Disclosure refers to the process whereby the seller "discloses" information to the buyer that makes the warranties the seller is giving in relation to the target business untrue.
Disclosure does not take place in all acquisitions - in simpler transactions, the warranties may be qualified in the acquisition agreement in such a way so as to make disclosure unnecessary. However, where the warranties are extensive or the target business is relatively complex, the seller will often look to limit its risk of a warranty claim by providing the buyer with a detailed disclosure letter.
Whilst it may seem disingenuous for a buyer to accept disclosures against a warranty, a key incentive for a buyer is to obtain information about the business pre-completion and so provide an opportunity for a price adjustment, negotiation of an indemnity or, if the disclosure is particularly concerning, withdrawal from the transaction.
Whilst many issues that may arise during disclosure may have already been picked up during financial or commercial due diligence (if undertaken by the buyer), there may be new problems that arise during this process. In such a case, the buyer needs to consider the impact of such a disclosure on the value of the business and the appropriate course of action. In order to do this, the buyer should seek as much detail about the disclosure as possible, particularly in relation to the likely quantum of any potential liability.
It is worth noting that even if an issue surrounding the target business is not disclosed by the seller, it may be difficult to bring a claim for a breach of warranty in relation to the issue if the buyer knew about the problem prior to completion.