Disclosure in business acquisitions: why is it important?

If you have previously been involved in a business sale or acquisition you may be aware that disclosure is an important stage of any such transaction. Disclosure may refer to (i) documents disclosed by the seller during the due diligence process to be inspected by the buyer, or (ii) disclosure made within the disclosure letter, which is a key document in any private acquisition for the mitigation of liability on the part of the Seller(s).

This blog will discuss the latter disclosure; if you require any further information about the due diligence process and its importance from a buyer’s perspective, please refer to our previous blog here.

What is disclosure?

Disclosure is a mechanism which protects the seller from potential liability by informing the buyer of any irregularities in the business being sold that may have occurred post-due diligence, as part of the due diligence or even prior to this. Disclosure may also be useful for a buyer as it encourages the seller to flush out as much information as possible about the business which in turn offers the buyer certainty of what it is actually acquiring and if there are any major issues at a relatively early stage.

How does it work?

The seller will have to provide certain warranties (i.e. statements of fact) to the buyer about the business being sold as part of the main sale and purchase agreement. If any of these warranties/statements turn out to be untrue, the buyer may have a claim against the seller for breach of warranty/contract if it suffers loss as a result. To avoid such liability, the seller should always disclose against the warranties that it knows may be untrue as such disclosures ensure the warranties are qualified which prevents the buyer from bringing a claim for the same.

The disclosure against warranties is contained within a disclosure letter which is formed of two parts – general disclosure and specific disclosures.

General disclosures ensure that the buyer cannot bring a claim against the seller for matters that appear to be public record/domain or matters which have already been disclosed to the buyer directly. General disclosure may include, but is not limited to:

• searches at public offices: such as the Land Registry, Companies House, or Intellectual Property Office;
• correspondence between the parties and their solicitors (except any correspondence which may protected by legal privilege);
• information that is already in the public domain: newspapers, internet etc.

The buyer should seek to limit general disclosure where possible and ensure that it has the opportunity to inspect any of the documents that are disclosed, including registry searches, correspondence etc. conversely, a Seller will want general disclosures to be as wide as possible to give more protection.

Specific disclosures make direct reference to the warranties in the sale and purchase agreement and refers to matters which, if not disclosed, may constitute a breach of those warranties. Specific disclosure will therefore vary from case to case depending on the facts of each sale/acquisition and the warranties that are given by the seller. They must also adhere to the standard of ‘disclosed’ as defined within the main sale and purchase agreement before they will be sufficient as a specific disclosure.

Why is it important?

Full and proper disclosure is in the interest of both seller and buyer.

The Corporate & Commercial Department can guide you through the transaction as well as assist with preparing any relevant documents. Should you require any further information or assistance please do not hesitate to get in touch – call 01206 700113 or email [email protected].