Did someone say ‘Disclosure’?
A disclosure letter is one of the most important documents in any M&A deal. But what exactly is it? What’s its purpose and what’s the seller’s obligations in relation to it?
We answer these questions below:
What is it?
A disclosure letter does what is says on the tin. It’s a letter from the seller to the buyer which sets out information abut the target company or business which is inconsistent with the warranties set out in the acquisition agreement. This is often accompanied by a disclosure bundle, which contains copies of various documents forming part of the disclosure being made by the seller.
Disclosures falls in one of the two categories: general disclosures and specific disclosures.
Disclosures that are defined as ‘general’ are matters that appear on publicly available registers such as Companies House or other public bodies which are therefore deemed to be disclosed to the buyer, whether or not the buyer has undertaken such search.
Buyers should already be aware of any general disclosures (through instruments such as; statutory books, accounts and correspondence) through the course of due diligence process, enquiries and searches prior to the agreement of any contract or sale
Specific disclosures are tailored to each particular transaction. Consequences of not providing disclosures in relation to warranties could result in the buyer bringing a claim of breach of said warranties.
A common example of this is as follows: there is a warranty the entity cannot take part in any litigation. If the entity had a claim against it, the seller must disclose this as a specific disclosure in the disclosure letter. This disclosure now means the buyer cannot claim a breach against the aforementioned warranty.
As the seller, it is important to disclose anything relevant in as much detail as possible. This will proactively limit any further liability.
Disclosures must be made in full for the buyer to understand the nature and scope of the matter being disclosed. If the disclosure lacks clarity and precision a court may rule that the disclosure is insufficient to preclude any claims of breach by the buyer.
A thorough disclosure letter will go through each warranty to consider if it’s true an accurate. Inaccuracies should be noted in full and supporting documentation should provide a basis for the disclosure to made against a warranty.
The seller should try to quantify the consequences of any disclosure and identity any and all warranties.