Saturday, 20 August 2016

SPA Series Part 11: Negotiating M&A Deals in Finland - On Disclosures and Disclosure Letters

As promised now we talk about disclosure letters, documents that are very critical in many respects. First, we must understand the relationship between disclosures and warranties. As we discussed in part 5 of this blog series in connection with the disclosure material, if an issue is described in the disclosure materials, then the purchaser cannot claim that there be a breach of warranty unless the parties have agreed on specific indemnity to cover a known risk. Although this document is critical, the parties often invest much more time and effort in the wording of the warranties than the disclosure letter. These kinds of “formal disclosure letters” are typically more common in the cross-border context, while, in domestic deals, the same end-result may be achieved by disclosure material definition and adjustments to the specific sections of the agreement (and this way avoiding the need to have a specific annex titled “disclosure schedule”).

Disclosure letters are typically drafted by the sellers and in UK models divided into three parts: general disclosures, specific disclosures and disclosed documents.

General disclosures refer to matters, e.g., in public registers and so forth, which are not necessarily included in the due diligence material otherwise BUT are still publicly available information. One has to bear in mind that even in cross-border deals there is no strict one-size fits all approach. In fact, for example, it might be conceivable to argue that general disclosures are actually not very typical in US deals while they are so in UK deals. Also, by way of comparison according to some study, in US deals there is more often a requirement that a disclosure must be cross-referenced to warranties (as opposed to automatically qualifying all warranties). 

Specific disclosures, on the other hand, refer to actual warranties and may be deemed to complement disclosures (if a risk is not for example otherwise sufficiently disclosed in the due diligence material). Or, alternatively, there are typically warranties that require additional information to be given and listed in the disclosure letter. 

Moreover, as a third element, this disclosure letter document contains a reference to or copies of the documentation bundle being disclosed. The answer to the question often asked from us, whether something should be included in the letter or not, is that if you are a seller and you wonder whether a risk, fact or matter is worth disclosing, just disclose it. Even if you consider that something is already disclosed, just verify it by disclosing it again.

There are, however, two schools, and some do not like the idea that one has to make specific disclosures in the first place but rather they want to ensure that disclosure material included in the data room generally is sufficiently clear. Of course, even in this case there might be listings of facts or matters (such as in connection with a specific warranty, “Except for the facts, matters and circumstances outlined in Annex X, the Sellers represent and warrant that there are no additional…”). From the enforcement perspective, one could argue that, say, if a risk is not disclosed in the disclosure schedule expressly as a specific disclosure but only in the disclosure material, in one of the many Board’s minutes in the data room, such risk is not “fairly disclosed” to the buyer (see also Part 5 of this blog series). So in other words when evaluating the seller’s liability in case of a breach of a warranty, this means that it could be easier for the buyer to establish that this disclosure was insufficient to qualify the seller’s warranties and therefore the seller should be held liable for the breach and therefore there is resistance against using disclosure letter in general. 

Another argument for resisting disclosure letters is that disclosures can act as a double-edged sword if the buyer opens price negotiations or walks away as mentioned above and therefore, sellers may attempt to solve this dilemma by making information available without expressly drawing the buyer’s attention to it, like, in one of the many Board minutes included in the data room material. This way they could still argue that the buyer was aware of the risk prior to the execution of the deal and therefore the seller should be exempted from the breach of warranty.

There are so many questions still to consider: what constitutes "fair disclosure"? What is the connection of materiality and specific disclosure? What warranties can be given regarding disclosures? When to disclose? And so forth. Some standard questions are also answered in the disclosure letter's introductory text which might say something like this:


This is the Disclosure Schedule referred to in Article X of the Share Purchase Agreement (the Agreement).

All capitalised terms used and not defined in this Disclosure Schedule shall have the meanings given to them in the Agreement, unless the contrary intention appears.

This Disclosure Schedule shall have the effect set out in the Agreement. Accordingly, we shall not be deemed to be in breach of the warranties or other terms of the Agreement: i) if such facts or circumstances are specifically disclosed herein; or ii) if the disclosure is made in the disclosure material if such facts or circumstances should have been apparent based on such investigation or otherwise to a person reasonably knowledgeable having experience in business similar to the Business. 

Specific disclosures set out in this Disclosure Schedule mark out the section or subsection to which they apply for the ease of reading only but also qualify other sections or subsections in Section of the Agreement. All representations and warranties are further qualified by information available from public sources including, without limitation, press releases, publications and trade registers.

Where any representation or warranty contained in the Agreement is limited or is qualified by the materiality of the matters to which the warranty relates, the inclusion of any matter in this Disclosure Schedule does not constitute a determination by the Seller that such matters are material. 

The inclusion of any matter in this Disclosure Schedule does not constitute a determination by the Seller that such matters need to be disclosed in order for the Seller to avoid liability under the Agreement.

Opinions expressed by independent advisors and consultants are to be read as containing their professional opinion with any assumptions and limitations pertaining thereto...."

So to conclude, these are the main principles to help you get started but we have tried to point out that there are many more open issues if you wish to go deeper into this topic. We will continue from here next time and in the meantime, let’s enjoy the last summer days of our beautiful country!

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