The disclosure process in a Sale of Shares / Business Agreement (the “Sale Agreement”) provides the seller the opportunity to disclose liabilities / potential liabilities to the purchaser which could avoid liability against a future claim for breach of warranty.
When entering into a Sale Agreement, it will often contain commercial warranties provided to the purchaser by the seller. Warranties are contractual statements of fact pertaining to the state of affairs of the company, its business and / or share capital. Should any of these warranties be proven untrue, the purchaser may have claim against the seller for breach of warranty.
A disclosure by the seller regarding a specific matter, provides protection against a potential breach of warranty claim relating to the same matter. Disclosures in relation to warranties are usually provided in the form of a Disclosure Letter in which the seller limits / qualifies the extent of certain of the warranties recorded in the Sale Agreement.
The intention of the disclosures provided in the Disclosure Letter is aimed at avoiding a breach of warranty by the seller, which breach would have existed had the disclosures not been made. Adequate disclosures protects a seller against possible claims for breach of warranty.
The Disclosure Letter is an important part of a transaction and should be drafted with due consideration to the practical effect of each and every warranty provided to the purchaser.