Disclosure Letters in M&A: Structure, Risks and Common Mistakes in Czech Deals

JUDr. Jakub Dohnal, Ph.D., LL.M.
JUDr. Jakub Dohnal, Ph.D., LL.M.
20.5.2026 | ARROWS law firm

A disclosure letter is a key document in M&A transactions that protects the seller against future claims for damages and provides the buyer with a truthful picture of the target company. Its correct and careful preparation is essential, as any omissions expose both parties to significant legal and financial risks. The attorneys at ARROWS, a Prague-based law firm, have extensive experience in this area.

The photo shows a lawyer discussing the topic of disclosure letters in M&A transactions.

Concept of warranties, disclosures, and their mutual relationship in legal practice

When purchasing a company or part of it, the seller undertakes, through seller’s representations, to guarantee certain facts about the company. These representations are called warranties and are contractual statements of fact relating to the company itself, its finances, rights, liabilities, employees, real estate, contracts, and other aspects of the business.

In the context of Czech law, warranties in share purchase agreements are governed primarily by the general provisions of the Civil Code (Act No. 89/2012 Coll.), in particular as regards liability for defects and contractual representations, including the sale of an enterprise (§ 2175 et seq.).

Warranties serve a number of functions – they provide the buyer with a tool to verify that they will truly receive what they believe they are buying, and they also provide the buyer with a legal basis for damages if it turns out that any of the warranties was untrue.

However, the seller can almost never undertake obligations in an absolute sense without exceptions. Practically every company has some minor disputes, arrears, real estate issues, or contractual imperfections.

This is precisely why a disclosure letter exists: a formal document in which the seller qualifies the warranties by disclosing all matters that would otherwise constitute a breach of those warranties.

A disclosure letter is therefore a tool that allows the seller to say, “yes, I am giving you these warranties, but with these exceptions,” without breaching the contractual commitment. It is essential to understand that warranties and disclosures must always be assessed together and in the context of the entire agreement. If, at this stage of negotiations, a disputed interpretation of the warranties or the scope of disclosure arises, it may be appropriate to involve support in the area of commercial and litigation disputes. It is not the case that the seller can simply write anything into the disclosure letter and thereby ensure that the warranties mean nothing at all.

Disclosures must be sufficiently specific and clear. If a disclosure does not meet the standard agreed by the parties in the purchase agreement (for example “fair,” “full,” “clear,” etc.), then the relevant matter may not qualify as a disclosure and the seller may still be liable for breach of warranty. This is exactly where many sellers run into trouble – they prepare a disclosure that is vague, unclear, or not agreed with the buyer, and then it turns out that it provides them with no protection. A practical step to prevent this is to carry out your own review in the form of vendor due diligence even before negotiations begin, so that the disclosures reflect the actual risks.

Structure and function of a disclosure letter in the M&A transaction process

In practice, a disclosure letter is usually divided into two main categories: general disclosures and specific disclosures. This distinction is not merely formal – it has a fundamental practical and legal impact on what is actually “carved out” from the warranties and how disputed issues are handled in practice.

General disclosures relate to matters that are already known, or that should be known to the buyer because they are in the “public domain.”

Typically, these are pieces of information found in the companies register (in the Czech Republic, for example, the Commercial Register maintained by the registration court, whose activities fall under the Ministry of Justice and which is accessible via the Justice.cz portal). In practice, when setting up general disclosures it is also advisable to address the link to the purchase price and its mechanism (e.g., locked box vs. closing accounts), as described in the article How the final price is determined when selling a company: Closing accounts vs. locked box.

General disclosures often take the form of a sentence such as: “The Seller generally discloses all matters contained in the companies register and which are known to the Buyer on the basis of a duly conducted due diligence process.”

However, this is precisely where one of the main risks arises. If the seller could afford to define “general disclosures” in a very toothless way, for example merely as “everything in the register and in the data room,” it could in practice mean that nothing is carved out from the warranties at all.

