INSIGHTS

The Disclosure Letter Explained

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A disclosure letter is a key document in many sale and purchase of business transactions, as well as asset and share sales. A disclosure letter serves two main purposes and it provides the buyer with specific information about the business they will be acquiring by the seller to assist them with their due diligence since it is prepared in a way that it includes general and specific disclosures regarding the seller’s warranties in the acquisition agreement. It must be mentioned if a seller makes inadequate disclosures it will cause a breach of warranty which could allow the buyer to recoup some or even the entire purchase price.

As it is mentioned above, a disclosure letter serves two main purposes. Firstly it provides specific information and thus it has an information provision to the purchaser that may be of particular interest to them about an asset, a business etc. This provision complements all of the information provided in “the data room” of the transaction or in an exchange made between the parties. It also has an updating effect with its information provision. Secondly, it minimizes the seller’s liability. It is being used to limit any warranties that the seller provides in the purchase agreement and it must set out any information about the assets that is inconsistent with the warranties in the purchase agreement.

The form of a disclosure letter can be divided into three parts; introduction, general disclosures and specific disclosures. The introduction clarifies the purpose of the letter and refers to the applicable sale agreement while the general disclosures covers certain matters that appear in public records and/or of which the buyer ought to be aware on the basis of pre-contract enquiries or which a buyer would normally make. Usually, general disclosure parts are being prepared as wide as possible. It can be said that the special disclosures part is the most important one since an incorrect statement or not disclosing a specific matter will constitute a breach of warranty. Time to time, a seller may want to refer to certain documents when making a specific disclosure by annexing those documents which can also be named as the disclosure bundle. Of course the disclosure bundle should contain all documents referred to in the warranties and/or the specific disclosures.

Even if there is no processes defined regarding to the disclosure or discovery documents under the Turkish Civil Procedure Law like it is in common law, parties to can of course attach a document which has the same characteristics of the disclosure letter. However, parties to a dispute can also attach any documental evidence to their pleadings even if that document is not named as a disclosure letter to rely in case of a dispute. Another possibility is that a parties to a dispute would need to make application to court that the opposing party should disclose a document or evidence in case of an ongoing dispute which will prove that the other party is aware of the purchase elements entirely.

It has to be said that a disclosure letter or any document which has the same characteristics with a disclosure letter must be prepared by an attorney at law since it is advantageous for the parties who are entering into a purchase agreement. Parties should be aware of a poorly drafted disclosure letter can cause repaying of the entire purchase price by the seller or not being able to claim the purchase price by the buyer since being misled.

For further information and inquiries please contact:

Av. Z. Deniz SEZER ([email protected])

– Hansu Law Office

Hansu Law Office is at your disposal to provide service to its local and foreign clients especially in the field of real estate, companies, tax and intellectual property rights. This bulletin aims at sharing the developments in the field of law. It should not be considered as a legal opinion or guidance. The opinion of the legal counselor should be taken regarding the private questions and problems.

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