Mergers and acquisitions (“M&A”) involve complex processes, with due diligence playing a pivotal role. Among the essential components of an M&A transaction are disclosure schedules—documents that complement and support a seller’s representations and warranties. Properly prepared disclosure schedules can mitigate liability risks for sellers and ensure smoother transactions.
Why Disclosure Schedules Matter
Disclosure schedules are integral to addressing liabilities that could otherwise jeopardize the seller’s financial security: buyers often hold a portion of the sale price in escrow for a negotiated period. If undisclosed liabilities, such as lawsuits, employee claims or tax issues arise post-closing, buyers can withdraw all or a portion of such funds from escrow without contest. Failure to disclose liabilities in disclosure schedules can also lead to lawsuits or arbitration. Comprehensive and accurate schedules not only protect sellers but also facilitate a more efficient and successful transaction process.
Understanding Disclosure Schedules
What Are Disclosure Schedules?
Disclosure schedules supplement the representations (i.e., statements of fact) and warranties (i.e., promises about future conditions) in an M&A agreement. They serve as a platform for sellers to disclose exceptions to these assertions. For example, if an agreement states there is no ongoing litigation, the disclosure schedule may outline exceptions such as an active lawsuit. This would be documented in the agreement as “There is no ongoing litigation against the seller except as set forth in Exhibit A.” Any active lawsuits would need to be in a schedule on Exhibit A so the buyer can take such litigation into account for their valuation and risk assessment.
Who Prepares Disclosure Schedules?
Drafting disclosure schedules is a collaborative process involving:
- The Seller: Gathers critical business data.
- The Seller’s Attorney: Aligns the schedules with representations and warranties.
- The Seller’s Accountant: Ensures financial data accuracy.
Errors in preparation can derail the transaction, making experienced legal and financial guidance essential.
What Do They Include?
While the content varies by transaction, common sections include:
- Contracts: Material agreements like leases, NDAs, and supplier contracts.
- Employees and Benefits: Workforce details, including disputes and benefit plans.
- Financial Statements: Historical data, accounting policies, and liabilities.
- Customers and Suppliers: Key relationships and terms.
- Intellectual Property (IP): Patents, trademarks, and trade secrets.
- Litigation and Regulatory Issues: Pending legal or government actions.
- Tax Information: Filing history and liabilities.
- Insurance Policies: Coverage details and exclusions.
When Are They Due?
Disclosure schedules are generally required before the closing date, either:
- At the time of signing in simultaneous sign-and-close deals.
- Shortly after signing, in deals where closing occurs later.
Common Mistakes and How to Avoid Them
Disclosure schedules are detailed and time-intensive, leaving room for errors such as:
- Incomplete or outdated information (e.g., contracts, employee rosters).
- Missing disclosures about litigation or financial matters.
- Failing to list material details like insurance policies or IT assets.
Tips for Success:
- Start Early: Delays increase the risk of errors and omissions.
- Understand the Purpose: Recognize that disclosure schedules are separate from due diligence.
- Engage Key Personnel: Collaborate with employees knowledgeable about the relevant data.
- Stay Organized: Track revisions in the agreement to ensure schedules remain accurate.
- Hire Experienced Counsel: An M&A-savvy attorney can help clarify requests and anticipate challenges.
Disclosure schedules are vital to successful M&A transactions. By thoroughly preparing these documents, sellers protect themselves from post-closing liabilities and ensure a smoother sale process. Engaging knowledgeable legal and financial professionals, starting early, and maintaining organization are key to minimizing risks and achieving a favorable outcome.
