M&A Disclosure Schedules: Seller and Buyer

PerspectivesMaking and Updating Disclosures in U.S. and International Deals

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WEDNESDAY, JUNE 17, 2020

Presenting a live 90-minute webinar with interactive Q&A

Karen A. Abesamis, Partner, Morgan Lewis & Bockius, Palo Alto, Calif.

Peter D. Feinberg, Attorney, Law Offices of Peter D Feinberg, San Francisco

Carol Osborne, Partner and Co-Leader, M&A and Corporate Finance, Bryan Cave

Leighton Paisner, London

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Law Office of Peter D. Feinberg

Disclosure Schedules in

M&A Transactions:Seller and Buyer Perspectives in

Preparing and Updating

Disclosures

Peter D. Feinberg

Purpose of Disclosure Schedules

• Disclosure schedules are one of two parts of the overall due

diligence process in M&A transactions:

– The other part of the process is production of seller’s

documents and usually occurs in steps beginning before

preparation of the disclosure schedules.

• Due diligence helps parties determine the appropriate

purchase price, identify assets and liabilities and allocate

risks.

• Disclosure schedules have two different but important

purposes:

– disclosure of key aspects of seller’s operations, and

– allocation of risk between the parties.

6

Preliminary Steps – Initial Diligence

• Document production begins before preparation of

the letter of intent (LoI) with buyer entering into a

non-disclosure agreement (NDA) or Confidentiality

Agreement with seller.

• Seller should never disclose anything without this

agreement being in place!

• Buyer will want basic financial information before

preparation of the LoI (note that some or all of this

may already be publicly available if seller is a

public company).

7

Preliminary Steps – Initial Diligence

• After the LoI is signed, Buyer will give Seller a

document request covering most aspects of

Seller’s operations including employees,

intellectual property, financials, assets and

liabilities, litigation, etc.

• Timing and extent of disclosures is always a

subject of discussion between the parties.

• Notwithstanding the NDA, Seller may choose to

withhold certain documents until just before or

even after closing, particularly those relating to

specific customers or trade secrets.

8

Seller Goals in Disclosure Process

• Seller wants to avoid, or at least limit, post-closing

liability

– Alert, but not scare, buyer as to pre-closing issues

• Seller wants to maintain the terms set out in the

letter of intent

– The knowledge buyer gains in the due diligence process may

lead it to cancel the deal or make seller-unfriendly changes to

consideration and/or indemnification provisions, but it will

rarely, if ever, lead to more seller-advantageous terms

9

Buyer Goals in Disclosure Process

• The disclosure process helps the buyer understand the

seller’s business (i.e., key customers, suppliers, employees,

owned assets, liabilities, etc.)

– This is of critical importance to the parties in determining what is the

appropriate purchase price.

• The Buyer also wants to know 2 opposite things on a post-

closing basis:

– Can it continue running the business as the Seller has done on a pre-closing

basis, and if not, what needs to be done for this to be the case? (Pre-closing

consents, regulatory approvals, etc.)

– Alternatively, the buyer wants to know that it can cancel any commitments

that it doesn’t want after the closing without penalty or other financial

consequence.

10

Impact of Buyer’s Knowledge

• The intersection of knowledge obtained in the document

production process and from the disclosure schedules is

somewhat hazy:

– If Buyer learns about a risk in a document provided by Seller

but it isn’t specifically disclosed, would Buyer be deemed to

have constructive notice of the risk, and thus, absent a

provision to the contrary, to be responsible for it?

11

Allocation of Risk - Generally

• Seller representations and warranties (and related disclosure

schedules), gain their importance primarily through the

indemnification provisions which allocate risk.

– A breach of a representation and warranty by seller which

creates liability for buyer after the closing will lead, subject to

some combination of limitations and conditions discussed

below, to an obligation for the seller to indemnify the buyer.

• Customary to have a closing condition in favor of buyer that

seller’s representations and warranties are true and correct

in all material respects.

– If the representations and warranties are not true and correct

in all material respects, buyer will not be required to complete

the transaction.

12

What Constitutes a Breach by

Seller?

• General answer: a statement which is untrue and

not modified by any conditions or disclosures.

