The Disclosure Letter Explained: How a Seller Qualifies Every Warranty in the SPA, and Why the Buyer’s Own Diligence Becomes the Seller’s Defence
Michael King, PE Investment Manager · 8 min read ·
- The seller gives warranties in the share purchase agreement; the disclosure letter is the exceptions list delivered alongside it. To the extent a matter is fairly disclosed, the buyer cannot bring a warranty claim on it — the warranty still stands, but that particular breach is carved out of it
- Disclosures come in two kinds. General disclosures qualify every warranty at once — public registers, the accounts, and in English practice the contents of the data room. Specific disclosures are itemised against numbered warranties, and they are where the negotiation actually happens
- The test is fair disclosure: a matter must be disclosed with enough detail for the buyer to identify its nature and scope. A data dump is not disclosure, and neither is an unsignposted document buried in a folder
- The contrarian read: a buyer who ran deep diligence and accepted general disclosure of the data room has bought less protection than one who ran none, because everything found is now knowledge and knowledge is disclosed. Diligence and warranty cover are substitutes, not complements
A Warranty Is a Promise; the Disclosure Letter Is the Exceptions List
A share purchase agreement carries a warranty schedule — contractual statements of fact by the seller that the accounts are true, tax has been paid and filed, the material contracts are valid and not in dispute, there is no undisclosed litigation, and the company owns what it says it owns. Breach one and the buyer has a damages claim — a different remedy from walking away under a material adverse change clause, which addresses deterioration between signing and completion rather than a false statement about the past.
The disclosure letter is delivered at signing and qualifies that schedule. It is a letter from seller to buyer setting out matters that are inconsistent with the warranties, accompanied by a disclosure bundle of supporting documents. Where a matter is fairly disclosed, the warranty is not breached by it — or, depending on drafting, the buyer is barred from claiming on it. Either way the economic effect is the same.
That makes the disclosure letter, not the warranty schedule, the document that determines how much protection the buyer actually holds. A twelve-page warranty schedule qualified by a forty-page disclosure letter is a different instrument from the same schedule qualified by two pages. Which is why the exercise runs for weeks, and why the two categories of disclosure are not treated alike.
General Disclosures Qualify Everything at Once; Specific Disclosures Are Negotiated Line by Line
General disclosures are sweeping carve-outs applied to the whole schedule. They typically cover matters of public record — Companies House filings, Land Registry and IP register entries, the searches a reasonable buyer would be expected to run — plus the audited accounts and any management accounts already provided.
Specific disclosures are tied to numbered warranties: this customer contract contains a change-of-control clause, that employee is in a live grievance process, this VAT treatment has been queried. They are drafted by the seller's lawyers working through the schedule with management, and they are the part of the exercise that consumes real time.
The asymmetry matters. A specific disclosure is visible, negotiated and usually priced — a buyer who reads one about a change-of-control clause can ask for an indemnity, a price chip or a condition. A general disclosure is a single clause that quietly qualifies all of it. The fight over which category the data room falls into is therefore the fight over the whole warranty package, and it is settled by one standard.
Fair Disclosure Is the Only Test That Matters
English practice does not accept that a matter is disclosed merely because the documents were somewhere the buyer could have looked. Disclosure has to be fair. As Lewis Silkin puts it, for disclosure to be fair "matters must be disclosed with sufficient detail to enable a buyer to identify the nature and scope of the matter so disclosed".
Two consequences follow. A vague cross-reference does not disclose — "as referred to in the management accounts" identifies nothing. And a document dropped into a data room folder without signposting does not disclose either, because scope cannot be identified from a filename.
Note that this is a contractual standard, not a statutory one. It lives in the SPA's definition of what counts as disclosed, and that definition is negotiated. A seller pushing for "disclosed" to mean anything in the data room, and a buyer pushing for "fairly disclosed with sufficient detail to identify the nature and scope", are arguing about several million pounds of contingent liability in a definitions clause. Which brings the data room itself into play.
