This is confidential – Would you (or should you) trust your witness?

When an individual executes an agreement, it is often a requirement for that execution process to be witnessed.  Many individuals, prior to executing an agreement, will not even stop to think about the risks involved in this seemingly innocuous process.  Further, many legal practitioners do not view the witnessing process as “risky” and would not, as a standard practice, advise their clients of the risks involved in relation to it.

If you are one of those who think there is little or no risk involved in having a witness witnessing the execution of an agreement, think again.

Having a witness (who is not an authorised witness, e.g. a solicitor or JP) witnessing an individual to sign an agreement may become problematic when the document to be executed contains market sensitive information and/or is confidential in nature.  This is because the witness, when witnessing the signature, will inevitably be able to glimpse through the document or, at the very least, be able to see the cover page of the document, and unless that person is bound by a duty not to disclose, there is no protection against the risk that the witness may use the information acquired as a result of “witnessing” the signing of the document.  This is not to say that such risk does not exist when such a signing process is witnessed by an authorised witness – the risk is only minimised.

Consider the following scenario.

Scenario 1 – Company A is an Australian private company and has proposed to pass a set of shareholder resolutions resolving the subdivision of shares which are part of the restructuring steps necessary for a further capital raise to fund the R&D of a new product (New Product) that will be a gamechanger in the market.  The purposes of passing these resolutions are documented in the circulating resolutions.  A few shareholders of Company A are individuals and would need sign the resolutions in front of a witness. 

If you were the legal adviser of Company A, what would you say to the individual shareholders prior to them signing the resolutions?

Then, consider the following scenario.

Scenario 2 – the first part of this Scenario 2 is the same as Scenario 1, except this time, one of the individual shareholders (Shareholder 1) has asked one of his friends (Friend), who, unbeknownst to Shareholder 1, works as a senior executive of Company B, which is a direct competitor of Company A.  If the information contained in the resolutions of Company A is learnt by Company B then it would offer Company B a head start in launching a product similar to the New Product, which would pose great threat to Company A’s market share.

If you were the legal adviser of Company A, would you have done something different to your answer in scenario 1?

Now, consider the following scenario.

Scenario 3 – the first part of this Scenario 3 is the same as Scenario 2, except this time, Shareholder 1 has asked the Friend to witness his signing of the resolutions of Company A and the Friend obtained the information set out in the resolutions (by glimpsing through the resolutions) and then reported back to Company B.  Company B, which has better funding than Company A, then launched another product that directly competes with the New Product and Company A lost a majority of its market share.

In this scenario, who should take the responsibility for Company A’s loss?

Now compare the answers in scenario’s 1, 2 and 3. Would you say that having a witness witnessing the signing of a document not risky?

As there is no black letter law governing the confidentiality obligations owed by a witness, we have set out below some practical tips which should reduce the associated risks.

• Ensure that the document is witnessed by someone who is also an authorised witness (e.g. a solicitor or JP);
• Notify the witness regarding the confidential nature of the document to be witnessed and request the witness to confirm to keep any knowledge of the content of the document to be witnessed confidential;
• Have the document witnessed by an employee from the same company who is bound by certain confidentiality obligations due to the employment relationship;
• For legal practitioners, prepare agreements with each of the execution blocks on separate pages. This reduces the risk that the witness may see the contents of the rest of the document.

Queries

For further information on the above please get in touch with an author or any member of our Corporate & Commercial team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action