Disclosure Letter (Asset Sales)
This Disclosure Letter (Asset Sales) is issued by the Seller or the Seller’s Solicitors prior to the completion of the sale of its assets and undertaking (also known as the business) to the Buyer. It is designed to protect the Seller from claims by the Buyer under the warranties included in the assets sale and purchase agreement.
The Disclosure Letter will be closely linked to the warranties. 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 he would have been had the warranty been true. Usually, this will be the difference between the actual market value of the business and the value it would be if the warranty were true.
In many transactions, the Seller will know that one or more of the standard warranties are untrue. The Disclosure Letter allows the Seller to make a disclosure against the warranty 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 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.
The Disclosure Letter should be printed on the Seller’s headed paper. This Disclosure Letter includes several introductory paragraphs making it clear that the matters in the letter are made for the purposes of the warranties and that specific disclosures will qualify all the other relevant warranties.
This Disclosure Letter (Asset Sales) is divided into two sections – General Disclosures and Specific Disclosures. The General Disclosures are typical of most share sales. In paragraph 1 of the General Disclosures, a disclosure is made of the most recent accounts. A Buyer should be aware that the words “provided for” will include a general provision for bad or doubtful debts (if one is given in the accounts) and the Buyer should ensure that they have enough information to appreciate what this entails.
Paragraph 2 makes a general disclosure of the Management Accounts. The comments made regarding the statutory accounts also apply. If the Seller is not providing Management Accounts, then this paragraph can be deleted.
Paragraph 3 makes a general disclosure of information filed at Companies House. If the Seller has been established for many years, then there may be a lot of information (some of which may be on microfiche) and it will be impractical for the Buyer to inspect all the information. The Buyer may therefore allow only information filed within a specified period to be disclosed.
Paragraph 5 makes a general disclosure of all information to be obtained from either a certificate of title or the title deeds and a physical inspection (delete as appropriate). If real property is not being sold, then this paragraph may be deleted.
The general disclosure in paragraph 6 can be deleted if the Seller has no patents or registered trade marks. The Buyer should be aware that a detailed search may be time consuming and expensive.
Paragraphs 7 and 8 can be deleted if they do not apply.
The Specific Disclosures will include not only matter that would be a breach of warranty were they not disclosed but also information which the warranties request to be included e.g. “The Disclosure Letter sets out full particulars of all policies of insurance maintained by or on behalf of the Seller in relation to the Business, all of which are in full force and effect and are not void or voidable.” The number of the relevant warranty against which the specific disclosure is being made should be included in the left column.
The Disclosure Letter will usually be accompanied by a Disclosure Bundle which includes copies of documents referred to in the specific disclosures and disclosed to the Buyer and Buyer’s Solicitors during the due diligence process.
The law surrounding this area is complex. The contents of this guidance note do not constitute legal advice and you should seek the help of a solicitor if you are not legally qualified or are unsure of any aspect of this Disclosure Letter or the procedures connected with it.
Once you have purchased access to the appropriate document folder click on the “Download Document” button below. You will be asked what you want to do with the file. It is recommended that you save the document to a location of your choice prior to viewing.