Disclosure Letters: The Importance of Disclosure in Corporate Transactions

In our recent article on due diligence, we explored how buyers/investors assess risk before committing to an acquisition or investment. Another key step in the transactional process, the disclosure letter, builds upon that premise. While due diligence uncovers information about a target business, the disclosure letter formally records what the seller/investees have revealed and, importantly, qualifies the warranties given in a sale or subscription agreement.

Warranties are contractual statements made by the seller or, in the context of an investment, the Company itself and potentially its founders, about the company or business being sold/invested into. If a warranty later proves to be untrue, and the buyer/investor suffers loss as a result, they may have a contractual claim for breach of warranty - unless the matter was properly disclosed in the disclosure letter.

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What Is a Disclosure Letter?

A disclosure letter is delivered by the warrantors to the buyer/investor as part of the suite of transactional documentation. Namely, it accompanies the purchase or, on an investment, subscription agreement and provides details of any exceptions to the warranties that are given.

Typically, the disclosure letter is split into two parts:

1. General disclosures, which apply to all warranties and cover information that should be deemed known to the buyer. This, subject to agreement between the parties and the context of the transaction, may include matters appearing in public records or disclosed during the due diligence process.
2. Specific disclosures, which highlight particular facts or circumstances that would otherwise breach the warranties if not expressly mentioned. They are bespoke in nature and apply to a specific warranty in the main purchase/investment agreement. The specifics will vary based on not only the operation of the business in question, but the drafting of the warranties themselves. There may for example be a warranty that the Company has no outstanding tax liabilities owed to a governing body, but in fact there may be an ongoing R&D claim with HMRC – that will need to be disclosed in the disclosure letter.

In essence, the disclosure letter acts as a bridge between the factual position of the business and the contractual promises being made about it.

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How Does It Protect You?

The importance of a disclosure letter lies in its protective function. For the seller/investee, it is the key mechanism to avoid future warranty claims - by ensuring that any potential issue has been clearly brought to the buyer’s attention. Once properly disclosed, that matter cannot later be relied on by the buyer as a breach of warranty.

Conversely, for the buyer, the disclosure letter provides an opportunity to test the accuracy and completeness of the information it has received during due diligence which might prompt further negotiation of the terms of a transaction.

Ultimately, the disclosure letter ensures a fairer balance of risk and reduces the likelihood of post-completion disputes.

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Practical Considerations and the Role of Culbert Ellis

Because the disclosure letter carries such weight, precision is critical. Sellers/investees should take care that disclosures are clear, specific, and supported by documentary evidence. Vague or incomplete disclosures risk being challenged later.

At Culbert Ellis, our corporate team regularly advises both buy and sell side on disclosure exercises within the remit of a wide range of transactions. We help clients prepare clear, defensible disclosures, negotiate warranty coverage to reflect correct commercial realities, and ensure that all parties enter completion with clarity.

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How To Get In Contact

We specialise in corporate transactions, acquisitions and investments. If you require assistance with corporate law, please contact Joe Moulding at Joe.Moulding@culbertellis.com or call +44 (0)203 987 0222.

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