A disclosure letter is usually required when you’re selling a business under a share or asset purchase agreement (SPA/APA).
It clarifies any risks, exceptions, or liabilities that could impact the deal. By addressing these issues early, you can avoid legal claims further down the line and ensure a smoother transaction.
Who is responsible for the disclosure letter?
As the seller, you are responsible for preparing the disclosure letter with the help of your legal team.
The letter must be delivered to and reviewed by the buyer’s solicitors, who may request further details or clarification before finalising the agreement.
What should I include in a disclosure letter?
A disclosure letter typically consists of two main sections – general disclosures and specific disclosures.
General disclosures qualify the seller’s warranties by referencing publicly available information, due diligence materials, and standard searches. They usually include:
- Information in public registers (e.g., Companies House, Land Registry).
- Documents provided in a data room.
- Matters a reasonable buyer would discover through standard searches or enquiries.
These disclosures help limit the seller’s liability by ensuring the buyer cannot later claim ignorance of such information.
Specific disclosures identify particular issues that could affect the sale, such as:
- Ongoing or past legal disputes.
- Breaches or potential breaches of supplier or customer contracts.
- Intellectual property issues, such as pending claims or disputes.
- Outstanding tax liabilities or regulatory investigations.
If you need to disclose any material issues, they should be clearly and accurately recorded to minimise confusion and reduce the buyer’s ability to bring a claim against you.
For example:
“The Company is currently engaged in a contractual dispute with XYZ Ltd regarding outstanding payments. The matter is scheduled for mediation next quarter.”
This statement outlines the issue, the parties involved, and the expected timeline for resolution.
Full and accurate disclosure allows the buyer to conduct further due diligence and assess whether the investment meets their expectations.
What happens if I fail to disclose?
If you fail to or inadequately disclose known issues, the buyer could have grounds to claim for a breach of warranty.
This could result in the seller being liable for damages, a reduction in the purchase prices or the buyer seeking to cancel the transaction.
To protect yourself, ensure all relevant matters are adequately disclosed.
Do you need assistance drafting your disclosure letter? Contact Matthew Johnson or Jonathan Hol today.