The Importance of the Disclosure Letter

On completion of the due diligence exercise, the buyer will likely insist on warranties and/or indemnities from the seller. Those warranties and indemnities will address any issues that the buyer discovers during the due diligence exercise, e.g. warrant that the business does not control or transfer personal data if the buyer discovers the target is not registered with the ICO.

A seller will then have to fully fairly and accurately disclose against any warranties that the buyer requests. For example, the buyer may request that the seller warrants that “there have never been any employment claims against the target company”. The seller then discloses against this warranty in the disclosure letter, similar to “the target has had a claim from one employee for constructive dismissal in 2010, which was dismissed by an employment tribunal”. The seller would then disclose the tribunal’s judgment as an annexed document.

Therefore, the disclosure letter is extremely important as it will qualify any warranties that the seller is required to make. It can help protect the seller in the event a claim is made by the buyer against the seller for breach of warranty. A seller should disclose as much information as possible, so as to flush out any warranties.