Problematic NDA Terms in California Association of Business Brokers form
June 09, 2023
by a searcher from Northwestern University - Kellogg School of Management in San Rafael, CA, USA
The CABB form NDA includes non-circumvention and related party non-contact language that I think creates excess risk for buyers. Do any lawyers or experienced investors have a position regarding the way they revise this language before signing, or do folks just blindly 'Docusign' and assume they will never have an issue? Is non-circumvention a 'market' NDA concept (it isn't in commercial real estate)? Lastly, do folks add investors to the list of parties (e.g., lawyers, accountants, lenders) with which they can share confidential information?
Non-circumvention: Per below, the last sentence of this clause makes Buyer responsible for paying Seller’s brokerage fee (if Seller doesn’t pay, regardless of whether a fee is due per the listing agreement) according to a listing agreement to which Buyer was not party. Secondly, “in any way interfere with broker’s right to a fee” is intentionally broad language that creates risk for Buyer. It is also a phrase that by striking, (falsely) indicates to Broker that you must intend to interfere!
Further Terms: being prevented from contacting Seller’s…customers, suppliers or otherwise observ(ing) the business for a period of three years is harsh and broad. Some degree###-###-#### mo?) of protection should apply if and only if I get into DD and Seller reveals proprietary customer data (e.g., customer contract terms). However, if I’m hunting for landscaping companies and buy a competitor instead of this one, why should I be prevented for pursuing the top 5 business parks in my city just because their names were listed in a CIM for a company that wouldn’t sign my LOI? Why can’t I buy products from the same suppliers? Also, what does it mean to “observe the business”?
Relevant CABB Agreement Clauses:
4. Non-circumvention Agreement: The seller has entered into an agreement providing that the Seller shall pay a fee to the Seller’s broker if, during the term of that agreement or up to twenty-four months thereafter, the Business is transferred to a buyer introduced by the Seller’s broker or a buyer’s broker. Buyer shall conduct all inquiries into and discussions about the Business solely through the broker identified above and shall not directly contact the seller or the Seller’s representatives without written authorization by the Seller’s broker. Should the Buyer or any person or entity affiliated with Buyer purchase all or part of the Business, acquire any interest in, or become affiliated in any capacity with the Business without the involvement of the broker(s) or in any way interfere with either broker’s right to a fee, Buyer shall be liable to the broker(s) for such fee.
5. Further Terms: For a period of three years, Buyer will not contact Seller’s employees, customers, landlords or suppliers, or otherwise observe the business, without Seller’s consent, nor shall buyer directly or indirectly solicit for employment any employees of seller…
#NDA #legal #non-circumvention
from University of Tennessee in Nashville, TN, USA
First, a disclaimer. I am not an attorney, have never practiced law, and am not well-versed in California statute or commercial real estate practices. That shared, I have seen and signed numerous NDAs and have practiced commercial real estate in the past.
The NDA language is boilerplate and intended to offer protection to the Broker and Seller. Circumvention is a very real threat in an age when I can procure anyone's contact information with $100 and an hour's time.
The most distinct California-related example I can give you (CA attorneys, please cite the case) was a Buyer-company based in San Diego (from recollection) that was introduced to a Seller-company in Pennsylvania via a California-based Business Broker. The Buyer signed the Broker's NDA, had multiple interactions with the Seller, but did not ultimately move forward with a transaction while the Seller was represented. Fast-forward several months later (CA attorneys, fact-check me here), the Buyer contacted the Seller directly and purchased the Seller-company directly. The Broker sued the Buyer for breach of contract and fees due. The venue was moved to PA, where the Seller-company was based. Through legal proceedings, the PA Supreme Court ruled against the Broker and in favor of the Buyer because the sale included Seller-owned real estate and the Broker did not have a real estate license in the state of PA. A technicality, but a very expensive and time-consuming one.
With respect to lock-out periods for customers, vendors, employees, etc., that too is customary. The likelihood of one company taking action against another is very low unless the Seller-company can prove that they were targeted by the known party to an NDA. They would have to know what every suitor that signed a NDA ultimately did in their acquisition search (buy a competitor, got bought by a competitor, go to work for a competitor, etc.). Assuming the Broker turns over a list of every party that signed a NDA to the successful Buyer, the new owner isn't likely to know who those Buyers' extended team members are (lawyers, accountants, investors, etc.). More likely than not, they're not going to care because they can rightfully claim the establishment is 'under new management.'
I opine that the issue is moot unless someone intends to violate the agreement that they signed.
from University of Canterbury in Houston, TX, USA
Firstly, on the non-circumvent the buyer should simply place the risk of the seller not paying its broker entirely with the seller. There are a number of ways this could be achieved, one would be for the broker to release the buyer from the non-circumvent obligation as a condition to closing (something they may be happy to do as it ensures they are in the middle of things). If the broker is not happy with this, a buyer could require that an amount equal to the broker fees is placed into escrow and will only be released once the buyer receives written confirmation that the broker has received its fee.
Secondly, on the 'Further Terms'... it is important to actually read the confidentiality agreement. The use of standard NDAs often undermines their value/protection for the seller. Some are poorly drafted. So, in this case the seller has an NDA that seeks to protect the "Seller's employees, customers, etc", where as the Seller might actually be the owner of the business and, on a strict interpretation, does not have any employees, customers, etc. They should be trying to protect the target.
Like others, I encourage clients to sign NDAs via their investment vehicle. I also encourage them to seek to negotiate NDAs as, if nothing else, it may provide a sense of how reasonable the broker/sell side advisor is and how keen they are to get a deal done with you.
As always, keen to hear other's views.
Chris