Legal drafting in different countries therefore differs in how openly it defines general disclosures, and Czech purchase agreements seek to balance this risk by requiring general disclosures to be specific and substantively relevant. Specific disclosures, by contrast, are very concrete. Each specific disclosure usually relates to one specific warranty set out in the purchase agreement.

If the purchase agreement focuses on the statement that “none of the employees has indicated that they would leave the company in the last six months,” then in the specific disclosures the seller must list, by name, each employee who has in fact given such notice. This means that disclosures “refine” the information and give the buyer a chance to investigate it further, request additional data, or even reconsider the transaction. This is also connected with the need to properly set up the procedural documentation and liability framework across the entire transaction, which typically falls within the scope of company sales and transaction advisory.

Attorneys from ARROWS advokátní kancelář know that specific disclosures are the most discussed part of the entire process. The seller aims for brevity and generality (to minimise risk), while the buyer demands detail and specificity (to gain a clear picture of the acquisition).

Typically, this is where legal and negotiation skill proves most important.

Practical risks and legal implications of a poorly prepared disclosure letter

Many Czech lawyers, directors and CFOs do not realise how critical proper preparation of a disclosure letter is for the transaction’s future legal certainty. The risks are very specific—and very expensive.

The first and most obvious risk is direct financial liability. If the seller has given a particular warranty and has not disclosed the relevant matter in the disclosure letter, the seller becomes exposed to the buyer’s claim for damages for breach of warranty. Depending on the impact on the company’s value, this can amount to tens to hundreds of millions of Czech crowns. For example, the seller warranted that “all real estate is owned by the company and is not encumbered by easements or legal restrictions”.

However, if the seller failed to state in the disclosure letter that one of the key properties is subject to an easement in favour of a competing company, causing annual losses in the millions, a problem arises. When the buyer discovers that it cannot use the property freely as expected, it may demand damages from the seller for breach of warranty.

The second risk is damage to the seller’s reputation and credibility, or that of its owners. A seller who attempts to conceal important information or disclose it inadequately builds a reputation as someone who is difficult to deal with.

If the seller is a party with a history of multiple transactions, it cannot afford damage to its goodwill. This may lead future partners to perceive it as unreliable. 

The third risk is a legal dispute and court proceedings. When the buyer finds that the disclosure letter was incomplete or misleading, it will usually first seek compensation under the warranty provisions.

If the seller refuses or a dispute arises as to what should or should not have been disclosed, it may end with both parties becoming involved in court proceedings. In the Czech Republic, such disputes arising from breaches of contractual warranties are resolved in civil proceedings (or in arbitration, if agreed) under Act No. 89/2012 Coll., the Civil Code, and Act No. 99/1963 Coll., the Code of Civil Procedure. Such proceedings may take many years and entail significant legal costs for both parties, typically in the hundreds of thousands to low millions of Czech crowns.

The fourth, and often overlooked, risk is the transaction being blocked. If, during the due diligence phase or shortly after signing the agreement but before completion (closing), it is discovered that the disclosure letter contains material limitations and omissions, the buyer may simply reconsider the transaction or withdraw.

This applies in particular to structures where completion of the transaction is conditional upon nothing material being revealed in advance.

Categorisation and qualification standards for a disclosure letter

Legal texts dealing with disclosure letters also address the question of what exactly “sufficient disclosure” means. Share purchase agreements prepared by lawyers typically include a definition of the standard of “disclosure” that must be met.

These standards are purely contractual in nature and may be phrased as “fair disclosure”, “full disclosure”, “clear disclosure” or “accurate disclosure”. Their interpretation is then governed by the general principles for interpreting legal acts under the Czech Civil Code.

The “fair disclosure” standard means that the disclosure must not be unclear, chaotic or overly general. In practice, this means the seller cannot simply write “there are some legal disputes,” but must specify which disputes, what stage they are at, what the risk is expressed in monetary terms, and so on.