• The main conditions on representations and

warranties are:

– materiality (that the breach has a certain level of consequence

on the business; dependent on both the breach and the size

of the business), and

– knowledge (that the statement was absolutely true vs. it was

true as far as the giver of the representation knew).

13

Role of “Knowledge” of Seller and

Disclosures

• Several key negotiation points on Seller’s “knowledge”:

– Whose knowledge is relevant?

– What kind of special inquiry, if any needed, should be made?

– Which representations and warranties can be modified by

knowledge?

• The role of disclosure schedules in modifying seller’s

potential liabilities for breaches will depend on:

– The nature and specificity of the disclosure and

– whether there is anything in the agreement providing that disclosure

will not negate liability or actions which the buyer may take which

would lead to seller retaining the liability or buyer’s liability being

limited

14

Indemnification – Key Features

• Indemnification provisions ordinarily contain:

– a minimum loss a buyer must incur (a “basket”) before the buyer may

receive indemnification

– a maximum amount of loss after which the seller is no longer liable

for any of buyer’s losses (a “cap”)

– offsets for insurance or tax benefits which the buyer may receive

– a maximum duration for such indemnification rights

– indemnification procedure under which the seller may choose to

either directly defend the claim, and assume any liability relating

thereto, or tender the claim to the buyer, in which case the seller will

likely waive its right to contest liability as against buyer.

• Note potential common law indemnification rights may exist

in favor of buyer.

15

Case Study - Facts

• Seller is an individual and the 100% owner of a

business selling canned foods to markets and

restaurants. In the course of a transaction to sell

100% of the stock to buyer, seller gives the

following representation and warranty:

– Inventory. To Seller’s knowledge, all inventory, including raw

materials, work in process, finished goods, service parts and

supplies (“Inventory”) consists of items of a quantity and

quality historically useable and/or saleable in the normal

course of business, except for items of obsolete and slow-

moving material and materials that are below standard quality,

all of which have been taken into account for purposes of

valuation in accordance with GAAP.

16

Case Study – The Problem

• A small but material part of Seller’s inventory had passed its

expiration date. Inventory management was normally done

by the company’s chief of operations and not a part of

seller’s own job responsibility so seller was not aware that

these items had passed their expiration dates.

• After the closing, buyer was sued for selling these expired

goods. Buyer sought indemnification from seller, who

defended himself based on the fact that he did not know that

goods had passed their expiration dates.

• Subject to the applicable cap, basket and duration of the

representations and warranties, would the seller have a duty

to indemnify buyer for its loss?

17

Case Study – The Outcome

• Maybe. The questions will be:

– Was “knowledge” defined in the agreement?

– Is the knowledge standard, seller’s actual knowledge, and if so, did

he have a duty of due inquiry, which would have pointed him to the

appropriate manager?

– Is the knowledge standard “knew or should have known”, which

would look less at what this seller should have done and more what

an “objective” seller would have done?

– If “knowledge” wasn’t defined, how would this be determined by the

law of the state in which disputes were to be decided?

• Important note: there is relatively little law on many issues

about which disputes arise relating to disclosure schedules

(or even merger & acquisition agreements generally).

18

Best Practices in Drafting

Disclosure Schedules

• As counsel to Seller, try to limit the scope of the

representations and warranties:

– limits Seller’s potential liabilities

– minimizes the amount of time spent preparing schedules

– Example: rather than having to disclose “all contracts which

have been in place in the past 5 years”, limit disclosure to

“material contracts currently in place or terminated within the

past year”.

• Once the scope is agreed, schedule a review

meeting with the client before drafting.

19

The “Review Meeting”• Attendees:

– A mid-level to senior attorney and a junior attorney should meet with

the seller and any key employees who might have knowledge of

Seller’s operations (CFO, General Counsel, Chief of Operations, VP

of HR, etc.).

– Note: Junior attorneys may not pick up on the intricacies of some of

the representations.

• Explain what the representations mean to your client.

– Example: the representation that the seller is qualified to do

business as a foreign corporation in any state or country so

required is difficult for all but the most knowledgeable client to

grasp, as it may entail a mix of volume of business, persons

engaged, real property used, etc.

