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Disclosure of confidential information to a prospective buyer and directors duties

A recent High Court case has emphasised the need for investors to ensure confidentially clauses in shareholders’ agreement are drafted correctly, if they wish to disclose company information to prospective purchasers. The case is also useful as a guide to how the courts may be willing to imply authorisation of an investor-appointed director’s conflict of interest.

The background to the case of Richmond Pharmacology Ltd v Chester Overseas Ltd & Ors [2014] EWHC 2692 was that an investor (Chester Overseas) took a 44% stake in Richmond Pharmacology and appointed two representatives to the board.  It also signed up to a shareholders’ agreement which required all parties to “treat as strictly confidential” all commercially sensitive information relating to the business, but carved-out disclosures made to a professional adviser, where such adviser agreed to keep the information confidential. The investor subsequently wished to sell its shares and appointed a corporate finance adviser. The adviser put together an information memorandum, containing confidential information about Richmond Pharmacy and approached a number of prospective buyers, providing them with the information memorandum once they had signed a non-disclosure agreement.

The company brought a claim against Chester Overseas for breach of the shareholders’ agreement as well as a claim against the investor directors for breach of their statutory duties under the Companies Act 2006 as directors (to promote the success of the company, to exercise reasonable care, skill and diligence, and to avoid positions of conflict).

The High Court found that the ordinary meaning of the phrase to “treat as strictly confidential” was to prevent disclosure to anyone.  Whilst Chester Overseas was allowed to disclose confidential information to the corporate finance adviser (taking advantage of the carve-out for professional advisers), it was not entitled to disclose such information to third party buyers, even if such buyers had signed up to confidentiality restrictions.  Chester Overseas had breached the terms of the shareholders’ agreement.

In respect of the breach of directors’ duties claims, the Court found that by entering into the shareholders’ agreement, the founders (as all the directors of the company at the time) had authorised the investor’s representatives to act as both directors of Richmond Pharmacology and as representatives of Chester Overseas, so there was no breach of directors’ conflicts at that point. However, due to their role in allowing disclosure of confidential information to potential buyers, the investor directors had breached their duty to avoid a conflict of interest; this was not something which could be said to have been authorised by directors as it involved a breach of the shareholders’ agreement. 

There was no breach of the duty to exercise reasonable care, skill and diligence. The Court also held that the duty to promote the success of the company could only be breached if a director acted in bad faith.  In this case, although the investor directors were wrong in thinking disclosure was permitted, the Court believed this was not an unreasonable conclusion to reach, and so there was no element of bad faith.

This case is a very good example of why it is important to draft confidentiality clauses in shareholders’ agreements correctly if the parties wish to be able to market the company for sale properly without fear of breach (by expressly allowing onward disclosure). Although the Court was willing to imply authorisation of a conflict of interest simply due to a shareholders’ agreement being put in place, it remains best practice to have potential conflicts of interest of directors expressly approved by the board or in the company’s articles of association once investor directors are appointed.

For further information please contact Charles Claisse.