Lawyers: Beware of confidentiality agreements

Private equity firms need to be cautious when entering into confidentiality agreements, warn legal sources. Three recent US cases highlight the dangers of poorly negotiated contracts.

A soft approach during confidentiality agreement (CA) negotiations can result in a court battle if a firm’s private equity deal turns sour, warn legal sources. 

According to a client memo from Morrison Foerster the take-away for private equity firms is that CAs will need to be more rigorously negotiated to ensure they are not hit by any unintended consequences.

Recent court cases have shown that provisions within the agreement that have even slight variances in their definition throughout the document could significantly impact a firm’s bargained-for protections. 

An example being negotiated “non-use provisions” which could prevent a firm from chasing unrelated deals with different targets that are operating in the same industry.

This can be seen in the New York District Court case between Goodrich Capital and Vector Capital, based on the alleged violation of Goodrich’s non-use provision. 

In this case Goodrich, the target, alleged Vector used information provided by Goodrich to evaluate another target in the same industry (which resulted in a deal that actually completed).The court found that since Vector's due diligence into Goodrich revealed the name of the ultimate target, that its CA “non-use provision” was to be respected.  

In another case that took place earlier this month, the Delaware Supreme Court affirmed a decision saying that confidential details disclosed by a buyer to meet its own legal requirements, in this instance SEC filings, could potentially breach a CA. 

The court ruled that Martin Marietta Materials, in the process of a hostile takeover of Vulcan Materials, violated its CA with the target by disclosing certain details in a SEC filing. Such requirements were not permitted by the CA's exceptions for “legal requirements”, the court ruled. 

In the third case buyer RAA Management claimed that target Savage Sports Holdings made fraudulent misrepresentations during the parties’ preliminary negotiations, details here.