A recent High Court case has emphasised the importance for investors to pay particular attention to confidentiality clauses in shareholders’ agreements, to ensure that they are drafted in such a way as to allow an institutional investor to instruct advisers on an exit and in doing so disclose confidential information to a prospective buyer. The case also gives guidance on the interpretation of directors’ duties (in particular, the duty to avoid conflicts of interest).

The Facts

Richmond Pharmacology Limited was owned by its founder shareholders and an investor, Chester Overseas Ltd, and a shareholders’ agreement (“Agreement”) was entered into between the parties. The other defendants in the case were representatives of Chester who were appointed to Richmond’s board of directors.

Chester wanted to sell its shares in Richmond and instructed a corporate finance adviser to facilitate the sale and, in doing so, disclosed confidential information to the adviser to assist with the sale process. The adviser approached a number of potential purchasers, some of whom were given the confidential information about Richmond by the adviser after having signed a non-disclosure agreement with Chester.

The Agreement contained a provision requiring the parties to “treat as strictly confidential” all commercially sensitive information relating to Richmond. Disclosure to a “professional adviser” was permitted where the adviser agreed to keep the information confidential. However, there was no provision permitting onward disclosure by the adviser to anyone, including to potential buyers.

The Claims

Richmond brought a claim against:

  1. Chester for breach of the Agreement and breach of confidence at common law; and
  2. against the investor directors (being representatives of Chester) for breach of their statutory duties as directors  to promote the success of Richmond (section 172 Companies Act 2006), to exercise reasonable care, skill and diligence (section 174 CA 2006) and to avoid conflicts of interest (section 175 CA  2006).


  1. Confidentiality  Clause

The Court held that the ordinary meaning of an obligation to treat information as strictly confidential is that it may not be disclosed  to anyone else. The confidentiality clause, as drafted, did not permit disclosure of confidential information relating to Richmond to prospective purchasers despite non-disclosure agreements being in place. Chester had therefore breached the Agreement.

  1. Directors’ duties
    1. To promote the success of the company

The Court found that the investor directors had acted in good faith and had not breached this duty. The Court also noted that they were entitled to take into account the interests of Chester (as their appointing investor), provided their decisions were in, what they genuinely considered to be, the best interests of Richmond.

  1. To exercise reasonable care, skill and diligence

No breach of this duty was found. Although the investor directors were mistaken in thinking the disclosure was permitted, it was held that  it was not an unreasonable conclusion for them to reach based on the knowledge they believed Richmond and the founders had of the ongoing sale process (various emails and board meeting minutes were produced to the Court to illustrate Richmond’s  awareness).

  1. To avoid conflicts of interest Interestingly (and helpfully when appointing

investor directors) the Court found that by entering into the Agreement, the founders had authorised the investor directors to act in a dual capacity as both directors of Richmond and representatives of Chester, despite the fact that this produced the potential for a conflict of interest. Therefore, the entering into of the Agreement constituted authority of the board, so long as Chester complied with its obligations under the Agreement. And this is where their issue lay – the Court found that the investor directors did breach this duty (to avoid conflicts of interest) as their disclosure of the information to potential purchasers was not a conflict authorised by the directors because it involved a breach of the Agreement. It is not a defence that the director acted in good faith or reasonably as the test applied in respect of this duty is an objective one.

The question of loss

The Court found that although Chester and the investor directors did breach their duties to Richmond, those breaches did not cause it any loss. Richmond tried to argue that a later downturn was due to the disclosures but the Court held that a competitor could not have made any gain from them or that Richmond would have suffered due to them. As a result, the Court awarded nominal damages of just £1 against Chester for breach of contract, and dismissed the claims against the investor directors.

Points to take away

  • Incorporate a specific carve-out from confidentiality restrictions (by expressly allowing onward disclosure) if a shareholder wishes (or may wish at a future date) to sell its interest.
  • Although the court held that there was deemed authorisation of a conflict of interest by virtue of signing the shareholders’ agreement it remains prudent to formally gain express authorisation in the articles from the board for potential conflicts of interest.