20

Drafting the Disclosure Schedules -

Generally

• The process of preparing disclosure schedules really begins

with the circulation of the definitive transaction documents.

– Initial draft of definitive agreements usually prepared by the buyer.

– Separate from the document disclosure, the disclosure schedules

correlate with the representations and warranties given by the seller.

– Negotiations around the representations and warranties can reduce

(or change) the extent of required disclosure.

• Disclosure schedule preparation can be one of the most time

and labor-intensive parts of a merger & acquisition

transaction.

21

Drafting Disclosure Schedules -

Mechanics• Establish a game plan on how to assemble information, both

narrative and documentary, which pertains to each representation.

– Until 10 years or so ago, this information was usually compiled in a

physical data room, but as most lawyers who have done a merger &

acquisition in the 21st century are aware, virtually all information is

now stored online in virtual depository sites such as box.com,

dropbox, etc.

• The information you receive from clients relating to the disclosure

schedules should be the first word, but not necessarily the last one.

• Sellers should reserve the right to update schedules before closing:

– particularly in sign and subsequent close transactions

– the buyer may want a closing “out” for a new post-signing disclosure,

or at least a right to indemnification, regardless of the potential

liability being disclosed.

22

Drafting Disclosure Schedules –

Roles and Resources

• The Law Firm:

– Junior attorney takes the lead in reviewing documents, issue spotting

and preparing schedules.

– Senior attorney is the “gatekeeper” only.

• The Deal Advisors

– Investment bankers or business brokers often tell clients that they

can take a major role in preparing disclosure schedules.

– Be careful! Their knowledge varies greatly, and their conversations

with clients, unlike yours, will not be privileged.

• Other Advisors

– CPA, insurance agent, benefits consultant and any other outside

professionals, and you should send them the representations which

apply to the work which they have done for the company.

23

Drafting Disclosure Schedules –

Roles and Resources• Utilize outside sources to confirm client information when

available:

– Order a certificate of good standing, ideally at the start of preparation

of the disclosures then shortly before closing;

– Order certified copies of the client’s articles/certificate of

incorporation and a lien search.

– Consider performing a litigation docket search as well.

• The disclosure schedule process is interactive; often, the more

information the attorney receives, the more questions he or she will

have for the client.

• Although the attorneys will be the primary drafters and much of the

consideration of what is included, as discussed below, will be legal

in nature, it is critical that the client understands and signs off on

the schedules.

24

How Much Should Seller Disclose?

• Questions inevitably arise over the scope of

disclosures:

– Clients may believe that documents disclosed to buyer may

be sufficient disclosure of an item without putting it in a

schedule to notify the buyer, or that extensive disclosures may

jeopardize a buyer’s willingness to go through with a

transaction.

• Inviolate rule of the schedule preparation process:

– The client should disclose any possibly relevant information to

its lawyer; and

– The lawyer makes the determination of the necessity for

disclosure.

25

How Much Should Seller Disclose?• Unless the disclosure in question is extremely remote or

speculative, more disclosure is generally better than less:

– More disclosure may negate potential liability, and

– Takes the possibility of fraud for non-disclosure off the table

• Language has to be carefully crafted so that the buyer is notified

without being unduly alarmed.

• It is important for seller to get out in front of key disclosures, so

that the first time the buyer hears of them will not be in the

schedules, but:

– Sellers may need to consider the timing of sensitive disclosures.

– Some information, often relating to customers or trade secrets,

should not be disclosed until shortly before closing (or even at the

closing), even with a NDA in place.

26

Should the Buyer Ever Make

Disclosures to Seller?

• Shouldn’t a seller consider receiving something

similar from buyer when seller is receiving a

significant amount of buyer’s stock (or even a note

or contingent cash after the closing) and it needs

to understand the buyer’s operations and ability to

perform?

• Yes, but this is invariably a difficult and

contentious negotiation between the parties.

27

COVID-19 and the Disclosure

Process

• With building access limited and employees off-site, the

disclosure process is likely to become even more remote

than has been the case in recent years.

