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Selling a San Diego Business: What is Your Duty to Disclose?
Selling a business in San Diego is a complex and time-consuming process. Your skilled and talented business lawyers, like the ones at San Diego Corporate Law, have drafted and redrafted the sales contracts. Now everyone is in the process of doing their due diligence. As a seller, what is your duty to disclose information to the buyer?
Selling a San Diego Business: Duty to Disclose
In San Diego and in California, the issue of disclosure falls under the legal rubric of “fraud.” Generally, fraud is a material misstatement about some fact. Under California law, a failure to disclose, an omission, or a concealment can also constitute fraud. The California courts have determined that there are four circumstances in which nondisclosure or concealment may constitute fraud:
- When the defendant is in a fiduciary relationship with the plaintiff
- When the defendant had exclusive knowledge of material facts not known to the plaintiff or discoverable by the plaintiff
- When the defendant actively conceals a material fact from the plaintiff OR
- When the defendant makes partial representations but also suppresses some material facts
When you are selling a business, the first circumstance rarely applies. A fiduciary relationship involves a situation in which one party gives to another the utmost trust and confidence in exchange for a steadfast duty of loyalty and fair dealing. An arms-length sale of a business rarely falls in that category. Thus, for the sale of most business, only circumstances 2, 3, and 4 will be applicable.
Selling a San Diego Business: What is a “Material” Fact That Should be Disclosed?
From the list above, in general, it is best to disclose material facts if you, the seller, have knowledge of the facts and it is clear that the buyer has no knowledge of the facts and that the buyer cannot easily discover the facts. This raises the question: What is a “material” fact for purposes of the duty to disclose? In general, something is “material” if that fact, had it been known, would have caused the plaintiff to not enter into the transaction. A “material” fact is also one that affects the value of the business, property, or transaction.
With respect to house purchases, here are a few examples found in the caselaw of what is material:
- Fact that lot was filled with debris, which was covered over
- Fact that land contained filled ground to a substantial depth
- Fact that house sold was constructed on filled land
- Fact that improvements were added to house without a building permit and in violation of zoning regulations
- Fact that improvements to house were in violation of building codes
- Fact of restriction on deed
- Fact of exceedingly noisy neighbors
- Fact that someone had been murdered in the house 10 years ago
By contrast in DNI Food Service, Inc. v. Kim, No. B266596 (Cal. App. 2nd Dist. 2017) (unpublished), it was held that it was not material to a commercial store lease transaction that a small piece of landscaping at the opposite end of the shopping center development from the store in question would be taken via eminent domain by CalTRAN. Court held such to have such a minimal impact on the value of the lease that it was not a “material fact” giving rise to a duty to disclose.
Contact San Diego Corporate Law
Whether you are a business buyer or seller, contact San Diego Corporate Law for a consultation to discuss your business sale/purchase options. As can be seen from the above discussion, legal advice is needed to help determine what must be disclosed. This requires knowledge of the law and knowledge of what would be considered “material” to a reasonable purchaser. From the standpoint of a buyer, it is important to know what the seller must disclose, but it is equally as important to ask the right questions. Sure, you can sue if the seller fails to disclose, but it is better to get the answers up front and do your due diligence. It is better to avoid a bad purchase than end up in court. For more information and/or help with the sale/purchase of a California business, contact attorney Michael Leonard of San Diego Corporate Law. To schedule a consultation, email or call at (858) 483-9200.
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