In mergers and acquisition (“M&A”) transactions, disclosure is a critical component of the due diligence process and overall deal success. Seeing what is “under the hood,” so to speak, can separate a deal from going through, stopping in its tracks, or potentially haunting parties post-closing. With this, sellers face an important strategic decision and clients have asked us this vital question: is it more advantageous to overdisclose or underdisclose when responding to due diligence requests? In other words, is it better for sellers to show as much as possible or only what is asked of them? The answer more often, than not is overdisclosing. In essence, overdisclosing (1) reduces post-closing liability, (2) builds trust with the Buyer, and (3) moves the deal lifecycle more efficiently.
At its core, disclosure is about shifting risk. If a seller properly discloses a fact or exception to a certain representation and warranty, they typically limit or eliminate liability for that certain piece of information. For example, if a seller discloses that a key customer contract is structured differently from its form structure, the buyer cannot later claim they were misled if the customer refuses to use the form structure. Thus, overdisclosure protects the seller by preventing claims of misrepresentation or breach of warranty.
Disclosure also provides buyers with confidence in what they are acquiring. When a seller appears transparent and thorough in their disclosures, it builds goodwill and often smooths negotiations. A proactive approach to disclosing company details, even risks—however minor they may seem—can demonstrate integrity and reduce the likelihood of the buyer renegotiating the deal terms late in the process.
Finally, and what may seem somewhat ironically, overdisclosure can actually expedite the deal. When buyers feel they have all the information, they may conduct less extensive follow-up diligence. Withholding information, even unintentionally, often leads to delays, extra legal costs, or worse—deal failure. Further, robust disclosure can shift leverage in the sense that buyers will be less likely to walk back from already agreed-upon terms based on “newly discovered” information.
Some might argue that only providing what is asked is the more direct approach, in the sense that overshowing your hand may shed light to something that might spook the buyer. However, the risks outweigh the benefits if one goes down that route. If an issue comes to light post-closing that was not disclosed, the seller may be liable for breach of representation, even if the buyer didn’t ask about it specifically. This could result in a plethora of unwanted obstacles. Buyers may walk away if they suspect the seller is hiding problems, or they may significantly reduce their offer price to account for perceived risk. From the buyer’s perspective, underdisclosure can lead to unexpected issues post-acquisition—ranging from employee disputes to unbudgeted liabilities. Also, the costs of these obstacles— both financial and reputational—can be steep.
However, overdisclosing does not mean bombarding the buyer with irrelevant or confusing details. It is about creating a clear and defensible record of unambiguity. Counsel for sellers, therefore, should encourage strategic overdisclosure to manage any post-closing risk and create a smooth pathway towards a deal getting through to the finish line.
