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The Warsaw Voice » Law » August 29, 2007
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Full Disclosure? (in a Polish Acquisition Contract)
August 29, 2007   
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While the media is vehemently calling for a full disclosure of the inside mechanisms of yet another political turmoil, we would like to invite you to consider the function of disclosure in another context, namely the role it plays in a Polish acquisition contract.


A contractual disclosure is the legal flip side of a warranty. It is almost a turn of phrase to say that a disclosure is made against a warranty. The two go together, as a warranty is a contractual promise that a particular statement is true. The trouble is that the term - and, more importantly, the concept - of a warranty is not Polish in origin and therefore is not automatically recognized by Polish law. With that in mind, the parties to acquisition agreements need to explain clearly how the warranties included in their contract should be understood and what the consequences would be of a breach of warranty.

While a purchaser will expect a seller to give him as many warranties as he can possibly come up with, the seller will understandably try to limit his liability under those warranties. This may be done in two ways. First, by making disclosures against the warranties, and second, by qualifying the warranties with the term "to the seller's knowledge" or suchlike.

Disclosures against the warranties are often set down in a "disclosure letter" or "disclosure schedule" attached to the acquisition contract. Typically, a disclosure letter will be divided into three sections. The first section, "General Disclosures," will list certain sources of information that are deemed automatically disclosed to the purchaser, such as matters on record with the National Court Register or the Land and Mortgage Register. The second section, "Specific Disclosures," will contain disclosures that are specific to the warranties in the acquisition agreement. Each disclosure must be clearly referenced to the particular warranty against which it is being made. The disclosures should contain sufficient detail to enable the purchaser to determine its effect on the value of the acquisition target. In turn, the purchaser will usually seek to obtain specific indemnities to cover the specific disclosures.

The third section - which is one the most likely to become a bone of contention - will be a list of disclosed documents. The seller will usually insist that this list be treated as a general disclosure against all of his warranties, which will result in a substantial limitation of his liability and will shift the burden of due diligence almost entirely over to the purchaser. The purchaser, of course, will strongly oppose any such proposal holding it to be not so much unfair as out of all proportion. A compromise may be struck by agreeing that the list of documents should be treated as an effective disclosure against the warranties only if a given matter has been "specifically and clearly" identified or disclosed in one of the documents on the list. The purchaser may further insist that the list of disclosed documents does not limit his right to raise claims under specific indemnities and for breach of warranties relating to the good title to the acquired shares, key assets or key contracts, such as leases in real estate acquisitions.

Apart from disclosures, the seller will usually seek to qualify certain warranties to his actual knowledge. A compromise might be reached by stating that where a warranty is qualified by an expression "so far as a party is aware" or a similar expression, the seller shall be deemed to have such additional awareness as he would have if he had made all due, diligent and careful inquiry (constructive knowledge). This may be further extended to cover the knowledge of the seller's advisers or the members of the governing bodies.

The question of knowledge will also arise with regard to the purchaser, to the extent that either generally or during his (or his advisers') due diligence investigation into the acquisition target he became actually or constructively aware of a breach of warranty. The seller will attempt to limit its liability for breach of warranty in such circumstances, and the purchaser will counter by requesting a clause that his knowledge would not prejudice a breach of warranty claim.

The seller will most likely try to classify the purchaser's due diligence as effective disclosure against the seller's warranties. Hence the importance of actually subjecting a full disclosure to the scrutiny of a due diligence examination conducted with, perhaps, an extreme level of professional care.

Tomasz D±browski
Arkadiusz Wierzbicki
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