According to the dictionary, ‘disclosure’ is defined as ‘the action of making new or secret information known’. In a corporate transaction this is partly right, but the concept of disclosure has a much broader meaning.
What is disclosure?
A share or business purchase agreement will contain a series of warranties. These are statements of fact about the target company or business. But what if these are untrue? The Seller can make a disclosure setting out the reasons why it is untrue, and qualify the warranty.
|Warranty||No employees have brought any claims against the Target.|
|Disclosure||On 22 August 2016 X brought a claim against the Target for unfair dismissal. The claim is for £Y. The notice of the claim is contained at document A. A summary of the legal advice received by the Target in respect of the claim is contained at document B. A summary of the facts behind the claim by the Target’s HR director following an internal investigation is contained at document C.|
What is the purpose of disclosure?
|Seller’s perspective||Protection: provided the matter is properly disclosed (which we’ll come to below), the buyer cannot bring a breach of warranty claim even though the warranty is untrue.|
|Buyer’s perspective||Information and adjustment: disclosure helps flush out information about the target, and disclosures which go to the value of the target may be dealt with by renegotiating the price or seeking enhanced protection by indemnity.|
The sale agreement will set out the standard required (and this is open to negotiation), but typically the seller needs to give full and sufficient details to enable the buyer to understand the issue and assess its impact.
So, not just any disclosure will do. Let’s consider some alternatives to the disclosure set out above.
|Disclosure 1||“A claim has been brought by one employee”||This is clearly insufficient as the seller has no detail. Is the claim financially significant in the context of the target? Does the claim reveal a flaw in the company’s HR policies? Will it have reputational consequences? What are the merits of the claim?|
|Disclosure 2||“The Target has received notice of one claim for £Y. The claim is for unfair dismissal but the seller considers it to be spurious”||This is better, but may still be insufficient. The sellers know the quantum and (at a high level) the basis of the claim. However there is no detail to enable an assessment of the claim to be carried out by the buyer. What if the seller’s view of the merits turns out to be wrong or unreasonable?|
Top tips for a seller
- Go the extra mile to give as much detail as possible in your disclosures. Though the process may seem tedious, detailed disclosures are the best protection against a breach of warranty claim.
- Ask everyone that you need to. The sale agreement will set out the individuals whose knowledge the seller is deemed to have. This may include senior staff members or even third party advisors.
- If in doubt, include information. The buyer’s solicitor will try to limit specific disclosures to only those matters which directly qualify the warranties. The wording is open to negotiation. However having too much information is a much better starting point than too little and the broader the agreed wording, the better for the seller.