A Corporate Disclosure Warning

22 January, 2018

Anyone who has been involved in a business sale will be aware of the disclosure obligation on a seller to provide purchasers with as much information about their business as possible. Buyers will want to carry out full due diligence and as a result, usually request copies of all contracts entered into by the target.

 

How it can go wrong

 

One recent case gave a useful reminder to exercise caution when carrying out this disclosure exercise. The facts can be summarised as follows:

  • Two unrelated parties (referred to as licensee and licensor below) acquired separate divisions of a business from a company that had gone into administration.
  • The licensor granted a licence to use its intellectual property rights to the licensee.
  • The licensee of IP rights disclosed a copy of a licence agreement to the future purchaser (and competitor) as part of the due diligence exercise.
  • The licence contained a specific clause that stated a breach of the confidentiality obligations contained in the licence itself constituted a non-remediable material breach.
  • The licensor then terminated the licence agreement on the grounds that the licensee had breached the confidentiality obligations contained in the licence.

 

The Appeal

 

The case reached the Court of Appeal where the licensee argued (in addition to the argument that it owned the intellectual property rights in the first place), that there was an implied term that it could disclose the licence agreement for reasonable business purposes which would include disclosure to a potential purchaser (and that consequently, there was no breach).

 

The Result

 

Unfortunately for the licensee, the Court of Appeal held that it will not imply such a term into a detailed commercial contract unless it is necessary to give the contract business efficacy or it is so obvious that it goes without saying.

The business purpose of the licence agreement was to enable the licensor to operate the business it had acquired; a share sale by the licensee’s shareholders was not a necessary business purpose for the licence. Accordingly, the implied term argued for was not necessary to give business efficacy to the licence. Nor was it so obvious as to go without saying and on the contrary, the licensor would be unlikely to have consented to disclosure to a competitor.

The case outlined above resulted from a wider set of more complicated facts and an argument surrounding what each party actually acquired from the original company in administration, but it does serve as a warning that disclosure of contracts during due diligence exercises could be problematic if they contain a right to terminate for breach of confidentiality, and disclosure of the licence itself would breach that confidentiality obligation.