M&A Vocabulary – Experts understand: “Disclosures”

In practice, it is repeatedly observed that the significance of regulations concerning disclosure mechanisms in corporate acquisition agreements is considerably underestimated, particularly by parties with a Continental European legal understanding, and is therefore neglected during contract drafting and negotiation. This regularly has negative consequences for the buyer, especially in transactions involving parties and advisors from common law jurisdictions on the seller’s side. In that legal tradition, disclosure obligations and rights hold significantly greater importance and are actively used as a tactical action to reduce liability risk.

Disclosures generally refer to the deliberate revelation of certain facts by the seller to the buyer, or the facts themselves that are thus revealed. Disclosure obligations and rights can arise from law or general legal principles, as well as from specific contractual agreements. The fundamental principle here is that the buyer cannot assert liability claims against the seller for any facts that the seller has disclosed to the buyer, because from the moment of disclosure, these facts are considered known (and accepted) by the buyer.

Depending on the legal situation and specific agreement in the purchase contract, the seller therefore has an interest in actively disclosing facts disadvantageous to them at a certain point in time – thereby achieving an exclusion of liability and/or fulfilling their disclosure obligation – or in concealing such facts.

For the buyer, disclosure often offers the last chance to withdraw from the transaction or to influence its terms, which is why – depending on the agreements made – the buyer may also have an interest in receiving the relevant information.

The spectrum ranges from extremely buyer-friendly to extremely seller-friendly provisions, and the generally accepted standards in various industries and countries sometimes vary considerably.

For example, agreements defining the entire content of the data room as a disclosure are possible, while on the other hand, contract clauses are also used stating that the data room content should have no liability-limiting effect whatsoever.

Disclosures can be made, for example, as appendices to the purchase agreement (disclosure schedules) or in a separate document (disclosure letter) that must reach the buyer by a certain deadline.

The following questions are typically subject to contract drafting and negotiation:

• In what form must a disclosure be made?
• By what time should such a disclosure be possible (at the latest)?
• What specific legal consequences are associated with a general disclosure and with disclosures of specific facts (e.g., exceptions to warranties)?
• How specific and detailed must disclosures be (fair disclosure)?

From the buyer’s perspective, it is particularly important to ensure that the seller is prevented from (or only allowed within very narrowly defined limits) making disclosures, for example, by means of a disclosure letter including a disclosure bundle (i.e., a multitude of attached documents) only after the contract has been signed.

Otherwise, there is a risk of being “flooded” with documents shortly before the closing date to achieve an exclusion of liability – at a time when actual review of the documents is no longer possible due to lack of capacity and time, and the buyer (depending on agreed withdrawal rights and closing conditions) often no longer has any opportunity to withdraw from the contract or influence the acquisition terms.

Therefore, due to their outstanding and long-lasting importance in the liability system of corporate acquisitions, disclosure regulations require careful drafting by experienced hands and, in cross-border transactions, appropriate examination and consideration of all applicable legal systems.

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