When considering the sale of an e-commerce business, often, some of the most valuable assets being sold are the target’s trade secrets. These may involve confidential customer/user account lists, vendor and supplier lists, advertising methods, shipping and customer service models, and more. As part of the process of courting and finding buyers, many parties may need — or claim to need — to have information about the target’s trade secrets. Such parties may include potential buyers, financiers, investors, and others. However, companies looking to be acquired must vigorously protect their trade secrets throughout the sales process. Here are some pro tips.
Why must trade secrets be protected?
Trade secrets must be protected for at least two interconnected reasons. First, as noted, trade secrets are often a significant proportion of the value of an e-commerce business. Without protecting those trade secrets, they can be lost to a competitor, either outright stolen or lost through loss of the legal status of being trade secrets. This, naturally, diminishes the value — the sale price — of the target e-commerce business.
Second, to sustain their legal protections as trade secrets, owners of trade secrets must take reasonable steps to maintain the secrecy of the trade secrets. These steps might include things like keeping the trade secrets under lock and key, limiting who has access to the trade secrets, requiring anyone with access to sign confidentiality and non-disclosure agreements, etc. These steps must be maintained throughout any bargaining and exploration of a merger and/or acquisition. Failure to maintain efforts to keep the secrecy of the trade secrets can result in the trade secrets no longer having protected status. There are cases, for example, where various trade secrets were disclosed during marketing/investor presentations. The end result was that, since the information was disclosed, the information was freely available for use by competitors.
What tools should be used?
Non-disclosure and confidentiality agreements (“NDACA”) are the most common tools used to protect the secrecy of trade secrets during the exploration of a merger and/or acquisition. These NDACAs must, of course, be carefully crafted to ensure that secrecy is maintained. Provisions should include the following:
- Limitation on who may see the data/information designated as trade secrets — it is best to specifically identify persons by name
- Requirement that persons designated to see confidential data/information be required to sign the NDACA
- Provisions specifically identifying the trade secrets
- Dividing disclosures into stages — that is, the most sensitive trade secrets are only disclosed after certain stages in the transaction have been reached (such as after a Letter of Intent is signed, after due process begins, or when financing is being sought)
- Consider dividing allowed access into different personnel for different categories of trade secret information (such as financial, marketing, IT systems, etc.)
- Ensuring that the obligations to maintain non-disclosure and confidentiality continue long after the deal is consummated or fails to consummate
- Requiring seller’s written permission to expand disclosures beyond those listed (such as to potential lenders, third-party investors, etc.
- And more
Aside from NDACAs, other tools that should be considered concern the physical protection of trade secret data and information. For example, the data could be presented in paper format only and only for in-person reviews at a particular location. This may be impractical. However, similar sorts of protections can be used for electronic format data.
Contact The E-commerce and Business Attorneys At Revision Legal
For more information, contact the experienced e-commerce and Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.
