Disclosure letter in Austria: disclosure, warranties and liability

The warranty catalogue describes what the seller assures. The disclosure letter describes what the seller precisely does not assure because it was disclosed beforehand. Both texts belong together, because the effect of the warranties only emerges from reading both documents. A warranty on tax arrears bites more narrowly if a disclosure letter names a concrete tax audit and discloses the resulting risk.

The basic idea follows the principle of good faith: a buyer who positively knew a risk before signing cannot later act as if it had been deceived. With the disclosure letter the seller creates the evidence that the buyer knew the risk and included it in its valuation. This shifts the risk in a contractually traceable way into the buyer sphere.

In practice the disclosure letter is only finalised shortly before signing, because it takes up the last insights from due diligence. How this review proceeds is covered by the post on the due diligence checklist. We explain the term itself in the glossary.

The general disclosure covers matters that every diligent buyer must know in any event. This includes the status of the company register, the most recently adopted annual accounts, the publicly accessible tax records or the standard documents made available in the data room. This disclosure works generally against all warranties and creates a baseline of awareness.

The specific disclosure goes further. It names a concrete matter, allocates it to a particular warranty and describes the associated risk. Examples are a pending claim against a large customer, an open tax audit by the tax office or a known objection from a regulator. Such matters should be named expressly, not merely indirectly through a reference to the data room.

In practice a two-column logic has proven itself. One column refers to the relevant warranty, the other describes the disclosure. This produces a clear allocation that later provides proof in dispute. A mere collection without allocation, by contrast, creates room for interpretation that hurts the seller more than it helps in serious cases.

The disclosure letter always refers to a cut-off date, usually the day of signing. What becomes known after that date is not disclosed and can trigger a breach of warranty if the warranty is to be confirmed at completion. This constellation is governed by the bring-down: the seller confirms at completion that the warranties continue to be true.

To keep the bring-down workable, many contracts foresee a supplementary disclosure shortly before completion. If a matter becomes known between signing and completion that would breach a warranty, the seller can notify it. The buyer then has to react: if it accepts the further disclosure, the warranty steps back; if it refuses, it can rely on the completion right or on a damages regime. How this interacts with closing conditions is covered by the post on closing conditions.

The rules on supplementary notification should be drafted narrowly, otherwise the seller devalues the warranties subsequently. A limitation to new matters, a veto right of the buyer or a damages regime that compensates the buyer at least financially is usual. An initial assessment of the risks is provided by our M&A transaction risk profile.

An effective disclosure as a rule excludes a breach of warranty for the disclosed risk. This effect must be expressly governed in the contract. Otherwise it can later be disputed whether the buyer can object to the risk despite disclosure. A clear clause links warranty and disclosure: what is disclosed counts as known, and the seller is not liable for it under the warranty.

For known and specifically identified risks the indemnity is the appropriate instrument. With it the seller takes on a certain loss independently of the warranty. This is in particular common with running tax audits or foreseeable disputes, because there the warranty no longer bites due to the disclosure, but the buyer still wants a risk allocation.

On the burden of proof the disclosure letter brings clarity. In the dispute on whether the buyer knew a risk it is not the content of the data room that is decisive but the allocated entry in the disclosure letter. Whoever works cleanly here has the better position in serious cases. Whoever relies on data room references risks a slow discussion on the reach of the disclosure.