The “fair” standard therefore imposes a higher obligation on the seller to be specific and precise. The “full disclosure” standard means that practically everything affecting any warranty should be disclosed. This is the strictest standard from the seller’s perspective. Any detail that should be known to the buyer and that relates in any way to any warranty must be stated. The “clear” or “accurate” standard is usually less strict than “fair” and significantly less strict than “full”, but it requires that the information be true and understandable.

In Czech-English transactions involving foreign investors, the Anglo-Saxon “fair” standard, or even “full”, is often used, which means Czech sellers must realise they are taking on very onerous obligations.

ARROWS attorneys in Prague encounter cases where sellers did not realise what standard they were actually committing to, and then found themselves in a situation where their disclosure letter was insufficient and faced a damages claim.

The most common mistakes and practical risks in preparing disclosure letters in the Czech Republic

Observations by ARROWS attorneys in Prague who focus on disclosure letters in practice show that there are several recurring mistakes that sellers repeatedly make.

The first and most common mistake is uncertainty and vagueness. Sellers often write disclosures that sound like “there are certain legal disputes”, “there are certain issues with real estate” or “there are certain matters that may be problematic”.

Such statements tell the buyer nothing and will not work as protection for the seller. The buyer then lacks information that would allow it to be cautious, while the seller has the illusion that it has protected itself “with something”.

The second common mistake is organisational confusion. Disclosure letters contain dozens to hundreds of items. If the seller and its lawyers are not careful, the disclosure letter will become a pile of unorganised information that does not relate at all to the specific warranties in the share purchase agreement.

This means the buyer will not be able to understand what is actually being disclosed and what is not, which may lead to an argument that the disclosure letter did not work at all and the seller therefore failed to qualify its warranties. Proper organisation of the disclosure letter should follow the structure of the share purchase agreement itself, with each disclosure being precisely linked to a specific warranty.

The third mistake is the inability or unwillingness to filter out information that the seller thinks might be problematic but is in fact not relevant. Sellers sometimes think that if they refer the buyer to the “data room” or “all documents in the register”, they have already protected themselves. But that does not work.

The data room or public documents are not, in themselves, disclosure; the seller must explicitly point to what in the data it considers relevant.

The fourth mistake is being out of date. Disclosure letters should be updated up to the moment the transaction is completed (closing). If the seller discovers at the last minute that something new has happened that relates to any of the warranties, it must immediately include it in the disclosure letter.

Many sellers think that once they sign the original disclosure letter, it is done. That is a very dangerous assumption.

The fifth risk is at the opposite end of the spectrum—excessive caution and over-disclosure. Some companies, especially legal or scientific firms, try to include literally everything they can think of in the disclosure letter.

This has a paradoxical effect: too much information becomes unclear, the buyer cannot navigate it, and ultimately it may turn out that the disclosure letter was so chaotic that it did not operate as an effective qualification of the warranties at all. The right balance must be found.

Potential issues

How ARROWS helps (office@arws.cz)

Unclear and vague disclosures: general statements without specific information do not provide protection for the seller

Precise disclosure wording: we will help you describe risks in a specific and legally effective way so that they genuinely qualify the warranties

Chaotic document structure: misalignment between the disclosure letter and the share purchase agreement leads to the invalidity of the warranty qualifications

Systematic linkage to the agreement: we will set the structure of the disclosure letter according to the individual warranties and ensure clarity

Incorrect reliance on the data room: general references to documents without specific identification do not work as disclosure

Targeted references to documentation: we will ensure that each relevant piece of information is expressly identified and legally usable

Outdated information: a disclosure letter that is not updated before closing exposes the seller to liability

Ongoing updates: we will ensure continuous supplementation of disclosures up to the completion of the transaction

Excessive amount of information: overly broad disclosures lead to lack of clarity and loss of effectiveness

Balanced scope of disclosures: we will help you set the optimal level of information so that it is clear and effective

Resolving problematic situations and questions related to disclosures

In practice, we encounter many situations where it is not clear whether something should or should not be included in the disclosure letter. The attorneys at ARROWS, a Prague-based law firm, deal with these questions very often and can resolve them through legal analysis and experience across individual sectors.

