Key Takeaways

  • A disclosure schedule supplements representations and warranties in M&A agreements by identifying exceptions and affirmatively listing key company information.
  • The two main types—list schedules and exception schedules—serve different legal and strategic purposes for buyers and sellers.
  • Inaccurate or incomplete disclosure schedules can result in significant liability for sellers and loss of protection for buyers.
  • Updating schedules between signing and closing is common and should be addressed contractually to balance transparency and deal certainty.
  • Best practices include being specific, consistent with agreement language, and involving legal counsel early.

Disclosure schedules are generally one of the most arduous and important components of an acquisition transaction. An essential part of defining and impacting the scope of the seller’s responsibilities and warranties, the disclosure schedule offers factual disclosures pertaining to the purchase agreement.

Whether a stock purchase agreement, an asset purchase agreement, or a merger agreement, disclosure schedules are common practice when it comes to mergers and acquisitions.

There are generally two different categories into which disclosure agreements may fall:

  • Affirmative disclosure
  • Negative disclosure

An affirmative disclosure, as the name implies, is one that in which the disclosures are affirmatively required by the seller’s warranties and representations. This type of disclosure schedule will provide information such as:

  • Employee benefit plans
  • Current litigation
  • Material contract employees

Meanwhile, a negative disclosure is one that serves as an exception or qualifier to the seller’s responsibilities and warranties. Essentially, the seller is verifying that the target company complies with any and all laws, with the exception of those spelled out in the disclosure schedules.

The Types of Disclosure Schedules

Lists and exceptions are the two categories in which information may be offered in a disclosure schedule.

When the seller provides verification that the schedule provides a complete and thorough record of various business aspects to the buyer, this is referred to as a list schedule. An example of this may be the seller providing representation to the buyer regarding all intellectual property that has been registered.

This type of schedule can be highly valuable for a buyer as it provides assurances and a comprehensive overview as to the various components of the business. It is not uncommon for a buyer to then request further information, or representations, on any of the items that were listed on the schedule. For example, a buyer may request additional information on the intellectual property that is owned by the seller, such as assurances that it is, in fact, owned outright.

Some frequent examples of list schedules include:

  • Lists of stockholders and any subsidiaries
  • Employee benefit plans
  • Intellectual property that is registered and owned by the business
  • Permits
  • Insurance policies
  • Any current or outstanding debts
  • Any real property that is either owned or leased

An exception schedule is the second type. This type of schedule serves to limit the seller’s potential liability and occurs when the seller is qualifying a warranty made by the merger or acquisition agreement. In turn, this limits the scope of the seller’s representation.

An example of this may be the seller providing a warranty in the acquisition agreement that the business is not involved in any litigation or court cases. If the seller, is in fact, a defendant in a material litigation case, then that will need to be included on the disclosure schedule.

Within the scope of an exception schedule exists a noncontravention schedule, which is both quite common among exception schedules, and prudent to know about. A noncontravention schedule essentially forecasts any potential hindrances to completing the transaction, such as:

  • Any needed consents, either from shareholders or the government
  • Identifying any negative consequences that could befall the business as a result of the merger or acquisition

Common Sections Found in Disclosure Schedules

A comprehensive disclosure schedule typically contains various sections corresponding to warranties in the purchase agreement. Commonly included sections are:

  • Organizational structure and subsidiaries
  • Capitalization and equity holders
  • Material contracts and customer/vendor agreements
  • Employment matters and compensation
  • Employee benefit plans
  • Litigation and legal proceedings
  • Environmental matters
  • Taxes (including audits, deficiencies, and liens)
  • Intellectual property ownership and disputes
  • Real and personal property
  • Related party transactions
  • Compliance with laws and permits

Each section should clearly reference the corresponding contract provision, and all disclosed items must be accurate and up to date.

Importance of Disclosure Schedules in M&A

Disclosure schedules are critical in mergers and acquisitions because they shift risk by disclosing exceptions to the seller’s representations and warranties. Without proper disclosures, sellers may remain liable for issues they could have otherwise disclosed, while buyers lose the opportunity to assess risks or negotiate terms. Courts may interpret omissions against the disclosing party, making clear and complete schedules legally protective.

These schedules also facilitate due diligence by revealing material issues like litigation, intellectual property status, or compliance concerns. Buyers rely on these disclosures to adjust valuation, negotiate indemnities, or even decide whether to proceed with the transaction.

Disclosure Schedule Updating

There is often a bit of time between the signing of the agreement and the actual closing, which can range from a few days to months. It is ultimately all dependent upon meeting the conditions that are required for the completion of the transaction. The exception to this is when the merger or acquisition agreement stipulates a simultaneous signing and closing, meaning that the transaction is actually completed at the time of the signing.

While a disclosure schedule is generally a part of the purchase agreement, it will typically be framed as to the date of the signing. With that said, prior to the actual closing, the seller can continue to engage in activities involving the overall operations of the business, including hiring or terminating employees or contractors, entering into new contracts with vendors or customers, and addressing any legal matters, should they arise. For this reason, a seller will want to be able to make continual updates to the disclosure schedule between the periods of signing and closing.

Understanding the differences between the two types of disclosure schedules is necessary, as buyers are often more open to disclosure schedules to those updates that are affirmative, rather than negative disclosures.

Legal Risks of Inadequate Disclosures

Failing to provide accurate and complete disclosures can expose the seller to post-closing liability for breach of representation and warranty. Courts often view incomplete disclosure schedules as negligent or deceptive, which could void indemnity protections or result in claims for fraud or misrepresentation.

Buyers, on the other hand, risk inheriting undisclosed liabilities, such as tax obligations or pending litigation. In high-stakes transactions, especially those involving equity consideration or earnouts, the accuracy of the disclosure schedule can determine deal survival or lead to prolonged disputes post-closing.

Best Practices for Preparing Disclosure Schedules

To prepare a legally sound and effective disclosure schedule, parties should follow these best practices:

  • Start early: Begin drafting alongside the main agreement to ensure alignment with representations and warranties.
  • Cross-reference precisely: Match each disclosure to the corresponding warranty section.
  • Be specific and thorough: Avoid vague language; include contract names, dates, parties, and amounts where applicable.
  • Use consistent definitions: Follow the terminology used in the acquisition agreement to avoid ambiguity.
  • Include backup documentation: Where possible, attach relevant exhibits such as contracts, permits, or legal correspondence.
  • Update frequently: If the deal spans a long signing-to-closing period, ensure updates are permitted and mechanisms are built into the contract.
  • Involve legal counsel: Lawyers can help ensure compliance with the agreement and minimize exposure to future disputes.

Frequently Asked Questions

  1. What is a disclosure schedule in an M&A transaction?
    A disclosure schedule is a document that accompanies an acquisition agreement, listing exceptions and supplemental facts to the seller’s representations and warranties.
  2. Why are disclosure schedules important?
    They help allocate risk between buyer and seller, provide key business disclosures, and serve as a tool for legal and financial due diligence.
  3. What should a disclosure schedule include?
    It typically includes litigation, IP ownership, employee matters, contracts, taxes, and any other relevant business exceptions or affirmations.
  4. Can a disclosure schedule be updated after signing?
    Yes, but only if the purchase agreement permits updates. These updates usually occur before closing and often require buyer consent.
  5. What are the risks of an incomplete disclosure schedule?
    An incomplete schedule may lead to legal liability for the seller and prevent the buyer from uncovering crucial business issues before closing.

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