Disclosure Letter

When selling a business or assets, the seller will usually be required to provide certain assurances to the purchaser regarding the target business or assets. These assurances are generally referred to as warranties and set out detailed information about the target business or assets.

If any of these warranties turn out to be untrue, inaccurate or misleading and, as a result the business or assets purchased by the buyer is worth less than he paid for it, the seller will be liable to the buyer for the difference.

The problem with warranties, however, is that they tend to present a perfect picture of the target business. Of course, no business is ever perfect. There will always be some late debtors, some problems with employees, and so on. As such, the seller would be at risk if he gave these perfect set of warranties to the buyer.

The way the seller protects itself from this risk is by means of ‘making disclosures’ against the warranties. If the seller discloses any details that make a warranty untrue, then the buyer will lose the right to take a warranty claim against the seller in relation to the matter disclosed even where the matter disclosed has resulted in a devaluation of the business or assets purchased.

This disclosure letter is a standard first draft prepared by or on behalf of a seller. It should be sent from the seller (and placed on its headed notepaper if any) and addressed to the buyer. The letter is usually divided into two parts, “general disclosures” and “specific disclosures”, and will have copies of the documentation being disclosed (known as the “disclosure bundle”) attached to it. The general disclosures will usually be much shorter than the specific disclosures, but can consume more negotiating time.

The general disclosures included should need very little amendment. In order to populate the section for specific disclosures, you will have to read through the warranties in the business purchase agreement or asset purchase agreement and, where appropriate, make a disclosure against each warranty setting out any facts or circumstances that render or could render that warranty untrue.

More specifically, each disclosure will set out, by reference to the number of the warranty, why that warranty is not entirely true or accurate. Where necessary, the seller will also make reference to a document in support of a disclosure. Where such a reference is made, the document should be listed in the list of documents attached to the disclosure letter and should be physically added to the documents to be disclosed by the seller and given to the buyer on completion of the business or asset purchase.

As both the seller and the buyer will be signing the disclosure letter, two versions of the letter should be signed by both parties. In addition, each party should, on completion, have a full copy of all documents which have been included in the disclosure bundle. This should remove any subsequent ambiguity in relation to whether a particular document has been disclosed or not.

The disclosure letter should be signed and dated at the same time as the business purchase agreement or asset purchase agreement.

Sellers should take time and care in formulating a disclosure letter. For more information on disclosure letters, visit the Learning Centre.

Instructions on completing the disclosure letter are contained in the notes that accompany the letter. This letter comes in downloadable format.

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