Question: What is a Disclosure Letter and When is it Used?Answer:
A disclosure letter is a key document in many sale and purchase of business transactions, including asset and share sales. It provides the buyer with specific information about the business they will be acquiring to assist them with their due diligence.
Purposes of a Disclosure Letter
A disclosure letter serves two main purposes.
1. Information Provision
Firstly, it provides specific information to the purchaser that may be of particular interest to them, about a business or asset for sale. This information complements information already provided:
- in the data room of the transaction; or
- to the purchaser as part of the information exchange between the parties.
A disclosure letter can also update the purchaser with any changes to documents or information that have already been provided to the purchaser.
2. Limiting of Warranties
A disclosure letter also serves a very important purpose in minimising the seller’s liability. It is often used to limit any warranties that the seller provides in the sale agreement. Accordingly, the disclosure letter should set out any information about the sale asset that is inconsistent with warranties in the sale agreement. This means that if a seller’s warranty is incorrect or untrue, the purchaser will not be able to make a claim against the seller.
Form of a Disclosure Letter
A disclosure letter typically takes the form of a letter comprising three main parts:
- general disclosures; and
- specific disclosures.
Firstly, the introduction clarifies the purpose of the letter and refers to the applicable sale agreement.
2. General Disclosures
These are usually standard disclosures that could apply to any transactions. An example of one such disclosure is that the purchaser is deemed to have knowledge of all matters that would have been disclosed to them had they conducted searches of public records (like the Personal Property Securities Register).
The parties’ lawyers will generally ensure that matters included in the general disclosures section do not overlap with matters already included in the sale agreement, to prevent inconsistency.
Note: It is in the seller’s best interests to make these general disclosures as wide as possible.
3. Specific Disclosures
Finally, the selling party usually provides specific disclosures that are tailored to the relevant transaction. They may give these disclosures in reference to specific warranties in the sale agreement.
Sometimes, a seller may want to refer to certain documents when making a specific disclosure. They can do this by annexing those documents, referred to as the disclosure bundle, to the disclosure letter.
Once both parties finalise the form and content of the disclosure letter/bundle, they will attach it to the sale agreement. The seller must then sign the letter and provide it to the buyer at completion. The buyer must also sign to acknowledge receipt of the letter and its disclosures.