Business Sales – Warranties, Indemnities & the Disclosure Letter

Introduction

In the process of the sale/purchase of a company or business, typically:

1. the buyer will want certain ‘warranties’ and ‘indemnities’ from the seller; and

2. the seller will make ‘disclosures’ to qualify the warranties and to provide information about the business being sold.

Warranties and Indemnities

1. Warranties are statements of fact in relation to specific matters concerning the business. If it is later discovered that a warranty was not true, the buyer may be able make a claim for breach of such warranty.

2. Indemnities are promises by the seller to make good losses incurred by the buyer in certain circumstances.

3. The amount that may be recovered by a buyer under a warranty is likely to differ from the amount which might be recovered for the same matter under an indemnity. In addition, when relying on indemnities the innocent party is not generally subject to the obligation to mitigate its loss.

4. Buyers want to see warranties and indemnities included in the sale agreement because of the protection they afford.

Disclosure Letter/Schedule

1. The warranties are normally set out in the Sale/Purchase Contract which, more often than not, is drafted by the buyer’s legal adviser. In response to the usually widely drafted warranties, the seller and its advisers make disclosures and sets them out in a disclosure letter or schedule. The disclosure letter provides: i) information to the buyer about the business or company being sold; and ii) qualifications or exceptions to the warranties contained in the Sale/Purchase Contract.

2. For example, if the seller is asked to give a warranty in the Sale/Purchase Contract that no Employee is subject to a current disciplinary warning or procedure but this is not true, then instead of amending the warranty, the seller will disclose details of all relevant disciplinary actions, procedures etc in the disclosure letter. Assuming that the buyer accepts the disclosure, then the seller is no longer liable in relation to those matters. The disclosure letter therefore provides the buyer with details of known exceptions to the warranties.

3. It is in the interests of both the seller and the buyer make sure that there is a record of each document disclosed during the course of the sale/purchase. This is often done by taking copies of such documents and creating a bundle (the ‘disclosure bundle’) and/or attaching a list of such documents (which may be cross referenced to the disclosure bundle) to the disclosure letter.

This should not be relied upon for legal advice. If you would like any further information or advice please email richard@clariclegal.co.uk.