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Disclosure Letters


The disclosure letter is a key document in relation to any business sale (be that a share purchase or a business purchase - click here to see article "Share v. Asset Sale").  It usually takes the form of a letter addressed to the buyer from the seller. It serves two main purposes. The first is as a source of further specific information for the buyer on the target business (in addition to information established during the due diligence process - click here to see article "Due Diligence"). Secondly it serves to minimise the seller's risk of a claim being brought against it for a breach of warranty.

The disclosure letter is the seller's opportunity to disclose to the buyer any matters which qualify or contradict the warranties contained in the sale and purchase agreement. The seller's potential liability for a breach of warranty is reduced to the extent that a matter is fairly disclosed. Precisely what "fairly disclosed" means is usually defined in the sale and purchase agreement. The scope of this definition has been the subject of several recent cases.

The form and format of disclosure letters has evolved over time and has become fairly standard. The letter usually includes a number of "general disclosures" and also a series of "specific disclosures". The letter also normally has attached to it an indexed "disclosure bundle" containing the various documentation cross-referred to in the letter itself.

The general disclosures cover matters which appear on public records which a buyer ought to have checked with respect to the target, including, for example, property searches and a search of information held by Companies House. The specific disclosures cross refer to the warranties in the sale and purchase agreement. Where the seller knows that a warranty in the sale and purchase agreement is inaccurate then the seller should make a specific disclosure to the buyer to explain why that is the case. This explanation is often supported by documentary evidence such as copy correspondence or copy contracts. This documentation is collated and indexed and forms the disclosure bundle accompanying the letter.

The usual disclosure process we undertake when preparing a disclosure letter is to meet with the seller and run through each of the warranties contained in the sale and purchase agreement with a view to prompting specific disclosures. This can be a fairly lengthy process, but, because fair disclosures reduce the risk of a warranty claim, a worthwhile one nonetheless.

As well as drafting disclosure letters on behalf of sellers, we also review and negotiate disclosure letters on behalf of buyers.

For further information in relation to this article, please contact Daniel McCormack.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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