Disclosure Letter

A disclosure letter qualifies the warranties. Each warranty is read as true except for what the letter discloses against it. Suppose the sellers of a logistics company warrant that the company is not party to any litigation. A former employee has in fact brought a claim for unpaid bonus. The sellers describe the claim in the disclosure letter and attach the court papers. The warranty stands, with that claim carved out of it.

The effect is to move the risk of each disclosed matter from the seller to the buyer. That is why the letter is negotiated alongside the agreement and delivered at signing. A buyer who learns of a problem through a draft of the letter can still ask for a lower price or a specific promise of compensation, or walk away.

Not every market uses a separate letter. In some, the exceptions are written into schedules to the agreement. The function is the same.

General disclosures refer to whole sources of information. Specific disclosures set out individual facts against individual warranties.

A general disclosure might cover everything on public registers, or everything in the data room that the buyer's advisers could read. Sellers like general disclosures because they are wide. Buyers resist them for the same reason: a problem buried in thousands of documents has been made available, but it has not been pointed out. A specific disclosure is numbered against the warranty it qualifies and describes the matter itself, as in the bonus claim.

Whether a disclosure works depends on the standard the agreement sets. Many agreements say that a matter counts as disclosed only if it is described in enough detail for the buyer to understand what it is and how far it reaches. The exact test, and how a court applies it, is a question for the governing law.

The documents must be identifiable later because a warranty claim can turn on a single question: was this document disclosed? The letter usually refers to a bundle of documents, or to a data room, and treats their contents as disclosed. A dispute may arise years after signing. By then the data room may be closed, and a file may have been replaced with a later version.

The record has to answer three things. What was disclosed means the exact documents, in the versions that existed at signing. When means that they were available before the agreement was signed, since the first letter covers only what was in the bundle at that moment. To whom means which people on the buyer's side had access.

In practice the parties fix an index of the bundle, agree it, and keep an unchangeable copy of the documents with the signed letter. A qualified electronic time stamp on the copy helps with the date. Under Article 41(2) of the eIDAS Regulation, such a time stamp is presumed to show the correct date and time, and the data it is bound to is presumed to be intact.

In principle yes. Under the eIDAS Regulation an electronic signature cannot be refused only because it is electronic, though national rules on form stay in place. The point to check is whether the sale agreement must take a particular form, such as a notarial deed, under the law that applies to it. If so, ask whether that form extends to the disclosure letter.

A disclosure letter is usually signed by both sides. The seller signs to give it, and the buyer signs to acknowledge receipt. The acknowledgement matters, because it is the buyer's own confirmation of what it received on that date. A qualified electronic signature rests on a certificate issued after the provider verified the signer's identity (Article 24(1)), which helps if the letter is challenged.

A disclosure letter can be updated only if the agreement allows it. Where closing follows some time after signing, the warranties are often repeated at closing, and something may have changed in between. Some agreements let the seller deliver a second letter that discloses new events.

What a second letter achieves is a matter of negotiation. It may limit the seller's liability for the new matter. It may leave the buyer's claim intact and give the buyer a right to withdraw. Keep each letter with its own bundle and its own date, so that the two sets of disclosures can be told apart later.

A disclosure letter often contains a good deal of personal data. Disclosures about employment disputes, key employees or customer complaints name individuals, and the attached documents name more. The GDPR applies to that data whatever the sale agreement says. Article 5(1)(c) limits personal data to what the purpose requires. A disclosure usually needs the facts of a dispute. It rarely needs the person's home address or medical details, so those can be removed from the bundle before it is fixed.

The retention question follows. The letter and its bundle are kept for as long as a warranty claim can be brought, which the agreement and the governing law decide.