In negotiations for M&A transactions, one of the most contentious points is whether the documents disclosed by sellers for due diligence conducted by buyers should be deemed incorporated into disclosure letters.

A disclosure letter sets out known issues which amount to inaccuracies or exceptions to the representations and warranties (R&W) given by sellers in sale and purchase agreements. Sellers would not be liable for breach of R&W relating to matters disclosed in disclosure letters (subject to buyer’s acceptance of the disclosure letters).

There are arguments for and against automatically incorporating documents made available for due diligence into disclosure letters. The nature and timeframe of due diligence are factors that should be considered.

Regardless of the arguments, sellers and buyers can do the following to protect their interests:

For the sellers

Sellers should disclose the exceptions and inaccuracies in disclosure letters with sufficient details to enable buyers to make informed decisions.

For buyers

Buyers should conduct comprehensive due diligence to uncover any issues which may affect their decision to acquire the target company.  If due diligence reveals issues affecting the valuation of the target, buyers may consider withholding a portion of the purchase price until the issues are resolved or adjust the purchase consideration.

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This post was posted on LinkedIn on 11 January 2024.