The Confidentiality Clauses (NDA/CA) in Business Acquisitions

Legal Insight

November 2021

George Psarakis LL.M. (mult.), PgCert

(republished from capital.gr)

Summary: Before a business acquisition (which can take many forms) can take place, the buyer will need to conduct a detailed and thorough legal, technical and financial due diligence where the business secrets of the sold business will be revealed. In this case, before the takeover takes place and before this check takes place, it is necessary for the parties to sign a confidentiality agreement. In this article we answer in simple terms the most common questions in relation to this agreement. 

In recent months we have seen more and more cases of acquisitions of Greek companies. The takeover process can be quite complex, with key points of reference being the legal and financial control of the acquired company, the regulation of the individual responsibilities of the parties and the formulation of the clauses for determining the price. However, the first step in any intended acquisition is a confidentiality and exclusivity agreement (the so-called 'NDA & EA'). 

The prospective seller will always feel the need to protect his business secrets (his trade secrets). This is even more pronounced when we have a business with structured and rich expertise. In fact, sometimes, if not deliberately, the interested buyer will end up acquiring not the business in question but a competitor of that business, and as a result will have become aware during the legal and financial due diligence of several of its business secrets. So how can the seller be safeguarded? The main contractual instrument is the Confidentiality and Non-Disclosure Agreement. In this article we will analyze the confidentiality clause.

1.What is the confidentiality clause?

A confidentiality clause is an agreement between the proposed acquirer and the seller not to disclose business secrets to third parties, usually drawn up at the stage before the due diligence of the acquired business. The aim is not to disclose business secrets to third parties or even not to use them by the proposed acquirer for purposes other than the acquisition, which may ultimately harm the seller if the latter is not achieved. This clause defines which information is protected as confidential, which persons have the right to access the information, the duration of the obligation, to which third party advisors of the proposed acquirer further disclosure of the secrets is possible, etc. If the parties have not entered into such a clause, the protection provided by law (in particular Articles 22a to 22k of Law 1733/1987 and Law 146/14) cannot work satisfactorily, in particular as regards the question of sanctions for breach. 

2. What constitutes a trade/trade secret?

Under recently adopted legislation, "(a) 'trade secret' means information which cumulatively meets the following conditions: (aa) it is secret in the sense that, either as a whole or in terms of the precise content and arrangement of its components, it is not generally known to persons in the circles which normally deal with this type of information, nor is it directly accessible to such persons, (b) they have a commercial value deriving from their confidential nature; (c) the person who has lawfully acquired control of the information in question has made reasonable efforts, having regard to the circumstances, to protect the confidential nature of the information' (see paragraph 2.1.1. Article 22a of Law 1733/1987 as amended by Law 4605/2019). Of course, the parties may agree that other information is also covered by the confidentiality clause. In the concept of "business confidentiality" we can include trade secrets, confidential information, industrial secrets and confidential know-how. Examples of critical such secrets are: customer lists, information on employee remuneration, information concerning sales and particular tactics, information concerning the network of distributors or suppliers, business plans, information relating to the costing and pricing of products, information relating to marketing, etc.

3. Who is bound by the clause?

The answer is simple: those who contract, usually the prospective buyer and the prospective seller. However, although it is the buyer who is liable to the seller for damages in the event of a breach, the question is always whether the person who has communicated in breach of the confidentiality clause is linked to the buyer in such a way that any fault on his part is attributable to the latter. E.g. one of the buyer's lawyers leaks secrets of the acquired business to another client. It is therefore usual for the confidentiality clause to specify in advance the circle of persons who will be the recipients of the secrets and whose conduct will be imputed to the proposed acquirer. The proposed acquirer undertakes to inform its employees and consultants of the existence of the clause and to be liable for any breach of it by the latter. 

4. What are the penalties for violation?

The penalties for infringement are mainly financial. Criminal offences are also provided for (mainly Article 17 of Law 146/1914), but the penalty is low and the conditions for establishing them are specific. At the level of financial compensation, therefore, the problem is one: how to calculate the amount of damages. How, for example, will the court be able to calculate the financial damage caused by the leakage of a particular business secret; obviously such a calculation is particularly difficult, if not impossible (see the legislator's attempt to define the damage as follows: "In determining the damages referred to in paragraph 1, the court shall take into account all relevant factors, such as the adverse economic effects, including loss of profits, suffered by the injured party, the unfair profits made by the infringer and, where appropriate, other elements in addition to economic ones, such as the moral damage caused to the trade secret owner by the unlawful acquisition, use or disclosure of the trade secret" - Article 22i of Law No. For this reason, in almost all cases of confidentiality agreements, the parties agree on a specific amount of a penalty clause, which they agree in advance as a sanction for the breach of confidentiality. This amount will of course also depend on the subject matter of the transaction (e.g. in a related exclusivity clause, a Greek court awarded the entire agreed penalty of EUR 2.5 million). The question here is raised by a relevant provision in our Civil Code which provides for a reduction of the penalty if the court considers it excessive. Therefore, even with the agreement on the penalty clause, the seller cannot be sure that he will be able to collect the full amount of the penalty clause (this will depend on many factors, many of which are mentioned in the above-mentioned article of the law). Finally, it is worth mentioning that following the incorporation of a relevant European Directive in 2019 (with Law 4605/2019), the breach of a relevant clause constitutes a tort and as a result the offender may also be sentenced to personal detention (a particularly important sanction since the personal freedom of the offender is at stake).

6. What are the traps in corresponding agreements? What should the seller be aware of?

Unfortunately, confidentiality agreements usually act as an "educational", i.e. as an "intimidating" tool for the prospective buyer. In practice, it is difficult to enforce them in court in case of breach, especially with regard to the claim for damages (although the protection provided has been strengthened since 2019 on the basis of the incorporation of a relevant European directive in Articles 22a et seq. of Law 1733/1987). This is not only because the amount of damages cannot be easily determined (unless a penalty clause of a specific amount has been agreed), but also because it is usually impossible to prove that they have been breached (see. See also the preamble to EU Directive 2016/943: "Moreover, the current national rules on the calculation of damages do not always take into account the intangible nature of trade secrets, which makes it difficult to prove actual lost profits or unjust enrichment of the infringer, since no market value can be calculated for the contested information"). The difficulty is particularly acute where the acquirer is a foreign company and has designated the courts of its own country as the competent courts for the resolution of disputes arising. For these reasons, it is necessary to pay particular attention to the drafting of the confidentiality agreement in order to provide the prospective seller with as much practical impact and protection as possible (e.g. by describing specific procedural agreements, supporting bases for the amount of the penalty clause, etc.). In any event, the confidentiality agreement is an important document which should not be neglected as a mere 'formality' on the way to the completion of the transaction.