• Forward-looking representations and disclaimers are likely

to be highly contentious.

• Some specific representations, particularly relating to the

PPP, are appearing, such as compliance with requirements,

repayment obligations, etc.

• Difficult and risky to generalize too much at this point about

a fast-moving and variable situation.

28

When Are There no Disclosures?

• Rarely, but:

– Bankruptcy when a buyer may be buying “as is”, subject to the

fact that the buyer will likely be receiving a significant discount

for doing so. The trustee or receiver may need to amass all of

the assets of the seller’s estate then distribute them to

creditors, so having contingent liabilities, such as

indemnifications for representations and warranties, may not

be feasible.

– Public company sales where seller will still give

representations and warranties and make disclosures but the

representations and warranties will not survive the closing of

the transaction. Instead, the representations and warranties

act more as covenants, which, if breached, will give the buyer

the opportunity to avoid closing the transaction.

29

Thank You!

If you have any questions . . .

Peter D. Feinberg

(415) 577-2340

peterdfeinbergesq@gmail.com

This presentation was provided as an educational service. It is an

overview only, and should not be construed as legal advice or advice to

take any specific action. If you have questions regarding any of the

content contained in this presentation, we recommend you seek the

assistance of a knowledgeable legal professional.

30

© 2015 Morgan, Lewis & Bockius LLP

M&A DISCLOSURE SCHEDULES: ISSUES, TRENDS AND BEST PRACTICESKaren Abesamis

31

ISSUES AND TRENDSM&A DISCLOSURE SCHEDULES

32

COVID-19 DISCLOSURES

• Party Preference– Sellers: Broad disclosures (impact and potential impact)

– Buyers: Narrow disclosures

• Absence of changes rep to have many new disclosures– Change in the line of business (ex: shifting to manufacturing hand sanitizer)

– Reductions in force and temporary shut downs

– Change in cash management practices

• Other particular disclosures to review carefully– Labor and employment

– Customers, Suppliers, Vendors

– Taxes

– Insurance

– IT/Data Privacy

33

COVID-19 DISCLOSURES

• Buyer may seek additional reps related to Seller’s emergency protocols, contingency planning and business continuity

• Consider modifying standard reps and warranties to address the current situation

• Compliance with laws rep and PPP loans

• Disclosures of known issues v. Protection for the unknown

34

DISCLOSURE SCHEDULE UPDATING

• Disclosure Schedule Updating = Risk Allocation

– Closing condition

– Seller: Need to continue to conduct business and not breach reps

– Buyer: Would amend the reps and reduce its protection

– Termination Rights

– Seller: No termination

– Buyer: Right to terminate

– Liability for Breach

– Seller: Reps should be read with disclosure schedule as of signing and the updated disclosure schedule as of closing

– Buyer: But this may absolve Seller of its breach

35

DISCLOSURE SCHEDULE UPDATING

• Era of COVID-19

– Deals signed but not closed: Look to see whether permitted to update

– Deals about to be signed:

– Sellers want right to disclose new COVID-19 consequences as things evolve

– Buyer wants right to terminate, bargained for adjustments, etc. and will push for limitations

– Materiality increasingly important

– Materiality previously irrelevant (all updates allowed, no updates allowed)

– Now, consider whether an update is material that would trigger closing condition failure or right of buyer to walk away

– Primary issues:

– Reps and warranties true and correct as of closing

– Termination right

– Liability for breach/right to cure

36

DISCLOSURE SCHEDULE UPDATING

• ABA M&A 2019 Private Target Deal Point Study

37

DISCLOSURE SCHEDULE UPDATING

• ABA M&A 2019 Private Target Deal Point Study Cont.

