M&A Monday: Disclosure Schedules

The critical role of Disclosure Schedules

Non-M&A veterans hear, Disclosure Schedules and it means nothing. In an M&A deal, the Disclosure Schedules (DS) are incredibly important, but often overlooked.

What are Disclosure Schedules?

In most acquisitions, a purchase agreement will require Seller to make lots of representations and warranties – these are promises about the business. The buyer’s recourse if something goes wrong after closing is usually limited to an intentional or unintentional misrepresentation in those reps and warranties or fraud (What if Something Goes Wrong After Closing). You may never have to read those pages, but if you have to, each word will be critical.

Thus, it is incredibly important that the buyer include broad and inclusive reps and warranties. Because some of these reps require attachments or long lists (e.g., financial statements, material contracts), we include them on a separate document, called, Disclosure Schedules.

A few months ago, a client called me because there were losses in the business after closing. We reviewed his reps and warranties and disclosure schedules and shared how surprised we were by how little the seller focused on the disclosure schedules. Thus, my client was able to point to multiple misrepresentations and issues not included in the Disclosure Schedules and was able to recoup some of his losses and reduce his promissory note.

There are two types of DS: List Schedules, and Exception Schedules.

The list schedules are a supplement to the reps and list items. For example, Schedule 3.10 includes a list of the top 20 customers.” It is usually in Buyer’s interest for that list to be as inclusive as possible and seller’s interest to negotiate for a short list. This is because any misrepresentation or omission in the schedules could create liability for the seller if something goes wrong.

As an example, if it turns out Seller did not list the correct customers and a loss occurs after closing as a result, Seller can be liable for that loss.

Second, the Exception Schedules. This is an exception to the reps (or promises) the seller is making. For example, “Schedule 3.10 includes a list of the top 20 customers… except as set forth on Schedule 3.10, no Material Customer has indicated that it plans to terminate or decrease its purchasing from Seller.”

It is in Buyer’s interest for these exceptions to be as narrowly tailored as possible. To oversimplify, anything listed as an exception, Seller will not be liable for. In our example, if Seller lists that Customer A indicated they may terminate, Buyer’s recourse is to change the purchase price or not close the deal, but they cannot get indemnified for the loss after closing if it was disclosed (short of a Specific Indemnity or blanket pre-closing indemnity).

Another example: The seller has a rep that says, except as listed in Section XXX of the disclosure schedules, there is no active litigation or to Seller’s knowledge no threatened litigation. Seller lists nothing in the Schedules. After closing Buyer gets served with a lawsuit relating to pre-closing periods (assuming a stock purchase), Buyer can recoup losses from that litigation from Seller (subject to Survival, Caps and Baskets: https://x.com/Eli_Albrecht/status/1734314621102669994 and https://x.com/Eli_Albrecht/status/1762228046403170358).

If, however, Seller lists such litigation in the Schedules, the Seller is likely not liable for losses related to that litigation.

I have had deals, especially with less sophisticated seller’s counsel where seller does not even submit disclosure schedules. In that case, they are saying there are no exceptions to the reps and they are not listing anything they are required to list – thus, their potential liability for a loss is massive. Of course, a buyer would have to have a legitimate loss to sue for.

On larger PE transactions, DS can be hundreds of pages and lawyers will spend hours and hundreds of thousands of dollars negotiating the disclosure schedules.

Although often overlooked, a savvy Independent Sponsor or searcher will focus a ton of their attention on the Disclosure Schedules.