WHAT IS THE PURPOSE OF DISCLOSURES SCHEDULES IN AN ACQUISITION TRANSACTION?

Disclosure schedules are a critical element of a business acquisition agreement, ensuring transparency between the buyer and seller and minimizing the risk of post-closing disputes. Their purpose is twofold: (1) to provide the buyer with specific information about the business they are acquiring by affirming or supplementing the representations and warranties the seller made in the agreement, and (2) to facilitate risk allocation between the parties.

Sellers typically aim to provide more generalized disclosures to minimize potential liability exposure. Buyers demand narrowly tailored disclosures to evaluate the potential impact on their investment and, if needed, renegotiate specific terms or seek indemnity protection.

Managing disclosures on the seller’s side is a balancing act. Sellers often worry about over- disclosure, which could alert the buyer to issues that might otherwise go unnoticed. However, inadequate disclosure can leave the seller open to liability. By disclosing relevant information, the seller shifts the risk of potential liabilities to the buyer. Therefore, sellers should collaborate with their legal counsel when preparing disclosure schedules. Preparing disclosures early in the process not only avoids the last-minute rush that can lead to omissions but also puts the seller on notice of any issues that, if not resolved, could be used by the buyer to renegotiate the purchase price or even walk away from the deal.

Many acquisition agreements provide for an “interim” period between signing and closing, during which the seller is expected to conduct operations without taking actions outside the ordinary course of business. Any changes, unexpected events, or unplanned expenditures during this interim period may render the seller’s previous representations and warranties false or inaccurate, thus necessitating additional disclosures. As with the initial disclosures, the parties’ approaches to schedule updates differ. Sellers usually seek the right to update disclosure schedules to reflect changed circumstances. Buyers prefer to maintain reliance on the original representations and warranties to preserve their right to terminate the agreement or seek indemnification post-closing. Negotiations may involve adopting language that balances both parties’ positions on schedule updates.

Disclosure schedules matter because they memorialize key aspects of the business in a legally binding way. Any owner, officer, or employee with operational knowledge relevant to the disclosures should review the schedules for completeness and accuracy. Sellers should never rely solely on the due diligence process or the inclusion of documents in the data room. Neither is a substitute for disclosing a relevant fact or document in the schedules. Only a complete and accurate disclosure within the schedules will provide the seller with adequate legal protection.