December 12, 2014

Is your confidentiality clause drafted widely enough?

Posted in Corporate
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You are looking to sell your shares in a company, but is it possible that the confidentiality provisions in your shareholders’ agreement will prevent you from doing so?

This question was put to the High Court in Richmond Pharmacology Ltd v Chester Overseas Ltd and others [2014] EWHC 2692, where judge Stephen Jourdan QC found an investor shareholder in breach of the confidentiality provisions of a shareholders’ agreement for disclosing information about the company to potential buyers of its shares in the company.

This case has highlighted a number of issues that shareholders should bear in mind when entering into shareholders’ agreements that include confidentiality clauses. It also addresses directors’ duties and, in particular, the issue of whether there is a conflict of interest between directors appointed as representatives of certain shareholders and the other members, and whether this conflict can be avoided if the directors are acting in the best interests of the company as a whole.


Chester Overseas Limited was an investor with a 44% interest in Richmond Pharmacology Limited. The founders of Richmond owned the remaining 56%. Chester, Richmond and the founders entered into a shareholders’ agreement, pursuant to which Chester appointed two directors to Richmond’s board (the Levine brothers) as their representatives. The shareholders’ agreement contained a confidentiality clause, which required all parties to “treat as strictly confidential” all commercially sensitive information concerning the affairs of the company or any information regarding the shareholders’ agreement. An exception to this restriction included the right to disclose confidential information to a “professional adviser”, subject to procuring that such adviser keeps the information confidential in accordance with that clause.

A few years after entering into this agreement, Chester looked to sell its stake in Richmond and it appointed a corporate finance adviser, to whom it disclosed Richmond’s confidential information as permitted by the confidentiality clause. The professional adviser then approached a number of potential buyers and asked them to sign a non-disclosure agreement agreeing to keep confidential the information they received in relation to Richmond.

Richmond claimed that Chester had breached the shareholders’ agreement by failing to ensure that the professional adviser kept the information confidential, despite having asked the potential buyers to sign a non-disclosure agreement before sharing that information. Richmond also brought a claim against the Levine brothers for breach of their statutory duties as directors to promote the success of the company, to exercise reasonable care, skill and diligence, and to avoid conflicts of interest (sections 172, 174 and 175 of the Companies Act 2006).


Confidentiality clause

While Chester was entitled to disclose information to the corporate finance adviser under the exception in the shareholders’ agreement, the Court held that the subsequent disclosure to third party buyers was not permitted by the clause and therefore amounted to a breach of the confidentiality provision. Chester argued that the obligation to keep information confidential could be complied with by ensuring that any third party to whom information was supplied agreed to keep that information confidential (it was done in this case by asking the potential buyers to sign non-disclosure agreements). However, the Court rejected that argument and held that the ordinary meaning of an obligation to treat information as strictly confidential is that it may not be disclosed to anyone else. This was supported by the fact that the parties had spelled out in the shareholders’ agreement certain situations where disclosure of information could be made; if the parties had intended to allow further disclosure of confidential information to other third parties, they should have included this as an express provision in the agreement.

Directors’ duties

The Levine brothers, who were appointed to the board by Chester, were acting both as directors of Richmond and as representatives of Chester. This arrangement clearly produced the potential for a conflict of interest between the interests of Chester and Richmond. However, the Court held that by entering into the shareholders’ agreement, the founder shareholders (as the then directors of Richmond) had authorised the Levine brothers to act in a dual capacity, subject to Chester complying with its obligations under the shareholders’ agreement. There was therefore an implied authorisation of any conflict of interest that arose as a result. When Chester breached the confidentiality provisions of the shareholders’ agreement by allowing the disclosure of confidential information to the potential buyers, the Court held that the Levine brothers also breached their section 175 duty to avoid a conflict of interest. This was a conflict of interest that could not be said to have been authorised by the board as it involved a breach of the shareholders’ agreement (the very instrument that was entered into which gave rise to the implicit authorisation in the first place).

Regarding the section 172 duty to act in a way that a director considers, in good faith, would most likely promote the success of the company for the benefit of its members as a whole, the Court held that the Levine brothers were acting in good faith and were found not to have breached this duty. The Court also commented that the directors could take the interests of Chester into account, provided that their decisions were in what they genuinely considered to be the best interests of Richmond. Further, the Court held that the directors did not breach the section 174 duty to exercise reasonable care, skill and diligence. Despite the Levine brothers being mistaken in thinking the disclosure of the confidential information was permitted, this was not an unreasonable conclusion for them to reach.


This case highlights how important it is when drafting confidentiality clauses for shareholders to think about specific future scenarios in which they may need to allow for the disclosure of confidential information to third parties. In this case, it was obvious that without disclosing information about the company to potential buyers, it would have been virtually impossible for the shareholder to sell its shares in the company. If a confidentiality provision does not make it clear whether the disclosure of confidential information is permitted, it is best practice to seek express board approval in advance which will authorise such action.

This case also confirms that directors can take the interests of their appointing shareholder into account, as long as they genuinely consider their decisions to be in the best interests of the company as a whole.

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