Disclosure letters: the importance of being properly advised - Kuits Solicitors Manchester
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Disclosure letters: the importance of being properly advised

Disclosure letters: the importance of being properly advised

1st September 2021 - Published by Kuits Corporate team

What is the disclosure letter and why is it so important? 

The sale and purchase agreement (SPA) will contain warranties which are contractual statements made by the seller about the business being sold. If any of these statements are not correct, i.e. the warranty is breached, the buyer will have a claim against the seller for compensation.  

Usually under the SPA, the seller will not be liable for a breach of warranty if the matter giving rise to the breach was disclosed in the disclosure letter.  

An example of a warranty is that the business is not involved in any litigation. If the business is involved in litigation and the seller adequately discloses this in the disclosure letter, the buyer cannot bring a warranty claim against the seller in respect of the disclosed litigation.   

The disclosure letter is agreed between the parties ahead of completion and signed by them as one of the transaction documents. It is of fundamental importance to both parties. It protects sellers from warranty claims. Through disclosure, buyers obtain information about the business before completion to compliment the due diligence process and can seek to address concerns before completing the purchase by, for example: requesting issues are put right, including indemnities in the SPA, which the buyer will still be able to claim under even though the matter has been disclosed, requesting an adjustment to the price or walking away if something unsurmountable comes to light. 

Some common pitfalls in preparing the disclosure letter and their consequences 

  1. Not providing enough detail: sellers will need to ensure disclosures are sufficient to protect from a claim for breach of warranty. What constitutes sufficient disclosure is the subject of lots of case law, and SPAs also usually specify how “disclosure” is to be defined. A seller should always approach disclosure by giving full, accurate and clear explanations to enable the buyer to have a complete understanding of the issue.  
  1. General disclosures: sellers will seek to fix the buyer with knowledge of matters in public records and/or which the buyer ought to be aware of, such as accounts, property searches or correspondence between the parties or their advisers. Buyers should ensure “generally disclosed” items are limited to information clearly identifiable, such as correspondence that is attached to the disclosure bundle and searches it has undertaken, so it is not prevented from claiming for breach of warranty in respect of items it has not reviewed. 
  1. Overlooking documents: buyers should ensure that all documents in the bundle of documents attached to the disclosure letter have been reviewed by them or their advisers, as the content of the disclosure bundle is typically deemed disclosed in its entirety.  
  1. Failing to ask for more information: it is better to understand and address an issue rather than go forward having unclear information, so buyers should ask for more information if needed. 
  1. Confidentiality: commercially sensitive information will be provided during disclosure. The seller should have an adequate confidentiality agreement in place with the buyer.  
  1. Losing privilege: communications between lawyer and client to get or give legal advice carry legal professional privilege and are confidential. Delivering disclosure documents to the buyer could cause such privilege to be lost, meaning it could be required to be produced during and could prejudice the seller or business in a dispute.  
  1. Seller doesn’t want to disclose: a seller may prefer to withhold information and run the risk of a breach of warranty claim rather than derail the transaction. However, there are serious potential consequences of not disclosing something, such as:  
  • it is a criminal offence, carrying an unlimited fine and/or seven years’ imprisonment, to dishonestly conceal material information or knowingly or recklessly make false or misleading statements to induce another party to enter into the transaction;   
  • withholding information usually causes the limitations on a seller’s liability contained in the SPA to cease to apply, such as any caps on liability;  
  • other claims against a seller, such as for deceit or misrepresentation; and   
  • the seller could have committed fraud if a warranty is given which is false (and not corrected by disclosure) and the seller does so dishonestly with the intention of making a gain or causing the buyer loss. There is a maximum penalty of ten years’ imprisonment, and it can also attract a fine. 

The importance of being properly advised 

A properly drafted and negotiated disclosure letter can avoid time and costs downstream on both sides. Bearing in mind the various potential pitfalls, it makes commercial sense to obtain legal advice before negotiating or agreeing to one.   

Get in touch with a Corporate Solicitor in Manchester 

We can deal with the legal aspects of a share or business sale or purchase, including the negotiation of the disclosure letter and guiding you through the disclosure process.  

Please contact Corporate Solicitor Rhian Gwilt on 0161 838 8164 or email rhiangwilt@kuits.com for assistance with your share or business sale or purchase.   

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