Disclosure Letter
A disclosure letter is the seller's list of everything it knows that would make a warranty in the sale agreement untrue — the litigation, the customer that has given notice, the regulator's open enquiry — delivered at signing so that the buyer cannot later claim for what it was told. It is the seller's protection against the warranties, and the document a buyer's lawyers read most carefully in the last week before signing.
- Also known as
- Disclosure schedule, Disclosures, Letter of disclosure
- Used at
- signing of a share or asset purchase, alongside the warranties; updated at completion if the two are split
- Binding
- yes — a matter fairly disclosed cannot be the subject of a warranty claim; what "fairly" means is defined in the agreement and fought over
- Typical structure
- general disclosures (public registers, the accounts, the data room, sometimes everything a search would have found) and specific disclosures against each warranty by number
- Typical standard
- "fair disclosure with sufficient detail to identify the nature and scope of the matter" — a reference to a document is not enough if the problem is buried in it
- Parties
- the seller and its lawyers, who write it; the buyer and its lawyers, who negotiate what counts as disclosed; the insurer, if warranty insurance is being placed, who excludes disclosed matters from cover
How a disclosure letter works in practice
The seller has been asked to warrant that the business is in a certain state. Where it is not, the seller has a choice: refuse the warranty, negotiate it narrower, or give it and disclose the exception. Disclosure is the usual answer, because it lets the seller give a broad warranty while carving out what it knows. The letter therefore goes warranty by warranty: against the litigation warranty, the three claims in progress; against the material contracts warranty, the customer that served notice last month; against the compliance warranty, the regulator's letter of 3 May and the remediation plan.
The fight is over the general disclosures. Sellers want the whole data room deemed disclosed, so that anything in its ten thousand documents is off the table; buyers want disclosure to mean a specific statement of a specific matter, so that a problem mentioned on page 40 of a board pack is not a defence. The agreement's definition of fair disclosure settles it, and the letter is negotiated up to the hour of signing as the seller's lawyers add what the management team remembered.
The letter's other reader is the warranty insurer: what is disclosed is a known risk, and known risks are excluded from the policy, so the seller's incentive to disclose everything and the buyer's incentive to keep the policy broad pull in opposite directions during the final week.
Example
A fintech seller warrants that the company has no open regulatory matters. Its disclosure letter, against that warranty, states: "On 3 May the FCA requested information on the firm's transaction monitoring thresholds; the firm responded on 24 May (data room 7.3.12) and has received no further correspondence." Eight months after completion the FCA opens an enforcement investigation into the same thresholds and the buyer spends £600,000 on remediation and legal costs. The seller relies on the disclosure; the buyer argues that a request for information did not disclose that the thresholds were non-compliant. The court reads the agreement's definition — fair disclosure of the nature and scope of the matter — and finds the disclosure identified the matter but not its scope: the seller's compliance team had known since April that the thresholds were below the FCA's expectations, and a memo saying so was in the data room but not referenced. The buyer recovers under the warranty. A specific indemnity, or a disclosure that said what the firm knew, would have saved both sides the litigation.
Common mistakes
- Disclosing a document instead of the fact it contains. - General disclosure of the entire data room, accepted by a buyer who has not read it. - Management not asked what they know until the night before signing, so the letter is written from the data room rather than from knowledge. - Failing to update the letter at completion when the warranties are repeated. - Treating disclosure as a defence against an indemnity, which it is not.