscrupulous competitor trying to acquire valuable information for its own purposes. Therefore, it is crucial that the company is protected against common risks before entering the process of negotiation.

What can be done to protect commercially sensitive information?

Confidentiality Agreements (or non-disclosure agreements - “NDAs”) are invaluable legal instruments targeted to protect commercially sensitive information. Hence, it is critical in the setting of a commercial transaction, such as the selling of a company.

Including such provisions at early stages of a transaction is standard practice. Confidentiality obligations should be added into the Letter of Intent(also known as a pre-contract protocol), which is a preliminary document showing the intentions of both sides to enter into a business transaction.

If the NDA was not in place before the negotiation process started, the company can enter into a standalone NDA retrospectively, prior to or during the due diligence stage.

What terms should be included into the NDA by the seller? 

The seller needs to clearly define “confidential information” and the potential uses and purposes of the information acquired. The seller often states that confidential information can only be used for the acquisition, negotiation and adjacent processes.

The agreement should include an immutable list of the individuals or parties, who can access the information defined. This list often contains professional advisors, such as solicitors, accountants and others.

The following provisions should typically be present: undertakings from the buyer not to disclose any confidential information for any other purposes; terms requiring the potential buyer to destroy all the information acquired if the transaction is unsuccessful; terms preventing the buyer from poaching employees.

What is usually disclosed by the seller in the due diligence stage?

The following information is almost always provided:

• company documents: shareholders’ agreements, articles of association;
• copies of annual and management accounts;
• key business contracts, however, such information might also be bound by pre-existing NDAs with third parties;
• information about any intellectual property owned by the company and whether it is disputed;
• contracts of employment; and
• any litigation procedures (either ongoing or threatened) against the company.

What is the best way to share information with a buyer?

Data rooms are often used for efficient information sharing between two parties (buyer and seller). In most cases, it is set up and administered by the seller.

A data room is a virtual repository (or, sometimes, a physical space),where all the documents related to the target company are stored. It is usually represented by a secure internet website, which allows authorised users to obtain documentation.

It is vital to ensure that access is only provided to the authorised individuals and everyone using the secure website link first agrees to terms and conditions, including confidentiality undertakings.

The seller is solely responsible for administering all the information in the data room, including the duty to refrain from sharing any information that can’t be shared due to GDPR or other restrictions.

How else can the seller mitigate the risks regarding the transaction?

Although it is not required by the legislation, the Sale and Purchase agreement (“SPA”) as well as the ancillary documentation is highly beneficial for both sides. It brings the following advantages:

• it provides a legal framework that details the sales process;
• both the seller and buyer become aware of their rights and obligations; and
• warranties, indemnities and other provisions in the SPA help to manage and allocate risks associated with the sale.

Which provisions help to mitigate the risks to the seller?

Buyers, seeking a protection from the caveat emptor principle(“buyer beware”), often require warranties to be put in the SPA, to reduce the starting disadvantage. Those warranties commonly include absence of any ongoing or threatened litigation, financial issues and other risks.

It is essential for the seller to also include warranty limitations, to reduce liability in the event of the dispute. For instance, the seller can seta term that all claims must be made within a certain period (typically up to 24months after the sale), detail any exceptional conditions upon which warranties do not apply, or set a limit on the aggregate liability for breach of warranties.

Selling a company requires a number of precautions from the seller, many of which can be covered with robust and well-established legal instruments outlined above.

Confidentiality agreements will protect sensitive data, while well-designed sales and purchase agreements should greatly reduce financial liabilities. 

Due to the complexities of legal structures and wide variety of risks involved, it is vital to engage legal and financial advisors throughout the process to ensure that all potential issues are covered.

‍