The owner of a building in the New York suburbs (let’s call it the Jurex Tower) has begun negotiations with a potential buyer. As is customary, the owner and potential seller will ask the prospective buyer to sign a confidentiality agreement, and Jurex he has agreed not to share information about the tower or a potential sale. Like most non-disclosure agreements, this agreement also has exceptions to allow buyers to share information with prospective investors.
A few weeks into the negotiations, the potential seller was shocked to receive a call from a neighbor about the Julex Tower. A neighbor was receiving something he received from someone else: a donation note to the Jurex Tower. Offered an opportunity to invest in the purchase of a tower. Disclosed all detailed rent rolls and other financial information (such as rent, lease expiration dates, renewal option terms, etc.) provided by the seller to potential buyers. A sales memo declared that the seller had chronically undermanaged the Jurex Tower. He took advantage of missed or ignored opportunities by sellers to implement strategic capital improvement programs. The buyer said all of this would double the building’s net operating income. Buyers often say all these things to prospective investors.
Aren’t any of these in violation of a confidentiality agreement? In fact, the neighbor was a future investor. He may have invested in a small portion of the Julex Tower acquisition. The same is true for every doctor, dentist, lawyer (or anyone else with a significant bank account) in town or elsewhere in the United States and around the world. The purchaser technically complied with a non-disclosure agreement as information about the Jurex Tower was only shared with potential investors.
The non-disclosure agreement in question was no different than hundreds of similar agreements in circulation today. They generally permit disclosure to “prospective investors” without further restrictions.
In response to the above experience, perhaps tomorrow’s prudent sellers or their attorneys should add some language to their standard nondisclosure agreements. should be restricted. Presumably, each prospective investor must be someone the principal of the purchaser already knows from previous transactions. Perhaps the buyer only needs to provide limited information as a “teaser” to prospective investors, unless the particular prospect shows serious interest in the deal. Perhaps each prospect should sign their own non-disclosure agreement and agree not to share any more confidential information. Perhaps the buyer should keep a roster of prospective investors and share it with the seller to demonstrate that any disclosure to the prospective investor does not violate any confidentiality agreement.
If the next prudent seller added some or all of these concepts to their non-disclosure agreement, it would add hundreds of words. you will want to negotiate This results in multiple drafts, phone calls, discussions, and other interactions that increase legal costs and delay substantive negotiations of potential deals.
A client has asked me to review an existing non-disclosure agreement regarding a recent transaction. Sure enough, disclosure to all potential investors was granted, resulting in exactly the same opening and potential risks faced by the seller of Jurex Tower. So did a whole pile of other (different) non-disclosure agreements that this client used for other transactions.
We told our client that a Jurex Tower seller learned all the seller’s secrets through a prospective buyer’s offer memo. I noted that this client’s standard non-disclosure agreement could be adjusted to mitigate risk in line with the suggestions above, though I also noted that the Jurex Tower story only happened once for him. please. it was an outlier.
Just because this happened once, did today’s seller want to complicate the standard non-disclosure agreement and related negotiations? This seller has never experienced a similar problem. . Ultimately, the seller decided to take the risk, keeping the standard non-disclosure agreement in place. But it was a close call. Often these close calls are reversed. This is how real estate and other legal documents rarely grow, grow and shrink.