38

DISCLOSURE SCHEDULE UPDATING

39

• Time Period

• Industry

• Covenants

• Materiality

– Terminate if update is material

– MAC closing condition

• Points of Compromise:

– Update will not cure breach in effect at signing but may update for new matters

– Update as to new information but not retroactive

#METOO

• “Weinstein Clause”: statement of no accusation of sexual harassment against managers, directors and senior officers

– “To the Company’s Knowledge, in the last ten (10) years, (i) no allegations of sexual harassment have been made against any Executives of the Company and (ii) the Company has not entered into any settlement agreements related to allegations of sexual harassment or misconduct by an Executive”

40

#METOO

• Confidentiality (esp. if investigation pending)

– Accuser

– Accused

– Buyer

• Disclaimers

The representations, warranties and covenants of each of the Company, Parent and Merger Sub contained in the Merger Agreement have been made solely for the benefit of the parties to the Merger Agreement. In addition, such representations, warranties and covenants (i) have been made only for purposes of the Merger Agreement, (ii) have been qualified by confidential disclosures made by the Company in connection with the Merger Agreement, (iii) are subject to materiality qualifications contained in the Merger Agreement which may differ from what may be viewed as material by investors, (iv) were made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement, and (v) have been included in the Merger Agreement for the purpose of allocating risk between the contracting parties rather than establishing matters as facts.

41

Materiality Qualifiers

• Materiality scrape or materiality read out

– Pro Buyer

– Single (loss) versus Double (breach + loss)

• Materiality scrape → Sellers will tend to over disclose in disclosure

schedule to avoid liability

– Increased time for both parties to prep, review, negotiate

– Effectiveness of disclosure schedule purpose

– Representations and warranties insurance

42

Representations and Warranties Insurance

• General and continued growing market acceptance

• ABA M&A 2019 Private Target Deal Point Study

43

Representations and Warranties Insurance

• General and continued growing market acceptance

• Will Seller provide full disclosures regardless of whether they retain post-closing liability?

– Insurer can create exclusion where insurer is not satisfied with scope of diligence and disclosure

– Moral Hazard

– Continued careful disclosure

– Retention amount ensures Seller has skin in the game

– Reputational harm

– Harm to continuing relationships // Buyer is not going to want to explain up

44

Representations and Warranties Insurance

• Era of COVID-19:

– Pay attention to policy exclusions. COVID-19 known risk. Some insurers have specifically excluded.

– Consider business interruption insurance to supplement

– Expect enhanced due diligence by underwriters and longer bring down calls.

45

Other Items

• Informational purposes only

• Discrepancies between original and translated

• Embedded links

• Electronic delivery

• Affiliates

46

BEST PRACTICESM&A DISCLOSURE SCHEDULES

47

When Representing Sellers

• Disclose Disclose Disclose

• Make it easy

– Who is included in the knowledge definition?

– Careful review

– Do not just focus on “except as set forth in the disclosure schedule”

• Start early

• Clear delegation of responsibility

• Lists not descriptions

• Review agreements and prep list assuming lower threshold

• Business Legal

• Cross references

48

When Representing Buyers

• Beware kitchen sink dump of information

• Beware broadly drafted and ambiguous exceptions

• Clear delegation of responsibility for reconciliation

• Descriptions preferred over lists

• Diligence must be in data room X days prior to signing

• Keep an eye on data room post-signing

• Flash drive or data room copy of data room

49

This material is provided as a general informational service to clients and friends of Morgan, Lewis & Bockius LLP. It does not constitute, and should not be construed as, legal advice on any specific matter, nor does it create an attorney-client relationship. You should not act or refrain from acting on the basis of this information. This material may be considered Attorney Advertising in some states. Any prior results discussed in the material do not guarantee similar outcomes. Links provided from outside sources are subject to expiration or change.

© 2015 Morgan, Lewis & Bockius LLP. All Rights Reserved.

THANK YOU

50

Biography

51

Karen A. Abesamis focuses her practice on mergers and acquisitions, strategic and venture capital investments, and technology transactions. She advises on general corporate matters, including securities compliance and corporate governance. Her clients include public and private companies, financial institutions, venture capital funds and corporate investors. Having practiced in the Bay Area for more than a decade, Karen has significant experience working with technology companies and non-technology companies that are finding opportunities to grow through the use oftechnology.

