Many times in acquisition, merger and joint venture discussions concerns arise about sharing proprietary or confidential information with counterparties such as competitors and potential rivals. The sensitive information typically includes customer lists, supplier contracts and computer code. The concerns sometimes impair effective due diligence and make negotiation of definitive agreements impossible. I have been doing transactions for 30 years, and yesterday I heard of a novel solution to this dilemma.
The solution is called the "black box". Each party to a transaction identifies their 2-3 most sensitive documents and sends them to the same trustworthy, third party to hold (the "trustee"). The parties agree to complete due diligence and negotiate definitive agreements without access to the documents in the black box. 72 hours before signing, each party gets to review the counterparty's documents in the black box. Both sides recognize that after reviewing these documents, either party can walk away from the transaction.
The obvious advantage to this process is that a prospective partner must invest considerable time and money in due diligence and legal fees before they get to see the confidential information. Spurious attempts to get confidential information should be substantially reduced by this process. Also, you can walk away from a transaction at any time knowing full well that you did not give up your most sensitive information and know-how.
What if the counterparty will not agree to the blackbox? Chances are they are not serious partners. What if they want to know the documents you are putting in the blackbox? Of course, you have to tell them or else due diligence may become unproductive. The answer takes a general form, for example--customer list. If they ask is there any customer concentration, answer truthfully. You do not want to waste your time and money on a deal that will explode when they find out 72 hours before closing that 89 percent of sales are to a startup in Guadalajara.
Who holds the documents in the black box? I like to use Big 4 accounting firms when I need an independent "trustee". They understand transactions and complex agreements and maintain confidentiality better than many other professionals. I have used them successfully in the past to escrow source code and the black box is a similar situation.
A black box is not a routine part of doing deals. There is an expense for setting up the black box and the "trustee" that holds the documents. Most people have overstated concerns about proprietary information. In the rare case where it is a legitimate concern, try a black box.