Evaluating your next Disclosure Letter
A Disclosure Letter (DL) is a key risk allocation tool in any
M&A/PE/VC transaction. In the discussions below, we cover a few
elemental aspects of a DL, both from a Sellers' and Buyers'
perspective.
Who does a DL protect?
Conventional wisdom says that a DL protects the Seller, as it
passes certain pre-existing liabilities to the account of the
Buyer. However, as a corollary, it also protects the Buyer by
presenting details of potential land mines ahead as well as limit
his exposure to those it is willing to accept, based on DL
negotiations.
What does a DL protect against?
A DL is a protection against breach of certain
representations/warranties, and a potential indemnity claim arising
therefrom on the Seller. In other words, it is not blanket passing
of that liability to the Buyer. There can be provisions in the
Investment Agreement to cover the same red flags as a specific
indemnity item or a pre-closing liability,