Karen Abesamis

Partner

Silicon Valley

+1.650.843.7277

San Francisco

+1.415.442.1317

karen.abesamis@morganlewis.com

Click Here for full bio

5252

U.K. and U.S. Disclosure Conventions

Compared

Carol Osborne

London

53

• There is opportunity:

– Despite Brexit, the UK is still the top destination for US-

European M&A activity, representing nearly 40% of all US-EU

deals since 2009

– Deal activity was expected to increase in 2020 pre-COVID 19

due to increased certainty around Brexit and a decisive

Conservative win during the December 2019 elections.

– COVID-19 (and impacts on certain key sectors) will create

opportunities for bargain hunting especially for well-funded US-

based investors

• Understanding the landscape improves deal efficiency

and client happiness!

Why relevant to a U.S. practitioner?

54

• In theory, due diligence and disclosure are two very separate exercises: – due diligence being undertaken at the outset of the deal by the Buyer in order to test the price and inform the

appropriate terms of the transaction;

– disclosure being undertaken by the Seller in response to the warranties in the acquisition agreement and in

order to avoid liability under them.

• But increasingly blurred - with all information being made available to the Buyer

(whether at the outset or subsequently) being included in the data room - and the

whole data room being generally disclosed.

• Same purposes for disclosure as in the U.S.

– Post-closing price adjustment mechanism if facts are not as represented.

– Pre-closing diligence opportunity for the Buyer which allows a pre-closing price

adjustment, an opportunity to seek a specific indemnity (with or without liability

caps) or the right to walk away.

• Special situations (auction or bankruptcy/administration) limit opportunities for full

diligence but limited warranties mean there are also limited disclosures.

Purposes of Disclosure Practice

55

• Disclosure is the means by which the Seller notifies the

Buyer of matters that are inconsistent with the

Warranties.

• It enables the Seller to avoid liability under Warranties –

in respect of the matters properly disclosed – and is

valuable to the Buyer as it provides it with further

information (which it may use for a price

reduction/indemnity/remedial action/other commercial

advantage).

• The disclosures are provided by means of a Disclosure

Letter.

Overview of the

U.K. Disclosure Process

56

• Make sure the letter of intent (LoI) is clear on this point!

• Don’t use throw away phrases like “usual and

customary” because you might not get what your client

wants.

• COMPARE:

– In the U.S., warranties are customarily given on a full indemnity

basis

– In the U.K., warranties are given on a contract basis

• It matters:

– Determining damages on a contract basis vs. damages on an

indemnity basis

Recovery on a Contract vs. Indemnity

Basis

57

• English law rule: protection arising from disclosure will not exist merely by disclosing

enough for the Buyer to “work out” certain facts and conclusions.

– A disclosure letter merely refers to other documents as a source of information

will generally not be adequate or fair disclosure

– Disclosure by omission will rarely be adequate

– "… fair disclosure requires some positive statement of the true position and not

just a fortuitous omission from which the buyer may be expected to infer matters

of significance.”

• The concept of “Disclosure” is always set forth in the acquisition agreement:

– The Buyer will require 'fair disclosure' to mean information is provided in

sufficient detail to reasonably allow its full relevance to be understood.

– The Seller’s preference will be to limit the requirement to providing sufficient

detail to identify the nature of the matter but not its potential impact.

• Effect of Buyer’s knowledge or investigation – Sandbagging and Anti-Sandbagging

discussed below.

What is Adequate Disclosure?

58

• The bundle of documents referred to in the Disclosure

Letter

• Why needed?

– Disclosure letter will often provide that the contents of

documents referred to therein are deemed to be disclosed

• Can you just disclose the entire data room?

– Different desired outcomes.

• Mechanics:

– Two identical physical or electronic bundles “initialed” by the

parties are delivered.

– Timing is important – especially for the buyer.

The Disclosure Bundle

59

• Separate from the acquisition agreement; not a schedule.

• Like a legal opinion letter, the preamble sets the context for the disclosure letter and what is

(and isn’t included).

• General Disclosures

– Information available through public sources or which the Seller can obtain

independently.

– COMPARE: This is generally not considered disclosure in the U.S.

• Specific Disclosures

– Facts, matters or circumstances which, if not disclosed, would result in a breach of one or

more warranties.

– Generally tied to specific warranties but can also be deemed to cover others.

– COMPARE: This is the U.S. style disclosure schedule.

• When delivered?

