Disclosure Letter

Sale agreements include warranties about the business, such as "there are no disputes", and the seller discloses facts that make warranties untrue, such as an ongoing dispute. The disclosure letter works alongside the share purchase agreement.

A warranty is a contractual statement about the company, for example that there is no current litigation, and if the seller knows of a claim, the disclosure should identify the matter and its scope rather than hope that a buyer discovers it in a document folder. The agreement decides what counts as effective disclosure and what liability remains, so local law and the signed agreement, not a generic glossary rule, decide a particular claim.

General disclosures may cover public records, accounts or an agreed collection of data-room documents, while specific disclosures identify exceptions against particular warranties. Sellers usually prepare the letter with their lawyers and people who know the contracts, employees, tax affairs and disputes, and a useful schedule points to the relevant warranty, explains the facts, and identifies evidence the buyer can inspect.

Do not paste a vague list of document names and assume the buyer can infer the issue. Fair disclosure is often negotiated to mean enough detail for the buyer to identify the nature and scope of a matter.

The UK law-firm discussion by Bird & Bird gives examples where burying information in complex records did not meet the agreed standard, and Norton Rose Fulbright describes general and specific disclosures in share purchases, with the qualification that its article outlines Luxembourg practice. The buyer should treat each disclosure as a decision point, not simply a legal appendix.

A pending lawsuit might lead to a price adjustment, escrow, insurance discussion, a specific indemnity or further diligence. An indemnity is a separate contractual promise about an identified risk, so disclosing the risk does not itself create that promise, and the parties should spell out what happens if the issue worsens between signing and completion.

Timing matters. The seller should start collecting exceptions as the warranties are negotiated, then recheck them before signing and, where required, completion, assigning someone to collect answers from finance, legal, HR and operations.

Use a version-controlled disclosure bundle so both sides know which document set was supplied and when, because late additions can lead to new questions or delay closing and a last-minute upload does not automatically cure an incomplete disclosure. For a simple fictional example, a warranty says all customer contracts are in force without disputes, and Palm Engineering knows that a major customer sent a written notice alleging missed milestones.

It should describe the notice, contract, amount at issue and current response, with the notice attached or referenced clearly, so the buyer can evaluate the commercial exposure, whereas saying only that all contracts are in the data room may not convey that specific risk. There is no universal numerical coverage score for a disclosure letter: counting 80 reviewed warranties out of 100 can measure internal review progress, but it cannot prove that disclosures are fair, and one omitted material dispute could matter more than dozens of routine checks, so replace the tempting percentage with a checklist of each warranty, responsible reviewer, known exception, supporting document and decision by both sides.