Contract Variation

When do I use this document?

• as the disclosure letter to be delivered at closing of an investment in a private limited company
• for general and specific disclosures to be given by the persons acting as warrantors under the investment or subscription agreement

What are the key features?

• in letter form from the warrantor(s) to the investor(s)
• introductory paragraphs, linking the disclosure letter and disclosures to the warranties in the investment or subscription agreement
• general disclosures of certain matters, including:
  • the contents of the disclosure documents, which are usually the documents provided to the investor(s) during due diligence and to be set out in an index to the disclosure letter
  • in relation to commercial property, matters available from public searches
  • matters which would be available from:
    • a Companies House search of the target company
    • a winding-up search on the target company
    • a search of the UK Intellectual Property Office
  • matters disclosed in correspondence between the parties and their advisers
• specific disclosures against the warranties to be included in table form

What else do I need to know?

Corporate transactions usually involve one party (the warrantor) providing warranties to another party concerning the company and its business, financial performance, prospects, assets, contracts, rights and liabilities. A breach of the warranties may result in a legal claim against the warrantor for damages for breach of contract.

The warrantor may wish to disclose specific events or circumstances as exceptions to certain warranties. The disclosure of these matters is intended to shield warrantor against a potential claim for breach of the particular warranties.  Instead of amending or qualifying the warranties themselves, the disclosures against specific warranties are set out in a separate letter prepared by the warrantor, known as a “Disclosure Letter”.

As an example in an investment transaction, the agreement may include a warranty that the target company has complied with all legal requirements in its business conduct.   If the founders, acting as warrantors, are aware of a failure by the company to comply with a specific legal requirement, they would disclose this as an exception to the warranty.  This is done by setting out a narrative of the circumstances of the breach, along with supporting documents, in the Disclosure Letter.  If the disclosure satisfies the defined requirement of “fair disclosure” in the investment agreement, it should shield the founders from a claim under the investment agreement for breach of this warranty regarding the disclosed non-compliance.

The warranties may explicitly require that certain facts or documents be included in the Disclosure Letter.  For instance, a warranty might require that the Disclosure Letter contains details and copies of all material contracts entered into by the target company.  Failure to disclose a material contract may result in a claim against the warrantors for breach of warranty if the omission causes loss to the investor(s).

Upon receiving disclosures during transaction negotiations and discussions on the draft Disclosure Letter, the investor(s) have several options:

• to accept the disclosure, with the result that the investor(s) have no legal recourse if the disclosed matter leads to an actual liability or loss
• to request specific indemnity cover from the warrantors in the investment agreement to cover the disclosed matter, under which the investor(s) may be able to recover any resulting liability or loss notwithstanding the disclosure
• to renegotiate the transaction terms, such as adjusting the company’s pre-investment value, or hold back some investment until the risk of a liability or loss has expired in the future
• to withdraw from the transaction entirely

What other documents are available?

For a disclosure letter for use in a share purchase transaction, see

• Disclosure Letter – share purchase

For a disclosure letter for use in a business purchase transaction, see

• Disclosure Letter – business purchase