Disclosure Letter (Business/Asset Purchase)
This Disclosure Letter is issued by a Seller (or a Seller’s Solicitors) prior to the completion of the sale of its assets or business to a Buyer. It is designed to protect the Seller from future claims by the Buyer under the warranties included in the business purchase agreement (BPA). It is also a means of the Seller providing information to the Buyer that may be of particular interest to them about the business or assets being sold.
The Disclosure Letter will be closely linked to the warranties as set out in the BPA. Warranties are a series of statements of fact (and sometimes statements of opinion) which the Seller warrants to be true. If a warranty proves to be untrue then the Buyer has a potential claim for damages. The damages will be whatever is required to place the Buyer in the position it would have been had the warranty been true. Usually, this will be the difference between the actual market value of the business or assets and the value they would have been had the warranty been true.
The Disclosure Letter allows the Seller to make disclosure against the warranties and thus avoid a potential claim by the Buyer for a breach of warranty. The Disclosure Letter will also be useful to the Buyer, alerting it to any “skeletons in the closet” that may not have been revealed during the due diligence process. Such disclosures may prompt the Buyer to renegotiate the purchase price or require an indemnity from the Seller.
This letter is divided into three parts, an introduction, general disclosures, and specific disclosure. The introduction clarifies the purpose of the letter and refers to the applicable business purchase agreement.
General disclosures are standard generic disclosures that could apply to any transaction, for example the Seller will disclose all information contained in any documents filed with certain public registries, e.g. Companies House or the Intellectual Property Office two days prior to completion. The Seller is therefore making it the responsibility of the Buyer to search various public registers and the Buyer is deemed to have knowledge of all matters that would have been disclosed had they conducted such searches.
Finally, the Seller provides specific disclosures that are tailored to the relevant transaction. These will reference specific warranties in the BPA.
This letter is in open format. Either enter the requisite details in the highlighted fields or adjust the wording to suit your purposes.
Optional phrases / clauses are enclosed in square brackets. These should be read carefully and selected so as to be compatible with one another. Unused options should be removed from the document.