What do you have to disclose when you sell a business?

The way company share sales are meant to work and the way they can end up applying are not always the same.

The way share sales should work is that problems ought to be disclosed before the contract is signed. English law encourages disclosure as we explain below. Disclosure is a contentious area in many sales of business transactions as buyers  often try to negotiate a price adjustment after certain disclosures are made.

Unscrupulous sellers may try to avoid making full disclosure in the hope the buyer does not find out if they do find out, they do not have the funds to pursue an action for loss.

We have a lot of experience of dealing with sales of varying sizes of companies across a range of sectors.

Disclosure letter

The share purchase agreement  is negotiated and will usually include a list of warranties. The warranties are contractual statements about the state of the seller’s business when it is purchased. Warranties tend to be a lengthy part of a share purchase agreement and cover a comprehensive list of aspects of the business being sold. Clauses tend to be of the boiler plate, standard types.

If a warranty is untrue at the time of the sale and purchase, a seller is required to disclose why the warranty is untrue and this is done in a disclosure letter rather than by deleting the warranty.

By a seller disclosing information against the warranties in a disclosure letter, the seller’s risk is reduced as a buyer is unable to pursue any claims against that seller for a loss for a breach of a warranty. A prudent buyer should consider that whilst a disclosure may mean there is an increased risk he/she/they can use this as an opportunity to negotiate a lower purchase price.

Common areas a buyer should request warranties on

Typically, a buyer should request warranty protection from the seller in connection with:

  • the share capital of the company being purchased
  • the accounts of the company being purchased
  • financing and banking
  • real property
  • environmental issues
  • commercial contracts
  • employees
  • intellectual property
  • legislation
  • tax

The above list is not exhaustive and warranty protection required should always be tailored for the transaction at hand.

What do you do if the seller has not disclosed important information?

If a seller has failed to disclose an issue to you meaning that a warranty provided by the seller when the shares were purchased was untrue, you have a possible claim against the seller. The next step for you is to show that you have suffered a loss. This may seem obvious but without suffering a loss, there is no right to pursue a claim for damages.

Damages for breach of warranty or inaccurate information from the seller?

Working out how much you can ask the seller to pay you is not easy to calculate. The usual method of valuing a loss is calculated by taking the market value of the company you purchased had the warranty been true and deducting the actual market value of the company you purchased. The difference between the two is the value you ask the seller to pay you. Performing the calculation will be a matter of debate invariably.

Tactical considerations

On the flip side, it is worth considering that a seller will likely argue that notwithstanding that he failed to let you know of the other company and its liabilities, you made a poor commercial decision and overpaid for the shares. To be successful at recovering any damages, you will need to demonstrate that there is a difference between the actual market value of the company you purchased and the value of the company you purchased had the warranty been true.

Ensuring that losses are kept to a minimum

The rules of the English legal system require that if you suffer a loss, that loss is kept to a minimum as a result of a breach of a warranty. Therefore, if you have suffered a loss like , you are required to take steps to mitigate losses.

For example, if the acquired company has undisclosed liabilities such as a bank loan which is accruing interest, just because you were not told of the liability does not mean that you can stop repaying the loan when it should otherwise be repaid. By stopping repayment, you may incur additional charges raised by the lender which may not be recoverable from the seller.

Using an incorrect method of valuing a loss can be costly, which is why we are at hand to guide you through the process.

If the buyers of your business later claim you provided misleading or inaccurate information or the accounts were inaccurate, we can assist in defending any claims made, including for alleged breach of warranty. Please do get in touch. We regularly deal with the sale and purchase of shares in private companies and disputes that arise therefrom. You can call us on 0207 438 1060.

Pia Dalziel

An accomplished and experienced commercial solicitor with 12 years experience. Specialist in running corporate transactions and drafting,reviewing and advising on commercial agreements.

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