Most common questions regarding problematic situations

1. What should you do if the seller does not know whether a particular fact breaches any warranty?
In such cases, the safest approach is to include the matter in the disclosure letter and leave it there. If the seller hesitates, it usually means it should be included. It is better to be cautious. The attorneys at ARROWS, a Prague-based law firm, recommend in such situations that the seller or the buyer consult the actual wording with a lawyer who knows the Czech legal system and the market practice in the relevant sector.

2. How long should a disclosure letter be?
There is no universal answer. Some transactions can manage with a disclosure letter that is only a few pages long because the company is simple and without major issues. Other transactions, especially in complex sectors such as financial services or real estate, may have disclosure letters running to tens or hundreds of pages. The key is not length, but relevance and completeness.

3. What if the buyer and the seller cannot agree on what should be included in the disclosure letter?
This is very common, and this is exactly where legal experience and negotiation skill play a key role. The attorneys at ARROWS, a Prague-based law firm, can tell when the seller is being overly cautious and when the buyer is being overly demanding. Their goal is to reach a reasonable solution through legal argumentation and market knowledge that will be acceptable to both parties.

How to properly structure and prepare an effective disclosure letter

Although there is no universal template that works for all situations, there are certain best-practice principles that have proven themselves in thousands of transactions worldwide and can also be applied in the Czech Republic.

The first principle is to organically link the structure of the disclosure letter to the structure of the share purchase agreement. The share purchase agreement usually consists of a number of chapters, each dealing with a specific topic – finance, rights and obligations, assets, employees, taxes, third-party contracts, etc.

The disclosure letter should have the same chapters so that it is clear which disclosure relates to which warranty.

The second principle is to be specific and name names. If it is stated that there is a legal dispute, the following should be specified: the name of the claimant, the name of the defendant, the court where the dispute is being heard, the case reference number, the subject matter of the dispute, and the amount in dispute.

It should also state what risk the seller expects. This way, the buyer will form an accurate picture of what it means and can come back with additional questions if necessary.

The third principle is to thoroughly verify that the information stated in the disclosure letter is truly correct. If the seller finds that information disclosed in the disclosure letter is inaccurate, it should be corrected immediately.

This is important because if the buyer later learns that information in the disclosure letter was untrue, it would no longer be a case of poor or incomplete disclosure (something the seller could explain). It would be a case of outright lying, which would lead to much more serious legal consequences.

The fourth principle is continuous updating. As mentioned above, the disclosure letter should not be prepared only once. The seller should keep a log of all new information learned during the process from signing the agreement up to closing. If it is discovered that something new has happened that relates to any of the warranties, it should be added to the disclosure letter and the buyer should also be informed.

The fifth principle is coherence between general and specific disclosures. If it is assumed that a certain fact has already appeared in the general disclosures (for example, because it is in a public register), the same information should also be stated in the specific disclosures with a precise reference to where it can be found in the register or in the data room.

This prevents the buyer (or later the court, if a dispute arises) from feeling that the seller is not aware of what is actually being disclosed.

Interdependence of the disclosure letter with other key documents in the M&A process

The disclosure letter never works in isolation. It is always part of a larger set of legal documents and processes that are interconnected.

First, the disclosure letter must relate to the due diligence process (fact-finding process) carried out by the buyer to familiarise itself with the company. Due diligence usually includes legal, financial, tax and operational analysis. Disclosures should take into account what the buyer has already found out during the due diligence process.

If the buyer itself has found that there is a legal dispute (because it found it in court registers or elsewhere), then it does not necessarily need to be stated again in the disclosure letter. However, in practice it is always included to avoid any ambiguity.

