Disclosure statement: Overview, definition, and example
What is a disclosure statement?
A disclosure statement is a document used to provide important information to a party in a transaction, typically outlining material facts, risks, or conflicts that may affect decisions. It is commonly used in financial, legal, and business contexts to ensure transparency and prevent misleading or incomplete information.
For example, when purchasing a property, the seller may provide a disclosure statement that outlines any known issues with the property, such as structural damage or environmental hazards.
Why is a disclosure statement important?
A disclosure statement is crucial because it ensures that all relevant information is shared between parties, promoting fairness, trust, and transparency. In many cases, failing to provide a proper disclosure statement can lead to legal liability, penalties, or the voiding of contracts.
For businesses, using disclosure statements helps mitigate risk, protect against fraud, and ensure compliance with laws, such as those governing securities, real estate transactions, or mergers and acquisitions.
Understanding disclosure statements through an example
Imagine a company is selling its assets to another business. Before the sale is completed, the seller provides a disclosure statement that includes information about any outstanding debts, legal disputes, or regulatory issues. This helps the buyer assess the risks before finalizing the transaction.
In another example, a company is offering shares to the public. As part of the initial public offering (IPO) process, the company must provide a disclosure statement to potential investors, detailing its financial condition, business operations, and risks associated with the investment.
An example of a disclosure statement clause
Here’s how a disclosure statement clause might appear in a contract:
“The Seller shall provide a Disclosure Statement to the Buyer, which shall include all material facts, risks, liabilities, and other relevant information related to the assets being sold. The Buyer acknowledges receipt of such statement and understands the disclosed information.”
Conclusion
A disclosure statement is a document used to provide important information in transactions, ensuring transparency and preventing misunderstandings. It helps businesses protect themselves from future liabilities and maintain trust in their dealings.
For businesses, ensuring that proper disclosure statements are provided and thoroughly reviewed is essential for informed decision-making and legal compliance.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.