The Data-Room Clause Turns the Buyer's Diligence Into the Seller's Defence
Sellers want the entire data room generally disclosed. Buyers resist and insist on specific, signposted disclosure. In English practice the seller usually wins more of this argument than a US buyer expects: general disclosure of data room contents is standard here, where in US deals it is routinely resisted and disclosures are usually specific and sit in schedules to the agreement itself rather than in a separate letter.
The implication runs against instinct. Diligence is normally treated as pure risk reduction — look harder, find more, be safer. But a buyer who commissions a thorough vendor due diligence exercise, reads everything, and then accepts general disclosure of the data room has converted its own findings into the seller's defence. Every issue surfaced is now knowledge, and knowledge is disclosed.
The buyer that did no diligence at all and refused general disclosure retains a warranty claim on the same facts. That is not an argument for doing less diligence — it is an argument for pricing what is found rather than assuming a warranty will catch it later. Diligence and warranty cover are substitutes. Treating them as complements is how a buyer ends up with neither, and it shows up in the one place the disclosure letter is priced explicitly.
W&I Insurance Prices Off the Disclosure Letter, Not the Warranty Schedule
Insurers do not cover known risks. Anything set out in the disclosure letter is excluded from a warranty and indemnity policy, which means the disclosure letter defines the hole in the cover the buyer is paying for. European W&I runs around 1% of the limit purchased, with cover typically 10-30% of enterprise value and a retention near 0.5% and drifting lower — small numbers against deal size, but they buy protection only for what nobody knew.
This is also why insurers take a view on the quality of the disclosure exercise before quoting. A thin, hurried disclosure letter is not a cheaper policy; it is an underwriting problem, because it suggests the seller has not looked properly.
The verdict for anyone reading an SPA for the first time: the warranty schedule tells you what was promised, and the disclosure letter tells you what was actually sold. Read them in that order, and read the definition of "disclosed" before either.
Frequently asked questions
What is a disclosure letter in an M&A deal?
A letter from the seller to the buyer, delivered at signing alongside the share purchase agreement, setting out matters that are inconsistent with the warranties the seller has given. It comes with a disclosure bundle of supporting documents. Where a matter is fairly disclosed, the buyer cannot bring a warranty claim on it, so the letter determines how much of the warranty schedule survives in practice.
What is the difference between general and specific disclosures?
General disclosures qualify every warranty at once and cover broad categories — matters of public record such as Companies House and Land Registry entries, the audited accounts, and in English practice the contents of the data room. Specific disclosures are itemised against numbered warranties: a named contract with a change-of-control clause, a live employment grievance, a queried VAT treatment. Specific disclosures are visible and usually negotiated or priced; general disclosures are one clause that quietly qualifies everything.
What does fair disclosure mean?
That a matter must be disclosed with sufficient detail to enable the buyer to identify its nature and scope. A vague cross-reference does not meet it, and neither does an unsignposted document buried in a data room folder. It is a contractual standard rather than a statutory one — it lives in the SPA definition of what counts as disclosed, and that definition is negotiated.
Can a buyer claim for a problem that was in the data room?
It depends on whether the data room was generally disclosed and whether the disclosure was fair. In English practice general disclosure of data room contents is common, so a matter properly evidenced and signposted there will usually bar a claim. A document dumped in without signposting may not meet the fair disclosure test. US practice differs: general disclosure of the data room is routinely resisted and disclosures are usually specific.
How does the disclosure letter affect W&I insurance?
Insurers do not cover known risks, so anything in the disclosure letter is excluded from the policy. The disclosure letter therefore defines the gap in the cover being bought. European W&I typically costs around 1% of the limit purchased, with cover of roughly 10-30% of enterprise value. Insurers also assess the quality of the disclosure exercise before quoting — a thin letter reads as the seller not having looked properly.