Investors and directors may have to manage potentially competing obligations when they are involved in negotiations to sell shares in a private business.
In Richmond Pharmacology Ltd v Chester Overseas Ltd and others , the court explored whether an investor, the defendant, had breached the confidentiality clause in a shareholders’ agreement by making disclosures to prospective purchasers relating to its share holdings in the claimant company.
Breaches of statutory duties under Companies Act 2006 were also considered in relation to disclosures made by the defendants’ representatives as directors on the board of the claimant.
The Facts of Richmond Pharmacology Ltd v Chester Overseas Ltd and others 
Chester Overseas Ltd bought 44% of Richmond Pharmacology Ltd shares. Consequently, the companies and founders entered a shareholders’ agreement. Chester Overseas Ltd appointed, brothers Mr Milton Levine and Mr Larry Levine as members of Richmond’s board, in order to represent its interests. Neither were actual directors of Chester Overseas Ltd.
Confidentiality clauses prevented disclosure of information deemed commercially sensitive, save to exempted classes of professionals including professional advisers or bankers, who must in turn preserve confidentiality. However, there was no disclosure exemption for prospective purchasers of shares in any amount.
Latterly, Chester sought to sell its stake in Richmond. It worked with a professional adviser and disclosed exempted information to them, as permitted under the non-disclosure clause in the shareholders agreement. However, the adviser then approached potential buyers and disclosed non-exempt information directly to them, thus allegedly breaching the agreement and confidentiality clause.
A claim was brought against Chester, by Richmond for breach of the Shareholders agreement and a separate claim against the Levines for breach of their duties under the Companies Act 2006.
The High Court Ruling
Chester argued that confidentiality had not been breached due to the recipients being told to keep the information provided confidential. It argued that interest in a company could not be raised without disclosing information.
These arguments were not accepted as the Court followed the ordinary meaning that confidential information is just that and should not be shared with third parties without agreement. It also added that non disclosure works in many business sales without detriment.
However, the disclosure to the professional adviser was exempt under the clause. Equitable principles supported the expected level of privacy because the adviser knew the information was confidential. Thus there would be no wider duty imposed by the court.
The Companies Act 2006 imposes various duties upon directors including a duty to act in good faith, a duty to exercise reasonable care and skill and a duty to avoid conflicts of interest.
The Levines were found not be in breach of their duties apart from disclosing the information to future buyers as this was not permitted under the shareholders agreement. As their actions were in good faith, there was no further breach.
Even though no loss resulted from the breaches by Chester, minimal damages of £1 were awarded to the claimants.
The Impact of Richmond Pharmacology Ltd v Chester Overseas Ltd and others 
The decision shows the ever present need for consistency and clarity in drafting shareholders agreements and confidentiality clauses.
It also shows that carve outs allowing disclosure of some information on sale may be useful but it may be difficult for consensus to be reached. In these circumstances, as this case shows, it can lead to confusion and potentially create liability for compensation.
Agreements relating to shareholders’ representatives appointed as board members also need to be drafted carefully to ensure clarity and avoid disputes. If express approval is granted by the board for making disclosures to potential buyers it cannot be denied due to confidentiality provisions in a shareholders agreement that conflict with that permission where the board has expressly authorised that agreement.
For specialist advice regarding confidentiality or shareholders agreements contact Peter Gourri today by email PGourri@rollingsons.co.uk or telephone 0207 611 4848.