The truth, the whole truth …

Perhaps we should begin with a quote from the Douglas Adams book, The Hitchhiker’s Guide to the Galaxy:

‘But look, you found the notice didn’t you?’

‘Yes,’ said Arthur, ‘yes I did. It was on display in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying ‘Beware of the Leopard’.’

In business transactions involving share sales, or the sale of business assets, buyers will undoubtedly carry out due diligence: a process of investigation to determine the worthiness and value of the potential purchase target.

It may be, however, that there are less tangible but equally important aspects that the accounts and customer records do not readily reveal: there may be unfinished business with a disgruntled major client who is planning legal action, or perhaps a forthcoming employee pay negotiation that may have a major impact on the business. The potential list is endless, but the seller may avoid significant later warranty claims by the buyer if such things are fully and clearly disclosed at the time of negotiation and sale.

Disclosed: Fully, clearly, accurately

While the seller may cover themselves from future claims by fully and clearly disclosing all unfinished business matters, it is also true that making all such things fully visible may reduce the value of the business and provide the buyer with ammunition that will assist them to potentially negotiate the sale price down. Such is the nature of the beast, but to hide information may prove to be even more costly eventually.

Some sellers may choose to provide full and proper disclosure, but do so in language and style that defies understanding. One such attempt from a case some years ago caused the court to comment that the disclosure letter was: ‘distinguished by the obscurity of its language.’

If in doubt

It is important that sale agreements fully describe the detail of the specific disclosure. Including a phrase such as ‘fairly disclosed’ will not necessarily hold up, and your commercial law specialist should be consulted.

Sellers should not assume that some issues do not need to be fully disclosed, or that the further effects of a matter will be obvious to the buyer. All matters of even the slightest concern should be raised, and if in doubt, included. Buyers are not mind-readers, and a less-than-complete disclosure letter leaves the seller open to future warranty claims.

A disclosure letter should be drawn up by lawyers and, with all supporting documentation attached, included with the sale agreement.

Disclosure letters have a predictable flow:

  • An introduction to clarify the purpose, nature and scale of the document, and to clarify its status in connection with the sale agreement.
  • General disclosures will state everything applicable in such transactions, and will highlight any areas of potential conflict with the agreement.
  • Specific disclosures will drill down to the specifics of the particular sale, expressly mentioning items of importance or concern.
  • Annexures are inclusions of any necessary supporting documentation referred to within the disclosure letter, and they complete the package of full disclosure.

Disclosure letters, along with supporting documentation, are a crucial element in the completion of a successful business transaction that is satisfactory for both seller and buyer.

Commercial Law – we live it every day. It will be easier with sound legal advice from the experts. If you have any questions about the issues raised in this article, or about commercial law in general, please don’t hesitate to contact us via email [email protected] or via phone on 1800 770 780. Owen Hodge Lawyers. We are here to help.