The Company Agreement Explained: Confidential Information and Non-Compete
August 6, 2014 | By Vela Wood
Most entrepreneurs and small business owners are familiar with confidentiality and non-compete agreements because, well, they want others to gain interest in their product or service, but they don’t want the recipient of the disclosed information to turn around and steal their idea or any other intellectual property related to the business. This same idea can also carry over to the company agreement because the managers and members may have extensive knowledge of information about the LLC that third parties shouldn’t be privy to.
A confidential information provision in an LLC company agreement performs certain function. The most obvious function of a confidentiality provision is to protect information regarding the business, affairs, and financial condition of the LLC. It is very likely that the managers in a manager-managed LLC and the members in a member-managed LLC will receive information about the LLC (ex: financial information, intellectual property, trade secrets, etc.) and such information can be damaging to the LLC if it reaches unintended third parties.
Another function of the confidential information provision is to define what confidential information is and what it includes and what it excludes. The LLC will generally want an all-inclusive definition of confidential information for more broad protection, whereas the recipient of the confidential information would like the definition to be narrow.
Most confidential information provisions include certain types of information that is excluded from the definition. Some examples of excluded information may be disclosures compelled by law or information known by the general public.
The confidential information provision to provide a remedy in the event the provision is breached, such as monetary damages, specific performance, or other remedy at law. Disclosure of an LLC’s confidential information is a serious breach and can cause great hardships to a business.
In addition to the confidential information provision, an LLC’s company agreement may provide for a non-compete provision, or also referred to as a “Conflict of Interest” provision. This provision should describe whether the managers or members can engage in other activities not related to the LLC or other activities or business ventures in competition with the LLC and whether the managers or members must offer the LLC, other managers, or other members the right to participate in the other activities or business ventures.
Every business situation is different, and it is always a good idea to have your attorney draft a company agreement or review your company agreement to make sure it fits your needs.
Posted in Company Agreement Series, Intellectual Property, Startups
Vela | Wood is a boutique corporate law firm that focuses on small businesses, entrepreneurs, and startups.