Second, the disclosure letter must be coordinated with representations and warranties insurance (RWI), which is insurance commonly obtained by the buyer to cover potential claims for breach of warranties. If the seller knows that a certain matter will be insured through RWI, it may worry less about it, but that does not mean it should not be included in the disclosure letter. On the contrary—if something is insured, it should be clearly stated so that it is clearly defined what is insured and what is not.

Third, the disclosure letter must relate to the share purchase agreement as its legal basis. All disclosures must be articulated so that they clearly correspond to the specific warranties set out in the agreement.

If the share purchase agreement contains a clause stating that disclosures relate only to “material issues”, the seller should distinguish between ordinary issues and material issues and disclose only the material ones. If the agreement defines what is meant by “material”, that definition must be applied to the disclosures.

Final summary

Proper preparation of a disclosure letter is one of the most important steps in the entire M&A process. It is not mere formal paperwork that someone can file away and forget. It is a document with a fundamental legal and financial impact on both parties to the transaction.

A seller who does not pay sufficient attention to preparing the disclosure letter assumes the risk of multi-million financial losses and legal complications in the future. A buyer who does not pay attention to reviewing and analysing the disclosure letter assumes the risk of missing key information needed for proper valuation and for making an informed decision on the transaction.

The attorneys at ARROWS advokátní kancelář are aware of all these risks and have experience in addressing them in practice. ARROWS advokátní kancelář is insured for professional liability (professional negligence) up to CZK 400 million, giving our clients confidence that if anything goes wrong, there is a safety net.

If you want your transaction to be prepared safely and professionally, feel free to contact the attorneys at ARROWS advokátní kancelář at office@arws.cz, so that together we can prepare a disclosure letter that will truly protect you.

FAQ - Most common questions about the disclosure letter 

1. What is the difference between a disclosure letter and a disclosure schedule?
In common law practice, the term “disclosure schedule” is sometimes used instead of “disclosure letter”. In essence, it is the same thing—a document in which exceptions to the warranties are disclosed.
Terminology varies by region and legal system, but the function is the same. In the Czech Republic, the term “disclosure letter” or “statement of exceptions” is more commonly used.

2. Does a disclosure letter always have to be part of the share purchase agreement?
A disclosure letter is not formally part of the share purchase agreement—it is usually a separate annex to the share purchase agreement. However, the share purchase agreement must contain a reference that disclosures will be provided and must define the standard to be applied. Without such a reference, the disclosure letter would not apply at all.

3. What happens if the seller forgets to include a material matter in the disclosure letter?
If the seller forgets or intentionally fails to include in the disclosure letter a fact that breaches a warranty, the seller becomes liable for breach of that warranty. The buyer will be able to claim damages up to an amount corresponding to the impact on the company’s value. Depending on the size of the company and the seriousness of the issue, this may be a significant amount.

4. Can the disclosure letter be changed after signing the share purchase agreement?
Yes, but only if both parties allow it and if they agree on it in the agreement. Typically, up to closing (finalisation of the transaction), the seller may add new disclosures if they learn of new facts. However, removing a disclosure once it has been made is not recommended, as it could raise the buyer’s suspicion that something is being concealed.

5. What information should not be included in a disclosure letter at all?
A disclosure letter typically does not include matters of a general nature that apply to business in general (for example, “all work is subject to all applicable laws”). It also does not include matters that are expressly excluded from the scope of warranties in the share purchase agreement.

6. How do you check whether a disclosure letter is sufficient?
The sufficiency of a disclosure letter is checked by analysing whether the standards defined in the share purchase agreement (fair, full, clear, etc.) are met, and whether the individual disclosures are specific and relevant to the specific warranties. It is also checked whether there are any material gaps. The attorneys at ARROWS advokátní kancelář can carry out a legal analysis of your disclosure letter and provide you with a detailed report on which parts may be risky.

Notice: The information contained in this article is of a general informational nature only and is intended for basic guidance based on the legal status as of 2026. Although we take the utmost care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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