How Blind Negotiations Can Put You in the Red

Woman statue blindfolded

November 26, 2014

We acted for a client recently in negotiating the purchase of a significant share of a startup business (a company).

No matter how many times we insisted that the other parties obtain their own independent legal advice, they refused to do so. They were sure they knew what they were doing, and were happy to go it alone selling their shares. 

Discussions and negotiations went well for quite some time, and all parties kept an open, informal and friendly dialogue. It was quite an unusual situation where the “selling camp” had an unconventional and (unecessarily) complex structure already in place, including discretionary trusts, and so the situation on paper was quite different to how it was presented in truth (the “selling camp” was a husband and wife).

Throughout the due diligence process, we discovered many critical circumstances were not as they were made out by the “selling camp”. In addition, the company’s only valuable asset was held by another separate entity. Nonetheless, relations were kept and the “selling camp” agreed to certain measures being taken in order to preserve the status quo and protect our client (although they continued to refuse to obtain independent legal advice).

A draft document was then prepared by us and sent to them for consideration. The “selling camp” got lost in the legal language, and instead of negotiating or engaging an independent solicitor to assist them in navigating the documents, they decided they no longer wanted to go through with the transaction. 

Our client had incurred significant losses through negotiations, the preparation of the documents, establishing new entities through which to purchase the shares and paying interest on a business loan, in addition to missing another investment opportunity in favour of the deal in question. 

We were successful in establishing that enforceable verbal agreements had been entered, and that an action for promissory estoppel had arisen. Ultimately, the “selling camp” settled to avoid Court, but had to pay a significant portion of those losses to our client as damages for breach of contract.

In light of the above, when it comes to significant business, commercial or corporate transactions, you will almost always save money by hiring a competent lawyer from the outset. Bear in mind that verbal agreements reached throughout the negotiation phase can be enforceable, even if the parties all understand that a document is later to be drawn up and signed reflecting the same agreement. 

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