M&A Vocabulary – Experts explain: Fair Disclosure

published on 20 October 2023 | reading time approx. 4 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

What is a Disclosure?

Warranties are contractual statements of fact or assurances by the seller(s) contained in the purchase agreement concerning various matters relating to the target company or asset. A catalogue of representations and warranties by sellers as part of the sale of their company or assets is common market practice in the UK, enabling buyers to bring a claim for breach of contract if proved untrue. Sellers, on the other hand, protect themselves by “qualifying” these warranties —this is done by disclosing information that conflicts with the relevant warranty which, if not disclosed, would constitute a breach of warranty.

For further information on “Disclosures”, how they work and why they are important in the M&A process, our colleague Tobias Kohler has written an article which is available here: M&A Vocabulary – Explained by the experts: Disclosures.

In an English M&A context, disclosures can be general or specific, and are contained in a disclosure letter that accompanies the purchase agreement.

General disclosures mainly contain matters which appear in public records or which the buyer ought to be aware of on the basis of pre-contractual enquiries (e.g. due diligence) about the target. Specific disclosures, on the other hand, are disclosures of specific information made by reference to individual warranties.

What are “Fair Disclosures”?

The purchase agreement defines the term “disclosure” and often, words like “full,” “fair,” “accurate” or “complete” are used to set the standard of disclosure within the context of the transaction. The definition (and the resulting disclosure standard) is negotiated between the parties, and depends on the facts of the particular transaction, as well as any information that the parties consider sensitive or material, such that they need to be treated as disclosed.

Thus, an example of the definition of a disclosure could be matters that are “fairly, fully and accurately disclosed (with sufficient detail to identify the nature and scope of the matter disclosed) in or under the disclosure letter”.

In principle, a disclosure is “fair” if it states facts not only in substance but also in sufficient detail, i.e., against the relevant warranty, so that they can be understood by the buyer. However, the definition of “fair disclosure” is contentious and has been debated by English courts on numerous occasions, a few of which we have set out below.

In Daniel Reeds Ltd v EM ESS Chemicals , the seller warranted that the target company held all necessary licenses to conduct its business, even though a key manufacturer’s license was due to expire immediately after closing. The seller, by way of disclosures, had listed all the licenses held by the target, but did not include the license in question. The seller argued the buyer should have reviewed the list of licences provided and inferred that the relevant license was missing. This was rejected by the courts, which held that “fair disclosure requires some positive statement of the true position” and that an omission of essential information (in this case, the absence of a key product license) would nullify the disclosure, leading to a successful claim by the buyer for breach of warranty.

In New Hearts v Cosmopolitan Investments , the court emphasised the need to positively and particularly bring the buyer’s attention to any matter that was being disclosed because a mere reference to a source of information, which was complex but which the diligent enquirer might find relevant, would not satisfy the requirements for fair disclosure.

Infiniteland Ltd and John Stewart Aviss v Artisan Contracting Ltd is a seminal case on this topic, providing more clarity on what the courts consider to be “fair disclosure” in particular, to (a) the standard of disclosure varying according to the language used in the relevant clause of the purchase agreement, and (b) who is reading the disclosures and whether or not expert advisers are involved.
The warranty claim in this case related to whether the accounts showed a “true and fair” view of the profit and loss of the relevant company.

It was held that the disclosure letter had been drafted taking into consideration the fact that documents and other written material had been supplied to the buyer’s accountants to carry out due diligence in advance of the proposed purchase. The buyer had the option to refuse general disclosure and insist on specific disclosures against individual warranties. However, the buyer chose not to do so, and was content to rely on its accountants to identify matters about which the buyer needed to be informed from the supplied documents. It was held, in this case, that the buyer’s accountants knew that the disclosed accounts were misleading.

Consequently, the seller relied on this knowledge to challenge the warranty claim, as the “actual knowledge” of the accountants was to be imputed to the buyer pursuant to the terms of the purchase agreement. Therefore, it was held that the disclosure requirement (“true and fair”) was satisfied in relation to such matters as might fairly be expected to come to the knowledge of the reporting accountants from the due diligence of the supplied documents.

“Fair” Disclosures in different jurisdictions

Given the complex nature of disclosures, and the often fluid nature of what constitutes “fair” disclosures, it is imperative to consult experts when drafting purchase agreements (that set the standard of disclosure) and disclosure letters (to ensure well drafted disclosures). In the context of cross-border acquisitions, it is particularly necessary to evaluate the meaning of fair disclosures as it is defined in the applicable jurisdiction, and the disclosure procedure must be comprehensively followed.