A Competitor in the Data Room: How Sellers Protect Their Trade Secrets

The best buyer for a mid-sized company is often a competitor. It knows the market, sees synergies and therefore frequently pays the highest price. Before buying, however, it wants to see exactly what the seller is least willing to disclose: margins, customer and supplier contracts, purchase prices. If the deal fails, this knowledge stays with the competitor. (Competition law (Kartellrecht) also sets limits; these must be examined separately.)

Why the seller must take precautions itself

1. Protection only with own precautions: Information is a legally protected trade secret (Geschäftsgeheimnis) only if its holder has taken reasonable secrecy measures (§ 2 Nr. 1 lit. b GeschGehG). If these are lacking, the claims to injunctive relief and damages also lapse (§§ 6, 10 GeschGehG).

2. Management is under an obligation: The secrets belong to the company, not to the selling shareholder. Managing directors (Geschäftsführer) who disclose them without authorisation may be liable to prosecution (§ 85 GmbHG); members of the management board (Vorstand) are obliged to maintain confidentiality (§ 93 Abs. 1 S. 3 AktG). In practice, a documented approval of the disclosure by the shareholders is therefore advisable.

3. Damage is hardly provable: If the competitor later uses the knowledge in the market, this can rarely be proven. Protection must therefore be in place contractually and organisationally in advance.

The tools in the transaction

1. A non-disclosure agreement with "teeth": Use exclusively for the transaction, no disclosure to third parties, return or deletion if the process is terminated. Anyone who breaches it also infringes the GeschGehG (§ 4 Abs. 2 Nr. 2 und 3 GeschGehG). For obligations to refrain from an act, a contractual penalty (Vertragsstrafe) is forfeited upon the breach itself (§ 339 S. 2 BGB) – no proof of damage is required.

2. Phased due diligence: In the first phase, only aggregated or anonymised data, for example revenues per customer group instead of per customer ("Customer A, B, C"). Details only once a letter of intent and exclusivity are in place and closing is likely.

3. Clean team / clean room: The raw data – individual prices, terms, contracting parties – are seen only by the buyer's external advisers bound to confidentiality (clean team) in a separate, protected part of the data room (clean room). They merely report the results to the buyer, for example: "Terms in line with market practice, no change-of-control termination rights in the top 10 customer contracts." The buyer thus receives what it needs for the valuation and the purchase agreement – but no names and figures.

4. Technology in the data room: No general download of all documents, watermarks, logging of access, redaction of names and prices in the generally accessible areas.

5. Warranties instead of inspection: What the buyer may not examine itself, it will want to have warranted in the purchase agreement. Less disclosure therefore regularly means more warranties for the seller and thus more liability. This trade-off should be made before the data room is opened.

Conclusion: A sale to a competitor is possible without giving away the crown jewels. What matters is that the non-disclosure agreement, phase plan, clean team and warranty concept fit together – and before the first data set is uploaded.