#10214 - Disclosure - Mergers and Acquisitions (Private Acquisitions)

Disclosure

NATURE AND PURPOSE OF THE DISCLOSURE LETTER

• Most the info the buyer requests is in the form of disclosures by the seller. Qualifies the warranties.

• The incentive for seller in making disclosures = avoidance of breach of warranty in relation to the matters disclosed.

• Is scrutinised by both parties due to its importance in determining seller’s potential liability and buyer’s risk.

• Seller is advised to make full and early disclosure of potential issues. Late disclosures carry risk that buyer will either:

  • refuse to accept the disclosure as fully limiting the seller’s liability in the relevant area, or

  • that the buyer will withdraw from the deal at a stage when significant professional costs have been incurred.

FORMAT OF THE DISCLOSURE LETTER

• Will be in the form of a letter from the seller to the buyer.

• Bundle of docs (the disclosure bundle) will be attached to the letter, comprising all the docs referred to in the letter as providing information which qualifies the warranties (e.g. distribution agreements, pension details etc.)

• Buyer must consider whether it is prepared to accept every disclosure without further info or contractual protection.

• If disclosure relates to a matter of significance to the buyer, it may decide to require an indemnity from the seller to:

  • cover any identified potential liability;

  • to reduce the purchase price it is prepared to pay; or,

  • if the matter is very significant, to withdraw from the purchase.

• On exchange, 2 copies of agreed form of disclosure letter & bundle available; 1 given to buyer & 1 retained by seller.

• The letters and associated bundles will be initialled by the parties as evidence that they are identical.

  • Thus in the event of claim for a breach of warranty, each party will be able to refer to the agreed disclosure docs.

• The disclosure letter itself will generally be divided into two sections:

1. General matters of which the buyer will be deemed to be aware (see below); and

2. Details of specific disclosures (see p2).

DEEMED DISCLOSURES

• General disclosures relate to publicly available info which buyer can be expected to find out for itself

• Can also, occasionally, relate to info that has been made available to the buyer during the DD investigation.

• Effect of deemed or general disclosure = Limit seller’s liability post-acquisition by making buyer aware of the risks.

SPECIFIC DISCLOSURE

• Specific disclosures draw to buyer’s attention specific info about target which is inconsistent with one or more warranties given by the seller.

• For ease of reference, the disclosures made will usually refer to specific warranty statements in the SPA.

• Often a significant degree of overlap between the warranties .^.. disclosure letter usually provides that each disclosure is deemed to be in respect of all the warranties and not merely the warranty referred to in it.

STANDARD OF DISCLOSURE

• It is in the interests of the buyer and the seller that all disclosures are fairly made.

  • The buyer will want the highest standard, as accurate a picture as possible when negotiating terms

  • Seller will want the minimum standard to negate the possibility of any later warranty claim.

• SPA usually specifies standard of disclosure required for disclosure to effectively negate liability under warranties.

ADEQUATE DISCLOSURE

• SPA will provide that the warranties are given subject to matters disclosed in the disclosure letter.

• Buyer may insist that disclosures are properly made i.e. they’re accurate & fully disclose matters to which they relate.

• Buyer won’t want to accept limitations on seller’s potential liability under warranties unless it has full details of the relevant circumstances.

• Advisable for seller’s to make detailed disclosures to avoid doubt as to whether disclosure has been properly made.

Levison v Farin – (Minimum standard)

• Facts:

  • Buyers generally aware of rundown condition of business, but still successfully claimed for breach of warranty which said ‘there will have been no material adverse change in the overall value of the net assets of the Co’.

  • The warranty had been given subject to the phrase ‘save as disclosed’ but no formal disclosure letter- orally disclosed.

• Judgement:

  • Gibson LJ held ‘a clause in this form is primarily designed and intended to require a party who wishes by disclosure to avoid a breach of warranty to give specific notice for the purpose of the agreement, and protection by disclosure will not normally be achieved by merely making known the means of knowledge which may or do enable the other party to work out certain facts and conclusions’.

  • I.e. need disclosure of a quantified reduction in net asset value or actual rate of continuing losses to avoid breaching a warranty that "save as disclosed there will have been no material adverse change in the overall value of the net assets of the company." – NB don’t actually have to fully qualify, just need to go as far as poss.

Infiniteland ltd v Artisan Contracting ltd – (middle ground disclosure)

• Concerns acquisition by share purchase of a group of companies.

• Facts:

  • Seller warranted that accounts gave a true and fair view of the group’s financial position ‘save as disclosed’, and the disclosures were warranted to have been made ‘fully, clearly and accurately’.

  • Although some specific disclosures against each warranty were sought by buyer, disclosure letter also provided for a general disclosure of all matters contained in docs provided to buyer’s reporting accountants for purpose of their DD review. The accounts for one of the group companies contained an exceptional item affecting that Co’s profit and loss account which resulted in buyer bringing an action for breach of warranty.

• Judgement:

  • Sufficiency of disclosure must be measured by reference to agreed contractual provisions and context of deal

  • The disclosure must match the standard agreed in the contract in order to negate a warranty claim.

  • Based that, this disclosure requirement = whether it could fairly be expected that reporting accountants would become aware of issue from an examination of docs in ordinary course of carrying out a DD diligence review.

  • Disclosure held to be effective because on the evidence provided this was an exceptional item that the reporting accountant could have identified.

• Raised some concerns about risk for buyer of accepting general disclosures of info supplied in the course of DD.

STANDARD OF DISCLOSURE CONT

ADEQUATE DISCLOSURE CONT.

MAN Nutzfahrzeuge AG v Freightliner Ltd

• Obiter - ‘the disclosure of all matters revealed by an inspection of specified docs’ would not extend so far as to include inferences which might be drawn from the docs inspected,

• NB judge didn’t rule out the possibility that an appropriately drafted disclosure could extend to such inferences.

BUYER’S KNOWLEDGE

• The buyer will usually insist on limiting disclosure specifically to matters revealed in the disclosure letter & bundle

• Often clause in SPA = warranties only qualified by matters contained in those docs & not by buyer’s own knowledge.

  • Advantage = limits relevant info to be considered on a warranty claim to the agreed docs of the transaction.

  • However, such a clause may not achieve the buyer’s objective.

Eurocopy plc v Teesdale (Knowledge Provision, good for buyer)

• Facts:

  • Buyer inserted the following clause into the sale and purchase agreement:

‘The Warranties are given subject to matters set out in the Disclosure Letter … but no other information relating to the Company of which the Purchaser has knowledge (actual, constructive or...