The Significance of the Full Disclosure Representation in Mergers and Acquisitions

By: Vaughn Marshall

In the sale of a business, negotiating the terms of the purchase agreement (aside from foundational economic terms) includes an exercise in the allocation of risk between the buyer and the seller, and one portion of the purchase agreement that highlights these competing interests of the buyer and the seller are the seller’s representations and warranties.  This is particularly true when it comes to the “full disclosure” representation.  The full disclosure representation may be drafted as follows:

“Neither Seller nor the Shareholders have knowledge of any fact (other than general economic or industry conditions) that may materially and adversely affect the Assets, the Business, prospects, financial condition, or results of operations of Seller that has not been set forth in this Agreement or the Disclosure Schedule.”

For clarity, this representation is distinct from the “10b-5” representation that is included in many purchase agreements.  That representation is intended to track Securities and Exchange Commission Rule 10b-5, and analysis of that representation is beyond the scope of this post.  The full disclosure representation operates as a catch-all backstop, that, depending on which side of the transaction you’re sitting, can be an important risk mitigation tool or an overreaching substitution for thorough due diligence.

Buyers Perspective

From the buyer’s perspective this representation gives the buyer added comfort that there are no “gotchas” that have not been disclosed to it in writing by the seller.  Buyers may take the position that this representation is necessary where the buyer feels that it has not had an opportunity to conduct full and complete due diligence, where the seller has insisted on a fast-paced path to closing, or due diligence has shown cause for concern on the part of the buyer.  More buyer-favorable versions of this representation may remove the knowledge qualifier or the carveout for general economic or industry conditions.


Sellers Perspective

On the other hand, sellers may view this representation as the buyer substituting overbearing contract terms for thorough due diligence.  From the seller’s perspective, this representation can open the door for liability if the buyer failed to properly value the target, as opposed to liability for the breach of specifically negotiated representations and warranties.  If a seller is willing to give this representation at all, the version presented above is a more seller-friendly formulation.  It is important for the seller to add as many qualifiers as possible, and to be sure that the representation is not limited to just the purchase agreement, but also includes any disclosure schedules/letter and if at all possible, due diligence materials provided to the buyer (i.e., data room).


Both buyers and sellers should consider the inclusion of this representation in light of the indemnification remedies available to the buyer under the purchase agreement, the quality of the due diligence provided by the seller to the buyer, the risk of underlying breaches of other representations and warranties, and the premium paid by the buyer (or lack thereof).  The full disclosure representation is an example of where an experienced M&A attorney provides value to their clients through the ability to focus on the details while keeping the big picture in mind.


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Meet Author Vaughn Marshall


Vaughn Marshall

Vaughn is driven to help his clients achieve their goals by providing practical legal advice. Due to a diverse background, including both a J.D. and an M.B.A., Vaughn helps clients navigate complex issues while keeping sight of the big picture. Vaughn brings this unique perspective all of his practice areas, including corporate law, mergers and acquisitions, securities, commercial real estate, commercial finance, and general transactional matters.

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