When acquiring a company, the term disclosure letter regularly comes up. In plain Dutch, the disclosure letter is best referred to as the "disclosure letter.
When selling a company, it is common for the seller to provide warranties to a buyer of her company. For example, the seller guarantees that the shares are hers, the seller is authorized to enter into the transaction and the company is not involved in any legal proceedings.
Due diligence
By performing due diligence, the buyer fulfills her duty to investigate. In addition to the buyer's duty to investigate, the seller has a duty of disclosure. In short, the duty of disclosure means that the seller must disclose (to "disclose") to the buyer facts and circumstances relevant to the buyer regarding the company. The seller does this by providing information to the buyer through, for example, a digital data room set up for that purpose to which the buyer and its advisers are given access.
The buyer and her advisers are then given the opportunity to review the information provided and ask questions of the seller about it. Upon completion of the due diligence by the buyer and prior to the signing of the purchase agreement by the parties, the data room is closed, thus preventing the seller from making any disclosures thereafter.
Accuracy of information
The buyer may assume that the information provided by the seller is correct and will base the terms of the transaction partly on this. The seller can in principle hold the information provided and the knowledge gained from it by the buyer against the buyer, which means that after completion of the transaction the buyer cannot sue the seller for breach of a warranty issued if the due diligence information shows that that particular warranty was incorrect. By disclosing the inaccuracy of a warranty prior to a transaction, the buyer fulfills his duty of disclosure.
In principle, if there is a split between signing and closing, the seller can no longer make additional disclosures in the intervening period. In that situation, the disclosure letter can offer a solution and in it the seller can report facts and circumstances that originate after signing. Please note: it happens that a seller consciously or unconsciously only reports facts and circumstances in the disclosure letter that were already known before signing and therefore should have been reported then.
Disclosure letter
Using a disclosure letter between signing and closing prevents the buyer from making a claim under the warranties immediately after closing. That seems fair to the seller, but it does result in the question of what the buyer does if it turns out that a disclosure is made which means that if it had known about it before signing it would not have entered into the purchase agreement or not under the same conditions.
The results of the due diligence may lead to commercial discussions between buyer and seller about the amount of the purchase price, specific guarantees and indemnities to be given, conditions precedent to be met, and security to be provided by the seller. You don't want such discussions just before closing.
The consequences of using a disclosure letter should therefore be considered early in the acquisition process.
