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

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.

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