No undisclosed material liabilities: Overview, definition, and example
What are "no undisclosed material liabilities"?
The term "no undisclosed material liabilities" refers to a contractual provision where a party, typically a seller in a business transaction, agrees that there are no significant financial obligations, debts, or other liabilities that have not been disclosed to the other party. In a merger, acquisition, or investment context, this provision is used to ensure that all major financial risks or obligations are fully disclosed, allowing the buyer or investor to make an informed decision. Material liabilities are those that could significantly impact the value of the business or the terms of the transaction. If such liabilities exist and are not disclosed, it could lead to a breach of the agreement.
In simpler terms, this means that the party making the statement guarantees that they have revealed all important debts or financial risks that could affect the deal.
Why is "no undisclosed material liabilities" important?
The "no undisclosed material liabilities" clause is important because it protects the buyer or investor from unexpected financial obligations that could arise after the transaction is completed. Without this clause, the buyer may end up inheriting debts or legal obligations that were not apparent during negotiations, which could have a significant negative impact on the value of the business or investment.
For sellers, including this clause may increase trust with the buyer, as it reassures them that the seller is transparent about the financial situation. For buyers or investors, the clause provides assurance that they are not taking on hidden risks or unexpected liabilities that could affect the value of the deal.
Understanding "no undisclosed material liabilities" through an example
Imagine a company is being sold to an investor, and the seller provides financial statements showing no major debts or obligations. To ensure the buyer is fully informed, the purchase agreement includes a "no undisclosed material liabilities" clause. This clause assures the buyer that there are no hidden liabilities, such as pending lawsuits, off-balance-sheet debts, or environmental obligations, that could affect the business’s future value. If such liabilities exist and were not disclosed, the buyer may have the right to seek compensation or cancel the deal.
In another example, an investor is considering purchasing shares in a startup. The investor requires the company to confirm, through a "no undisclosed material liabilities" clause, that there are no undisclosed financial risks, such as unpaid taxes or large outstanding debts. The clause ensures that the investor won’t inherit hidden financial burdens that were not disclosed during the investment negotiations.
Example of a "no undisclosed material liabilities" clause
Here’s how a "no undisclosed material liabilities" clause might appear in a contract or agreement:
"The Seller represents and warrants that, as of the Closing Date, there are no material liabilities, debts, or obligations of the Company that have not been disclosed in the financial statements or otherwise made known to the Buyer. The Seller agrees to indemnify the Buyer for any undisclosed liabilities that arise after the Closing Date, which were not previously disclosed in writing."
Conclusion
The "no undisclosed material liabilities" clause is a vital provision in business transactions, ensuring that all significant financial risks and obligations are disclosed and accounted for. This provides protection for buyers and investors, allowing them to make informed decisions and avoid inheriting unexpected liabilities. For sellers, this clause fosters transparency and trust in the transaction process.
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.