|Business Credit Law and Regulations|
What is is, how to use it and how it affects bankruptcy
When establishing a new business relationship there are uncertainties in the beginning regarding shipping goods, providing services and extending credit. Many companies will require that before they release private financial information, to help substantiate their credit worthiness, that a confidentiality agreement be signed.
Another common use of confidentiality agreements is when you are selected to serve on the creditors committee in a bankruptcy proceeding. Many decisions that the committee will make are based upon current finances of the debtor. The debtor may insist that a confidentiality agreement be signed before releasing private financial information to the committee.
Confidentiality agreements and nondisclosure agreements are contracts between two or more parties where the subject of the agreement is a promise that information conveyed will be maintained in secrecy. These agreements can be used to protect any type of information. The agreement can be mutual, where both parties become obligated to maintain secrecy, or a unilateral agreement, which only obligates one party. The structure of a confidentiality agreement depends upon the nature of the information to be protected and the needs of the party wishing to keep the information a secret.
I. What is Confidential Information
The most important part of the agreement is the definition of the confidential information. The confidentiality agreement should set forth as specifically as possible the scope of information covered by the agreement. The disclosing party may be reluctant to describe the information to the vendor in the contract for fear that some of the confidential information might be revealed in the contract itself.
The explanation of purpose for the disclosure of the confidential information to the vendor is another key component of the agreement. The disclosing party should choose to state the specific purposes for which the confidential information may be used by the vendor.
Many agreements do not contain a disclosure provision. This provision states that in return for agreeing to keep the information confidential, the vendor has the right to receive the information. This puts a duty on the discloser to disclose its confidential information to the vendor and places a duty on the vendor to only use the information for the purposes included in the agreement.
The vendor who receives the information must agree not to disclose the information to third parties. This provision to a large extent controls the strength of the agreement. The agreement states the vendor must make their "best effort" to keep the information confidential, or whether to limit access to the confidential information to a "need to know" basis. The agreement may also state the vendor receiving the information must protect the information in a manner similar to the way it protects its own confidential information.
Usually agreements will put limits on the type of information that will be deemed confidential. If the vendor already knew the information before it was revealed by the discloser, or if the information was revealed to the vendor by a third party, that information will not be treated as confidential. Other circumstances when confidential information may not be deemed confidential any longer are: when information becomes publicly known; information that is requested by order of a government agency; and information independently developed. The disclosing party may require a certain level of proof by the vendor before such information is considered non-confidential.
The term provision of the agreement is extremely important. The term must be long enough to protect the interests of the disclosing party, but should not be unduly burdensome to the vendor.
Some provisions may be optional depending upon the parties involved. These are provisions such as:
The confidentiality agreement should also address the treatment of materials storing the confidential information at the termination of the agreement by the vendor and disclosing party. The agreement should prohibit any further use of the information by the vendor. Also, outline whether or not the hard copies should be returned, materials should be destroyed, computer disks returned, and ensure permanent deletion of the material from all computers hard drives is mandatory.
In the event that confidential information is leaked or shared in violation of the agreement by the vendor, the disclosing party will have a contractual legal remedy. As detailed previously, these agreements a merely contracts on how and when the confidential information may be shared and used. Courts will generally enforce private contracts so long as they are not against public policy. Unfortunately, it is often difficult and expensive to enforce the agreement. A party may seek injunctive relief which will prevent the violating party from any further breach of the agreement, or seek monetary damages. The monetary damages must be quantifiable at the time the confidential agreement was formed.
II. Creditor Committees and Confidentiality Agreements
It is extremely unusual for a creditors’ committee to meet without its counsel, but the mere presence of counsel does not ensure that all of the committee’s deliberations are privileged. Most, if not all, the committee’s decisions are directed toward deciding what legal steps the committee should take in the pending bankruptcy. In the event there is a question regarding if deliberations are confidential, a factor influencing a court’s decision is whether the evidence shows that the committee and its counsel intended these discussions to be privileged and for the purpose of obtaining legal advice.
A confidentiality agreement among committee members specifically agr eeing that they will not divulge committee discussions is recommended. It is not uncommon for committee members to be unwilling to sign confidentiality agreements.
Instead of having the committee sign a formal confidentiality agreement, an alternative is having the committee members represent orally that they will keep extremely sensitive information confidential. In this event, it should be recorded in the minutes of the committee meeting that an agreement regarding confidentiality was reached.
An example of a creditors’ committee confidentiality agreement is attached as Exhibit “A”.
III. Debtors and Confidentiality Agreements
Getting meaningful information is the first step to adequately representing unsecured creditors’ rights. The official committee of unsecured creditors more often than not will require financial information from the debtor, or debtor-in-possession, to make informed decisions regarding the use of cash collateral, potential litigation, objections to claims, objecting to the plan of reorganization, and the distribution to the unsecured creditors.
There are numerous means to obtain meaningful financial information from a business in bankruptcy. The debtor has a duty to provide the following basic financial information: a complete list of creditors; a schedule of all of assets and liabilities; a schedule of current income and expenditures; a schedule of all executory contracts; and a statement of financial affairs. The debtor must also file monthly operating reports.
More detailed information may be obtained either consensually or by compelling a debtor, its officers, employees, or accounting professionals to testify in an examination under oath Rule 2004 of the Bankruptcy Code. In both circumstances the committee may be required to enter into a confidentiality agreement before being permitted access to the confidential, nonpublic financial information.
An example of a confidentiality agreement a debtor may require a committee to enter into is attached as Exhibit “B”.
A well crafted confidentiality agreement will allow the sharing of confidential information while ensuring it does not end up in the hands of third parties.
Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP