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Disclosure Letter
Disclosure letter for use in a business purchase transaction, disclosing to the buyer general and specific matters against the warranties in the Business Purchase Agreement.
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What is a Disclosure Letter?
Business purchase transactions usually involve the seller giving warranties to the buyer relating to the business and assets which are the subject of the transaction. A breach of the warranties may result in a legal claim against the seller for damages for breach of contract.
The seller may wish to disclose specific events or circumstances as exceptions to certain warranties. The disclosure of these matters is intended to protect the seller 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 seller, known as a “Disclosure Letter”.
As an example in a business purchase transaction, the BPA may include a warranty that the seller has complied with all customer contracts in the conduct of its business. If the seller is aware of a breach of a customer contract, it 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 BPA, it should protect the seller from a claim under the BPA for breach of this warranty regarding the disclosed customer contract breach.
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 relating to the business. Failure to disclose a material contract may result in a claim against the seller for breach of warranty if the omission causes loss to the buyer.
Upon receiving disclosures during transaction negotiations and discussions on the draft Disclosure Letter, the buyer has several options:
- to accept the disclosure, with the result that the buyer has no legal recourse if the disclosed matter leads to an actual liability or loss
- to request specific indemnity cover from the seller in the BPA to cover the disclosed matter, under which the buyer may be able to recover any resulting liability or loss notwithstanding the disclosure
- to renegotiate the transaction terms, such as adjusting the purchase price or holding back some of the consideration until the risk of a liability or loss has expired in the future
- to withdraw from the transaction entirely
