As a corporate lawyer focused on complex M&A transactions, I’ve closed countless deals for corporations of all sizes and high-net-worth individuals. In my experience, here are the five most important things you need to know about disclosure schedules and their critical role in the process:
1. What are Disclosure Schedules?
A large part of an M&A agreement will consist of “representations and warranties,” i.e., “promises” that are being made on behalf of the parties. Disclosure schedules are an attachment to the M&A agreement which closely mirror the representations and warranties. In addition to providing an opportunity to correct existing facts that could otherwise result in breach of the agreement, they qualify statements to make exceptions that would otherwise clutter the main document.
2. Are There Different Types of Disclosures?
There are two main types of disclosures that can be made in the disclosure schedules. The first type is an “exception” to a representation. For example, let’s say a purchase agreement contains a warranty that the target entity has marketable title. However, the seller has knowledge of a claim that impairs the target entity’s marketable title. The seller would then describe the claim in the corresponding section of the disclosure schedule. By disclosing this “exception,” you avoid any breach of warranty issue.
The second type is a “listing” required by a representation. For example, an agreement requires you to list all real property associated with your company. In a corresponding section of the disclosure schedule, you would then list all real property associated with your company.
3. What is the Purpose of a Disclosure Schedule?
The disclosure schedules provide dual protection for both buyers and sellers. For sellers, the disclosure schedules shift risks to the buyer. For example, a seller could represent that the company does not have any outstanding tax liability “except” for all the tax liability represented on the disclosure schedule. Post-closing, this shifts the risk for all tax liability contained within that disclosure schedule to the buyer. For buyers, disclosure schedules advance due diligence by increasing the transparency that is difficult to detail in the main agreement. Also, they create the foundation for claims which may arise post-closing.
4. How Much Disclosure is Enough?
It can be difficult to determine the level of disclosure, but generally a seller should not be concerned about disclosing too much. Over-disclosing may cause additional work, but this level of transparency allows the seller to appropriately shift risk to the buyer, as the instances of breaching a representation or warranty is drastically reduced.
5. Is There Any Preparation Needed to Draft a Disclosure Schedule?
- Involve employees with the knowledge base to oversee the production of disclosure schedules which can streamline the process.
- Keep concise, accurate records leading up to the M&A transaction, with an accurate backup of those records.
- Retain accurate records of any employee claims or third-party claims.
- Record agreements with top customers or suppliers, including disputes.
- Organize records pertaining to insurance and benefits plans, if applicable.
- Collaborate early and consistently with counsel to articulate representations and warranties with specificity which assists with balancing the scales towards over-disclosure, to shift the risk.
For guidance, contact Vincent J. Costa at 631-738-9100 ext. 343.
Thank you to Linda Reimann for her research and writing assistance.