Confidentiality duty: To disclose, or not to disclose, that is the question

This article was originally published in Luxembourg newspaper AGEFI, in February and is reproduced with permission from the publisher. 

Over the years, Luxembourg has positioned itself as a structuring hub and an attractive jurisdiction for investors to set up co-investments and joint venture vehicles. In this context, it is usual for shareholders to ask to be granted the right to nominate candidates to the management body of such vehicles to easily access to information on the daily operations of these vehicles and their underlying assets.

Shareholders will commonly expect their representatives in the management body to disclose information they have had access to as part of their management duties, the extent of which is typically contractually agreed between the shareholders and the relevant company. Such disclosure undertakings could however trigger some challenges in light of the legal confidentiality duty of members of management bodies of Luxembourg companies (Management Members). Pursuant to the law of 10 August 1915 on commercial companies, as amended from time to time (the Law), Management Members (among others) shall be under a duty, even after they have ceased to hold office, not to divulge any information which they have on the company they manage, the disclosure of which might be prejudicial to that company’s interests.

Consequently, Management Members constantly need to assess whether or not they may disclose the information without exposing themselves to a liability risk.

 

What information is considered as confidential?

The Law expressly provides that any information (whether acquired at a management board meeting or by any other means as part of their mandate) that Management Members receive about a company, the disclosure of which could be detrimental to that company, falls within the scope of the confidentiality duty as provided for by articles 444-6 and 710-15 of the Law. The Law only allows disclosure of information in case it is in the public interest to do so or whenever the disclosure is permitted by any law or a regulation, which are quite limited situations in the context of joint-ventures or co-investments.

This confidentiality duty is inherent with the Management Members’ duty to manage the company with care and in its best corporate interest. The protection offered by the Law to Management Members also aims at ensuring that attendees to a management meeting feel confident to express their views freely and perform their duties in the best interest of the company, knowing that their views will not be disclosed outside the board room.

As the Law leaves a margin of interpretation to Management Members as to what may or may not be disclosed, they shall carefully review and assess whether the information they expect to disclose could go against the company’s interests.

 

When can information be disclosed to the shareholders?

The Law provides for a right for shareholders of a Luxembourg company to access certain information about the company or to ask Management Members to provide certain information about specific management acts. The information right of shareholders is limited by law as shareholders of a Luxembourg company are not supposed, nor entitled to interfere in the management of the company.

As mentioned above, it also aims at providing for some protection to Management Members by ensuring that they would always consider the corporate interest of the company over the interest of the shareholders, in the event of conflict between both.

In joint-venture and co-investment situations, it is common that shareholders contractually request that Management Members provide them with certain information and/or that a Management Member representing the interest of a specific shareholder be entitled to disclose certain information to that shareholder.

It could be argued that when all Management Members contractually agree and undertake that disclosing certain information to the shareholders is acceptable, disclosures are acceptable as long as they do not go against the interests of the company and do not contravene public order. On that basis, it is acceptable that agreements such as shareholders’ agreements require Management Members to share with the shareholders more information than the ones they are legally obliged to share. However, Management Members should always be careful and reassess and, as required, review their position if they consider that the disclosure of some information may affect the company’s interests at a certain point in time. In addition, it is advisable that the same information be shared with all the shareholders and if not, that the difference of treatment be justified by the interests of the company or of the shareholders taken as a whole.

Circling this back with the corporate interest concept and the disclosure of information to shareholders, the balancing exercise to be made by Management Members can turn to be difficult.

This could be illustrated with a joint venture between investors owning preference shares, entitling their holders to a preferred return over common shares and founding partners owning common shares, entitling their holders to a return only to the extent that the company reaches a certain EBITDA upon exit or liquidation of the company. In a situation where the company would need additional financing to reach or exceed the targeted EBITDA, investors may target to exit earlier or liquidate the company to get at least a portion of their preferred returned paid while founding partners may have more incentive to seek for a bank financing or an extension of the term of the company to stand greater chance to reach the targeted EBITDA and increase their common shares entitlement in the exit or liquidation proceeds. The founders and investors would have diverging interests and their representative managers would also have to carefully determine whether the disclosure of information and these potential options would put them at the risk of breach of duty of disclosure.

This example shows that interests shall constantly be assessed and that although the disclosure of a piece of information may be in line with the company’s interests at a certain point in time, disclosing the same piece of information at a different time could go against the company’s interests. Management Members shall proceed with an assessment on a case-by-case basis, in light of the situation that the company is in at the time of the envisaged disclosure.

In an economic context where the number of group restructurings is growing, Management Members may want to get guidance on the assessment to be conducted as it is likely that in such scenario, the interests of the shareholders and that of the company diverge.

In order to prove their diligence, it is advisable that anytime the alignment with the company’s interests could be questioned, Management Members document their decision to disclose or not to disclose and the rationale of their decision to limit their liability risk.

 

When can information be disclosed to third parties?

Management Members often face situations where they are requested to disclose information to third parties, both in the day-to-day business of the company (to the company’s auditor, legal advisors or other providers), and in the context of specific transactions (such as an investment, divestment or external bank financing).

The disclosure of information to third parties is also subject to the confidentiality duty provided by articles 444-6 and 710-15 of the Law. Management Members shall act diligently whenever they are willing to disclose confidential information to a third party and ensure that the disclosure is indeed made in the best interest of the company and falls within the permitted disclosures under the Law (i.e., if it is in the public interest or permitted by a law or a regulation).

This may be done by ensuring that the third party is legally subject to similar confidentiality duties as the ones the company is subject to or, as is common practice, by entering into a non-disclosure agreement with that third party in order to specifically provide what information shall be considered as confidential and the sanctions resulting from a breach.

 

Conclusion

Determining whether or not the disclosure of confidential information may be done within the limits set by the Law is not always an easy exercise, especially in the economic environment companies currently operate in. Similarly to a changing economic environment, the outcome of the assessment as to whether or not confidential information could be disclosed may vary depending on the situation a company is in. It is key for Management Members to collectively reflect when diverging interests may arise and, as need be, seek legal advice to make an enlightened decision.