EnerMatix Article

Confidentiality Agreements and Areas of Exclusion
January 17th, 2008 | Categories : Business Practises, Confidentiality, Corporate, Oil & Gas

If we want to promote a business opportunity we need to provide information about it, but by providing the information we may have our idea, vision, or data exploited by a competitor. Organizations are reluctant to disclose without safeguarding what they share. Organizations are reluctant to invest without receiving satisfactory disclosure. The confidentiality agreement is one of the oil and gas industry’s most common business tools in helping to overcome this paralysis.

There are several things to keep in mind when dealing with confidentiality agreements. The first is that the party providing the information and the party receiving it have very different agendas. The provider will want an agreement that sets out specific safeguards to keep the shared information in confidence and will want to make its scope as broad as possible. In contrast, the information receiver wants a very specific definition of what is to be held in confidence to remove uncertainty about how to manage the expectations of confidentiality. The next concern is that the information provider must be aware of the interests of its existing business associates because it may have pre-existing contractual obligations that restrict its right to release sensitive information for review by interested parties. It’s important to be sure that information disclosure does not breach existing obligations. Fortunately, the 1990 and 2007 CAPL operating procedures include exceptions that allow release of information to third parties for several reasons including acquisitions and divestitures. But, be careful because the earlier CAPL operating procedures don’t have this kind of provision. If there is concern, negotiation with business associates to permit disclosure is usually successful because each one will probably need the same favour one day.

A confidentiality agreement will usually say that everything being shared by the information provider is confidential, except what is already public. It’s also important to be sure that it reaches back and covers information disclosed before the agreement is signed. However, it usually exception information that goes public without fault of the receiver, or through a third party, and it doesn’t restrict information the receiver already had before disclosure.

If there’s ever any dispute about whether or not an exception applies the agreement must be clear about who shoulders the burden of proof. The provider will have trouble showing how the receiver actually obtained the information because it lacks inside information. So, it’s usually fair for the agreement to expect the receiver to show how an exception applies.

Be careful that a confidentiality agreement doesn’t inadvertently setup a trust by including language that says the receiver is holding the information, or any benefits arising from its improper use, on behalf of or in trust for the provider. This could make the receiver a fiduciary of the provider. The agreement should also say that information will only be disclosed to those representatives of the receiver on a need-to-know basis and that these people will be told that the information is confidential and cannot be disclosed to others. It’s a good idea to require representatives to provide a confidentially undertaking to the information provider agreeing to be bound by the terms of the confidentiality agreement. In any event, the receiver should be prepared to indemnify the provider against improper use or disclosure of the information.

Another idea to keep in mind is that it’s often useful to have the agreement prevent disclosure of the fact that the information itself has been shared. The provider must consent to any proposal for joint bids to be made by the receiver with any other party. Otherwise, the mere knowledge that the information has been shared can provide an undesired market signal.

A confidentiality agreement will generally provide that the confidential information is to be used solely for the purpose of evaluating a possible transaction involving the information provider and the receiver. It should block any other kind of use, although it needs to allow disclosure so the receiver can defend itself in legal proceedings. The provider may even want to have the agreement give it the right to become party to any action requiring disclosure and to allow it to defend the action. Otherwise, the provider is at the mercy of the receiver’s decision about whether or not to defend against a claim.

The information provider won’t usually make any promises about what it will disclose. This is best left at the provider’s discretion. If promises are made then the details about what information is to be shared and timelines for delivery need to be established. The provider should also avoid making any representation or warranty about the accuracy or completeness of the information and use of the information by the receiver should not create provider liability. Meanwhile, the receiver should make sure that this disclaimer is subject to the terms of any later agreement relating to the information such as a purchase and sale agreement

The agreement should say that the receiver will return all information provided to it if the deal doesn’t go through. However, there may be an issue about how to handle interpretative reports and data and other material that the receiver generates with the information it receives. The receiver will probably not want to return this material. The best solution is probably to have the receiver agree to destroy everything except information that has been presented to the receiver’s directors and now forms part of the minutes of director’s meetings because this forms part of the corporate record.

Survival of terms is something else to think about. Often, confidentiality agreements have a fuse that makes them expire at a specified date or when a certain kind of even occurs. For example, if the agreement relates an acquisition transaction the obligations usually terminate on closing. However, if there is no transaction, the survival period may be for a year, or so. If the confidentiality agreement is about reserves and production, then duration is not as important because everything will soon become public. Unless it’s a partial sale of interest, the provider is not concerned about disclosure after closing because it has divested its interest. The concern usually rests with the receiver because unsuccessful rivals will be entitled to use and disclose the information after the survival period expires.

It’s helpful to include language that says the information provider has the right to get an injunction if the confidential information is disclosed in breach of the agreement. It clearly tells the court that the provider believes unauthorized disclosure is very serious and that it believes this is a case where the special relief of injunction is appropriate.

Perhaps the most challenging part of a confidentiality agreement is the expectation that the information receiver agree to an area of exclusion. This can apply even though the receiver didn’t use the confidential information improperly to acquire interest within the area of exclusion. It’s hard for a provider to prove that a receiver used confidential information improperly. However, it’s still a good idea for a receiver to negotiate an exception to the area of exclusion for cases where it can show that it didn’t use any confidential information in getting the interest. An area of exclusion also needs to say how the cash value of non-cash deals will be determined; deal with agreements, like farmouts, that restrict assignments; and create an exception for situations where newly acquired interests are a minor part of a much larger acquisition by the receiver.

This is a complex type of agreement to draft and this article has only highlighted a few key points. It’s recommended that the preparation of a confidentiality agreement be referred to legal counsel.

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Tracey Stock, LL.B., M.B.A., P.Eng. practices oil and gas law, land administration, and systems management. He has extensive experience in law, engineering, land, information technology, and has combined his background and experience in all disciplines for several of leading energy companies. His practice has included thousands of transactions throughout Canada and the United States with total value of several billion dollars involving oil and gas mineral acquisitions and divestitures, land title review, management of preferential rights, energy partnerships, joint ventures, economic analysis, and evaluations. He is a notable leader in significantly reducing administrative costs by designing and implementing information and GIS mapping systems that successfully support business processes. Tracey has extensive negotiating experience and has lead data aggregation, mapping, analysis, and interpretation in support of strategic business opportunities in strategic land acquisitions and trend optimization. Tracey has successfully managed corporate departments, project teams, and his own private law practice focusing on oil and gas and land title transactions and has provided legal and business support for successful trade missions to China.

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