– Usually delivered just prior to signing

– Concerns around confidentiality, data protection and privilege may well affect what is

disclosed and/or when (certain documents being withheld until a late stage and certain

details being redacted or anonymised).

The Disclosure Letter

60

• Contents of Acquisition Agreement (schedules, etc.)

• Companies House searches (i.e., publicly filed corporate records)

• The contents of the Seller’s company books and records

• Property Searches

• Other public record searches (e.g. UK Intellectual Property Office)

• Physical inspections of properties or assets

• Audited accounts

• Documents in the disclosure bundle

• Matters “in the public domain”

General Disclosures

61

• Includes details of any specific matters that are known to the Seller or persons designated as having “knowledge.”

• The specific disclosures are produced by reference to the Warranties themselves.

– Disclosure against one Warranty would normally count as disclosure against all Warranties unless the disclosure is not precise enough to qualify as “fair” disclosure.

• As discussed, disclosure must be sufficiently precise (i.e., match any definition for proper disclosure in the acquisition agreement) or it may not serve as a defense to a breach of warranty claim.

• Process for developing specific disclosures comparable to the U.S. but COMPARE:

– The Seller should make careful and reasonable enquiry into the subject matter of the Warranties. If it fails to do so, it exposes itself to liability under the Warranties – and it will lose the benefit of any Seller limitations on liability if a Warranty is given fraudulently.

– A Warranty will be given fraudulently if the person making it knows it to be untrue, does not believe it to be true or is reckless as to its truth!

• The Buyer should not hesitate to mark up the specific disclosures if necessary.

Specific Disclosures

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• The nature and extent of the disclosure will depend upon the nature of the materiality

qualifier:

– qualifier relating to 'performance' (e.g., “The Target has complied in all material

respects with all laws") will require the Seller to disclose material non-compliance

(ie the nature and extent of how it has complied – rather than necessarily

considering the impact of non-compliance;

– qualifier in relation to a 'thing' (e.g., “The Target is not in breach of any material

contract") will be easier to disclose against – as the Seller simply has to consider

whether it has breached any material contract (and there may even be a

definition of what counts as a material contract) – it should not, for example, have

to consider material breaches of non-material contracts; or

– qualifier relating to the nature of the 'impact' (e.g. “The Target has not done or

omitted to do anything in breach of any law that could result in a penalty or other

liability which has a material adverse effect on its business") may arguably only

require something quite significant to be disclosed – but it would be prudent for

the Seller not to construe any requirement to disclose too narrowly.

Disclosure for Warranties Qualified by

Materiality

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• Yes, we have it in the U.K. too (we just don’t call it that).

• The definition of “Disclosed” sometimes excludes

matters known to the Buyer merely as a result of due

diligence or data room access. If the matter is not

discussed in the disclosure letter or the document is not

in the bundle, it is not considered “fairly disclosed.”

• Case law suggests the Buyer may not be able to rely on

such a savings clause if it (directly or through its

advisors) had actual knowledge of a matter.

Sandbagging and Anti-Sandbagging

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• Full or partial disclosure might be undesirable for commercial reasons:– Risk of losing attorney-client privilege in a sensitive litigation matter

– Concern over unduly aggressive pre-closing purchase price adjustments

• Caveat Emptor: in the absence of a Warranty to disclose against, the Seller is not obliged to draw to the Buyer's attention matters that might reasonably effect Buyer’s willingness to proceed with the transaction on the proposed terms or at all.

• BUT if the Warranty has been agreed and the Seller fails to disclose something it knows: – the Warranty will have been given fraudulently.

– Seller will lose the benefit of any Seller limitations on liability.

– Seller also runs the risk of criminal liability.

Deciding not to disclose…

65

If you have any questions:

Carol OsborneBryan Cave Leighton Paisner

Governor’s House5 Laurence Pountney Hill

London EC4R 0BRcarol.osborne@bclplaw.com

This presentation was provided as an educational service. It is an overview only, and should not be construed as legal advice or advice to take any specific action. If you have questions regarding any of the content contained in this presentation, we recommend you seek the assistance of a knowledgeable legal professional.

Thank you!