Disclosure of confidential information to a prospective purchaser

Print publication


In Richmond Pharmacology Ltd v Chester Overseas Ltd [1] Chester held 44 per cent of the shares in Richmond (the Company). The remaining shares were held by the Company’s founders. All the shareholders, and the Company, had entered into a shareholders’ agreement pursuant to which Chester appointed two nominee directors to the Company’s board.

The shareholders’ agreement included a confidentiality clause pursuant to which all parties were required to “treat as strictly confidential” all commercially sensitive information relating to the Company. While there were standard exceptions, such as disclosure to banks, there was no exception for the disclosure of confidential information to prospective purchasers.

Chester decided it wished to sell its shares in the Company and appointed a financial advisor to whom it disclosed confidential information. The financial advisor in turn disclosed confidential information to prospective third parties, after these had signed into a non-disclosure agreement with Chester.

The Company brought proceedings against Chester for breach of the shareholders’ agreement and breach of confidence at common law and against the two nominee directors under section 172 of the Companies Act 2006 (duty to promote the success of the company); section 174 (duty to exercise reasonable care, skill and diligence) and section 175 (duty to avoid a conflict of interest).

Confidential information
On the issue of the disclosure of confidential information, the High Court rejected Chester’s submission that it could disclose the information so long as the recipient was obliged to treat it as confidential. The Court said that the wording of the clause imposed an absolute obligation not to disclose (subject to the explicit exceptions). The Court said that if Chester wanted to sell its shares, which necessitated the disclosure of confidential information, it would need to seek board approval before doing so.

The Court accepted that Chester was entitled to disclose information to its corporate finance advisor as the latter was a “professional advisor” and, as such, fell within one of the exceptions to the confidentiality clause. However, Chester had breached the shareholders’ agreement by failing to procure that the advisor kept that information confidential.

Directors’ breach of duty
The Court found that by entering into the shareholders’ agreement, the founders (as the then directors of the Company) had authorised the nominee directors to act in a dual capacity as directors of the Company and as representatives of Chester, even though this created the possibility for a conflict of interest. However, the nominees had breached section 175 (the duty to avoid a conflict) by disclosing the confidential information in breach of the shareholders’ agreement as this had not been authorised by the founders. It was immaterial that, in so doing, the nominees had acted in good faith or in the mistaken belief that they were entitled to do so.

This contrasted with the duty under section 172 which can only be breached where the director has not acted in good faith. The Court also made the point that they were entitled to take into account the interest of Chester provided that their decisions were in what they genuinely considered to be the Company’s best interests.

Finally, there had been no breach of the section 174 duty. Although the nominee directors were wrong in thinking that the disclosure of the information was permitted, it was not unreasonable of them to reach this conclusion.

WM comment
Investors considering selling their shareholding must check the terms of any shareholders’ agreements before disclosing confidential information to a prospective third-party purchaser. When negotiating a shareholders’ agreement, consider including a specific carve-out from the confidentiality restrictions for sales to prospective third-party purchasers.

[1] [2014] EWHC 2692 (Ch)