By Michael J. “Mick” McGirr, Esq. | Phocus Law
One of the greatest sources of litigation aimed at entrepreneurs and investors is the truth. We were all raised to tell the truth, but as you dive deeper into your professional life, you may find that what it means, to be honest, becomes more difficult to pinpoint. The purpose of this article is simply to identify for you a few buckets where I have seen some clients encounter muddy waters around the truth and to help you avoid getting lost in those boggy conditions.
First, let’s talk about the most apparent topic – misrepresentations. No matter what team you find yourself on in a transaction (buyer, seller, borrower, lender), the reality will exist that there will always be a stretched truth that, if told, would improve your position. This is inherent to deals, as you never have the perfect conditions, and if the conditions were just a bit better, you would likely make a bit (or a lot) more money. Any misrepresentation regarding your position in a transaction can open you up to potential legal exposure and liability. Misrepresentations can include giving inaccurate information regarding the construction quality of a construction property, misrepresenting your qualification as a borrower, painting an inaccurately rosy picture of your lending terms, and more. The best advice I can offer on this topic is that it is simply better to make a penny less by being honest than to risk a vault worth in legal fees by stretching the truth.
Second, and closely related to the first point, is the risk inherent in failing to disclose information that is material to the transaction, especially when that information could be expected to negatively affect your position. Think of this as the sin of omission being equal to a sin of commission. It’s a natural instinct for ‘deal’ people to think that it’s the responsibility of the purchaser, when buying something as-is, to do their own research to identify any issues. Unfortunately, that doesn’t actually absolve you of any liability. If you know something that would materially and negatively affect your position in a transaction, and you fail to disclose it, there is a very high probability that once the deal closes and the negative fact is discovered, you’ll face liability for that omitted tidbit. In residential real estate transactions, the SPDS form exists to try to tease out of the seller these important items of interest, but in many other transactions in which you may become involved, no such form exists, and it falls to you to proactively disclose such information. If you think this process of disclosing negative items sounds tedious, I wish you could see the disclosure schedule for the deal I am working on right now. It is the acquisition of one business by another in a transaction that is well into the nine figures. The list of items each party is disclosing to one another covers more pages than some New York Times best sellers. To borrow a phrase from the AZ Realtors’ SPDS form: When in doubt, disclose!
Finally, I want to quickly address a tactic that is best described as bait-and-switch. It’s been a long-standing strategy of dealmakers to begin negotiations on false pretenses or keeping certain significant truths buried, with the intent to correct the falsehoods or disclose the hidden issues as the negotiation progresses. This is typically done with the idea that the more invested the other party becomes in the negotiations, the less likely that party is to walk away as certain negative factors are discovered nearer the finish line than they would be if those factors were revealed at the outset. Again, I urge exercising restraint and caution against employing such tactics. Ultimately, although you are disclosing the negative factors before the deal is finalized, the tactic of concealing those items to bait the other party in can cause legal exposure for you despite your intention to come clean before final ink touches paper. Negotiating in bad faith is legally actionable and could cause you to end up in a deal on terms you would not approve of or could result in you owing substantial damages to the initially bamboozled party.
In summary, the old saying that ‘honesty is the best policy’ holds true. Corners cut through sleights of hand with the truth are another ‘get rich quick’ tactic and will never provide the long-term stability and comfort that building your empire ‘the old-fashioned way’ provides.
The Phocus Law team has decades of experience maximizing value for clients in high-stakes transactions, whether in real estate, mergers & acquisitions or otherwise. If I can ever assist you in making the best of your deal, and doing so in an honest and genuine manner, please don’t hesitate to reach out. I can be reached by email at Mick@PhocusCompanies.com or by phone at 602-457-2191.