Money Corner: Non-disclosure Agreements – Not Applicable in Financial Remedy Proceedings

The problem

It is entirely understandable that business owners are protective of commercially sensitive information. Consequently, it is perhaps unsurprising that they often ask for non-disclosure agreements (NDAs) to be signed by accountancy single joint expert (SJE) witnesses who have been appointed to value their companies.

Many of these business owners will have had experience of business valuations in the context of mergers and acquisitions. In those circumstances, NDAs are unquestionably accepted as a standard requirement. Those same business owners may be less likely to have been involved in previous divorces and may well be strangers to litigation generally. That is why their first reaction, when confronted by an intrusive list of questions from SJEs about their businesses, is to reach for a pro-forma NDA.

However, the clauses that are typically found in standard NDAs are generally incompatible with court proceedings. Specifically, they seek to impose obligations upon those receiving the confidential information to which no SJE could agree to be bound. Importantly, it is the judge and not the SJE who has the discretion to determine what information within the litigation is made public.

By the time a standard NDA has been modified so that it is fit for purpose within financial remedy proceedings, it is likely to have been watered down to such an extent as to make it of little value. For that reason there are better solutions for those with genuine concerns about commercially sensitive data.

Of course, one solution would be for parties to arbitrate as an alternative to litigation. Arbitration is a private tribunal and therefore (subject to appeals, or interlocutory hearings and injunctions in court) privacy can generally be guaranteed in a way that is not possible in the court proceedings on which this article focuses.

Possible solutions

The first and most important step for anyone advising business owners with concerns about confidentiality is to identify precisely what information is considered to be so sensitive that measures are required to protect it.

In the vast majority of cases, it will be sufficient for the business owner’s legal team simply to explain the effect of the strict implied duty of confidentiality that is inherent in all civil litigation. That duty is as strong as anything that could be introduced by an NDA and means that any breaches of confidentiality or any use of information obtained in the litigation for other purposes would constitute contempt of court.

If further comfort is required, parties can be asked explicitly to state in writing that they understand their duties of confidentiality and undertake to comply with them. This has no legal force because it is simply a restatement of duties and obligations that already exist, but it can provide useful reassurance to those who are concerned about potential data breaches.

That said, in a very small minority of cases, there can be a legitimate reason for taking specific action to avoid the inappropriate misuse of information. One example could be a case in which the business owner’s spouse has a connection with a competing business. Whilst that may sound like an unlikely scenario, it has arisen.

Another, more common example arises in cases in which the clients of the business include high profile companies or individuals whose custom contributes to its value and therefore whose identity will be a relevant factor in any valuation. The business may well be fiercely keen to maintain client confidentiality and therefore be reluctant to disclose its client list without additional assurances that it would not be made public.

In these exceptional cases, it is first appropriate to agree what information is to be treated as sensitive. Once it has been defined, discussions can take place as to how most appropriately it can be protected.

One option could be for the sensitive information to be disclosed in full to the SJE but on the basis that all references to it in the SJE’s report are either redacted or anonymised. This approach can be effective if the primary concern of the business owner is to avoid disclosure of information to the other party in the proceedings. This was the approach adopted successfully in the case of the non-business-owning spouse who had a connection with a competing business.

However, this approach is less effective if the sensitive information is such that its redaction renders the SJE’s report meaningless or difficult to understand or challenge. A good example would be a company whose largest customer was a particular well known and hugely wealthy public figure or a high-profile global company. The identity of that customer would be very likely to inform the SJE’s valuation opinion. Without the court or the other party in the litigation knowing the identity of the customer, they would be unable adequately to challenge the SJE’s opinions.

The solution here is to address the issue at the earliest opportunity and preferably at the first appointment at which the SJE’s instruction is considered by the court. At that stage, representations can and should be made as to how not only the SJE but also the parties and even the court itself are to treat the sensitive information. Specific provisions can then be built into a directions order that ought to be capable of reassuring even the most nervous business owner.

For example, the SJE could be instructed to restrict the sensitive information to a specific section of the report that can then be made subject to specific restrictions.

Summary

In conclusion, when considering the need to preserve commercially sensitive information:

(1) recognise that an NDA is almost certainly not the answer;

(2) explain to the client that the implied duty of confidentiality within litigation is sufficient protection in all but exceptional circumstances;

(3) consider asking the parties to put in writing a statement to the effect that they recognise their obligation to preserve confidentiality;

(4) if the circumstances are exceptional, define precisely what information is so commercially sensitive that it justifies the need for specific steps to protect it;

(5) consider whether it would be sufficient to disclose the sensitive information to the SJE for the SJE’s eyes only such that it is redacted or anonymised within the SJE’s report; and

(6) lastly, if redaction is not an adequate solution, raise the matter at the first appointment and try to obtain relevant assurances from the parties and the court that allay any legitimate concerns.