Learn about the importance of safeguarding confidential information in M&A deals and the legal battles that can arise when confidentiality agreements are breached.
M&A Stories
May 9, 2019
Introduction:
In the world of business acquisitions, safeguarding confidential information is paramount. Buyers often invest a substantial portion of the purchase price in acquiring sensitive data like customer contacts, pricing, cost structures, and terms. Consequently, sellers typically commit in the purchase agreement to refrain from using this confidential information or engaging in competitive activities post-closing.
The Deal:
Consider a case involving a company providing waste management services across ten states, catering to city and county governments. In May 2016, the seller transferred the business to the buyer for $64 million. Part of the agreement stipulated that the seller must not utilize or disclose the company’s confidential data, including customer information.
The Conflict:
Unfortunately, post-closing, tensions arose between the buyer and seller. The buyer believed it had paid too much due to the seller’s misrepresentations. To exacerbate matters, the buyer discovered that the seller had bid on a project with a Florida county, using some of the company’s customer information, including pricing, names, addresses, and contract terms.
The Legal Battle:
This disagreement escalated into a lawsuit in a Delaware court, featuring claims and counterclaims. The buyer accused the seller of unlawfully using customer information, violating the purchase agreement’s confidentiality clause. In turn, the seller sued the buyer for allegedly causing it to lose a contract with the Florida county.
The Seller’s Defense:
The seller admitted to using and disclosing customer information but argued that it was permissible under the confidentiality covenant. They asserted that the covenant didn’t apply to information already known to the public, especially since it pertained to government customers. The court agreed, dismissing the buyer’s claim.
Insight:
Although the buyer lost on a technicality regarding public information, the fight had a clear underlying rationale. The buyer had paid for this information and believed that competitors should not gain easy access to it. In hindsight, requiring the seller to refrain from competing in the same market for a reasonable period would have been a wise move.
Case Reference:
Bobcat North America, LLC v. Inland Waste Holdings, LLC, C.A. No. N17C-06-170 PRW CCLD, Superior Court of Delaware, (Decided: April 26, 2019)
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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