Disclosure Letter: Business Purchase
Disclosure Letter for use in conjunction with a business purchase transaction
What is a Disclosure Letter?
A variety of, usually corporate, transactions involve one party giving warranties to another party relating to the company which is the subject of the transaction, including its business, financial performance and prospects, assets, contracts, rights and liabilities. A breach of the warranties may result in a legal claim against the party which has given the warranties (the warrantor) for damages for breach of contract.
The warrantor may wish to disclose specific events or circumstances against certain warranties. The disclosure of these matters is intended to protect the warrantor against what might otherwise give rise to a claim for a breach of the particular warranties. Rather than amending or qualifying the warranties themselves for these specific events and circumstances, the disclosures against specific warranties are set out in a separate letter from (and prepared by) the warrantor to the other party, known as a Disclosure Letter.
As an example in the context of a business purchase, the agreement may include a warranty that the seller, as the warrantor, has complied with all customer contracts in the conduct of its business. The seller may be aware of an ongoing claim from a third party that the seller has failed to comply with a particular contract. The seller would want to set out a narrative of the circumstances relating to this matter, together with supporting documents, in the Disclosure Letter. Provided that the disclosure satisfies the defined requirement in the agreement of what constitutes a fair disclosure for these purposes, the disclosure of this potential breach of contract should protect the seller from a claim under the agreement for breach of this warranty in relation to such non-compliance.
The warranties may also expressly require that certain facts or documents are set out in the Disclosure Letter. As an example, there may be a warranty that the Disclosure Letter sets out details and copies of all employment contracts for the employees of the seller who will transfer to the buyer as part of the business purchase. The seller should include details and copies of such contracts in the Disclosure Letter, failing which the warrantor may be subject to a claim for breach of warranty.
Once a particular matter or document has been disclosed, the party which has the benefit of the warranties in the agreement may choose either:
- to accept the disclosure, with the result that there will be no legal recourse available to that party should the disclosed matter result in an actual liability or loss
- to require that the disclosed matter is covered by a specific indemnity in the agreement, with the result that the party may be able to recover any subsequent liability or loss notwithstanding the disclosure
- to renegotiate the price for the transaction or hold back some of the consideration until the risk of a liability of loss has expired in the future
- to withdraw from the transaction
About this document
This document is a template disclosure letter for use in a business purchase transaction.
- introductory paragraphs, linking the disclosure letter and disclosures to the warranties in the business purchase agreement
- general disclosures of certain matters, including matters available from a company search on the seller and the contents of the documents scheduled to the disclosure letter
- table for inclusion of specific disclosures against particular warranties in the share purchase
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