No undisclosed liabilities: Overview, definition, and example
What are no undisclosed liabilities?
"No undisclosed liabilities" refers to a provision in a contract or agreement in which one party assures the other that there are no hidden or unreported debts, obligations, or financial responsibilities that have not been revealed at the time of the agreement. This provision is often included in business transactions, particularly in mergers and acquisitions, to protect the buyer from taking on unforeseen liabilities that were not disclosed by the seller. It ensures transparency and trust in the financial status of the parties involved.
For example, in a company acquisition, the seller may warrant that the company being sold has no undisclosed liabilities, such as pending lawsuits or outstanding debts, beyond what has already been shared with the buyer.
Why are no undisclosed liabilities important?
No undisclosed liabilities are important because they help ensure that one party is not unknowingly assuming financial risks that could affect the overall value of the transaction or business. This provision provides a level of protection for the buyer or party receiving the information, allowing them to make informed decisions based on the true financial condition of the other party.
For businesses, this provision is essential in managing risk, avoiding unexpected financial obligations, and ensuring that all material facts have been disclosed before entering into a deal or agreement.
Understanding no undisclosed liabilities through an example
Imagine a company is selling its assets to another business. As part of the sale agreement, the seller includes a warranty stating that the business being sold has no undisclosed liabilities, such as unpaid taxes, lawsuits, or debts. After the sale is completed, the buyer discovers that the company was involved in a pending lawsuit that was not disclosed. The no undisclosed liabilities clause allows the buyer to take legal action against the seller to recover any damages or expenses resulting from the undisclosed liability.
In another example, a company enters into a partnership agreement with another business. The agreement includes a clause stating that the partner has no undisclosed liabilities. Later, the business discovers that the partner had been under investigation by regulators for potential violations, which was not disclosed before the partnership was formed. The clause allows the affected business to terminate or renegotiate the agreement.
An example of a no undisclosed liabilities clause
Here’s how a no undisclosed liabilities clause might look in a contract:
“The Seller represents and warrants that, as of the Closing Date, the Company has no liabilities or obligations of any kind, whether accrued, contingent, or otherwise, that have not been fully disclosed to the Buyer. Any undisclosed liabilities shall be the sole responsibility of the Seller.”
Conclusion
The "no undisclosed liabilities" provision is an important clause in business transactions that ensures transparency and protects the buyer or receiving party from taking on hidden financial risks. By including this provision, businesses can minimize the potential for disputes and ensure that all material financial information has been disclosed before finalizing an agreement.
This clause is critical for protecting business interests, maintaining trust, and ensuring that both parties are operating with full knowledge of any liabilities that may affect the deal.
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.