SGS 5 (Disclosure)

Question 1

What are the buyer’s possible responses to disclosure?

Answer 1

Ask for more info

Negotiate a warranty
ask for indemnity

reduction in purchase price

CPs

accept

reject

amend

withdraw

restructure as asset sale or pre-completion hive down.

Question 2

Who is the DL from?

Answer 2

Seller’s solicitors to the Buyer’s solicitors and signed at the same time as the acquisition agreement (exchange), by both parties.

Question 3

General disclosures?

Answer 3

Matters of public record that the Buyer could do (e.g. local authority, Companies House, TM Registry) –

Buyers deemed to know about a matter generally disclosed

Question 4

Specific disclosures?

Answer 4

Relate to specific warranties given

Matters which, if not disclosed would amount to breach of warranty

Buyer cannot sue the seller for breach of warranty to the extent of the disclosure.

Question 5

How does an auction vs PTS affect the timing of a DL?

Answer 5

A: As SS’ prepare draft AA can release draft DL at same time.

PTS: Buyer’s solicitors prepare draft AA so SS’ send draft DL once they have seen the AA (disclose in RESPONSE to warranties)

Question 6

What is the standard of disclosure?

Answer 6

Whether a disclosure actually qualifies the warranty in question

Question 7

Ratio of Infiniteland?

Answer 7

There is no universal standard of disclosure

The standard depends on what the seller and buyer have agreed in the AA

Question 8

Which three other cases are important and what are their ratios?

Answer 8

Levinson – disclosure must be sufficiently precise – seller cannot rely on buyer working out facts by itself.

Daniel Reeds – disclosure must be a positive statement not by omission.

New Hearts – disclosure must be clearly signposted for buyer and not just referred to a complex source of information.

Question 9

If the Seller decides not to disclose a dispute on the basis that the Buyer already knows about it from its own due diligence can the Buyer still bring a claim?

Answer 9

It depends on the wording of the acquisition agreement

Question 10

Options under Buyer’s knowledge?

Answer 10

Infiniteland

AA contains a clause stating that B canNOT bring a breach of warranty claim if it knows about breach before completion –> buyer can’t bring a claim

If AA states that B can sue, B can bring a claim.

Question 11

What is the effect of the buyer’s knowledge if the AA is silent?

Answer 11

Buyer probably can still sue BUT may be difficult to prove loss if knowledge of breach influenced the price.

Court takes dim view if thinks a buyer is acting unfairly.

Better for buyer to get a condition precedent / indemnity / reduction in purchase price

Question 12

Why is the following general disclosure unacceptable to the Buyer?
All matters which would be revealed by a search of the file of the Company and each of the Subsidiaries at Companies House AT THE DATE of this Disclosure Letter and the contents of the minute books and other statutory books of the Company and each of the Subsidiaries, all of which have been made available to the Buyer.”

Answer 12

Should refer only to searches actually done.

Advisers busy with deal at exchange and completion so difficult to carry out CH search then.

Entire period from incorporation is too onerous a task to evaluate.

Question 13

Why is this clause unacceptable to a buyer?

“All matters which would be apparent from an inspection of the Properties at the date of this Disclosure Letter.”

Answer 13

Searches could not be conducted by all personnel and advisers in Buyer’s team as they would not appreciate what to look for in a search.

‘would be apparent’ is evidentially uncertain

Question 14

Why should the following disclosure be rejected by the buyer?
“Any matters referred to in correspondence between the Company and/or the Seller and/or their advisers and the Buyer and/or its advisers, together with all enclosures attached to such correspondence and all matters referred to in such enclosures

Answer 14

Vast amount of correspondence giving info about Target, most of which not read with view to qualifying warranties.

Does not make sense for some correspondence to qualify the warranties.

Question 15

What is the Seller’s argument for including the following clause?
“All matters disclosed to the Buyer and its advisers or which ought reasonably to have been revealed in the course of the due diligence investigation of the Group by the Buyer and its advisers and all matters disclosed in the report produced by the Buyer’s accountants on the business and affairs of the Company and its Subsidiaries.”

Answer 15

buyer has already learned a great deal about target and all matters discovered in the course of DD investigation should be deemed disclosed.

Question 16

What is the Buyer’s argument for rejecting
“All matters disclosed to the Buyer and its advisers or which ought reasonably to have been revealed in the course of the due diligence investigation of the Group by the Buyer and its advisers and all matters disclosed in the report produced by the Buyer’s accountants on the business and affairs of the Company and its Subsidiaries.”

Answer 16

DD paid for and carried out by buyer, Seller should not be able to use it to relieve itself of liability.

Buyer not in a position to understand full significance of everything revealed. Wants specific disclosures which can be reviewed by relevant personnel.

Question 17

What is the issue with the following?

All information contained or matters referred to in the documents in the bundle of documents annexed to this letter and initialled by or on behalf of the parties to this Disclosure Letter for the purposes of identification”

Answer 17

up to Seller to indicate in relation to each relevant warranty what specific matters it is seeking to disclose.

Question 18

Purpose of an entire agreement clause?

Answer 18

make it impossible for a buyer to bring an action in innocent or negligent misrepresentation against the seller based on an oral or written representation, whether or not it has been expressly repeated in the contract

Question 19

Elements of an entire agreement clause?

Answer 19

AA constitutes entire agreement between parties

Buyer does not rely on any statements which have not been included in AA.

Buyer’s only remedies are contractual

Entire agreement does not purport to exclude liability for fraud.

Question 20

Key elements of a de maximus clause?

Answer 20

capped to sum equal to total consideration or a % or purchase price paid

Exclude liability for dishonesty or fraud.

Should be limiting liabilities in relation to warranties, not indemnities –> Buyers would want to remove the wording ‘and the Tax Covenant’.

Question 21

Key elements of Time Limits clause?

Answer 21

Tax, either 7 years from completion date or 6 years from last accounting period.

Buyers want at least two full audit periods = 3-4 years.

Delete Seller shall be liable for the excess.

Question 22

Key elements of De Minimis?

Answer 22

Claim means a claim in respect of any breach of WARRANTIES.

Minimum cap on aggregate of claims = 1% of the purchase price

Minimum cap on each individual claim = £5-10k

State whether liable for just excess (seller wants this) or full amount (buyer wants this) if over a threshold.