In a private-company acquisition, disclosure schedules are the seller’s list of exceptions and details that qualify the representations and warranties in the purchase agreement. They protect the seller: a problem that is properly disclosed generally cannot later be the basis of an indemnification claim for breach of that representation. Sellers who treat the schedules as a box-checking exercise risk losing escrow or holdback funds, or facing claims, after closing.
Disclosure schedules are often prepared late and in a hurry. They deserve more care, because they are one of the main tools a seller has to manage post-closing liability.
Representations, Warranties and Disclosure Schedules
A stock purchase agreement, asset purchase agreement or merger agreement contains the seller’s representations and warranties: statements about the business as of signing and, usually, closing. Typical representations cover capitalization, financial statements, material contracts, intellectual property, employees, taxes, litigation, compliance with law and privacy.
Many representations are written as absolute statements with an exception: for example, “there is no pending litigation against the company, except as set forth in Section 3.10 of the Disclosure Schedule.” The disclosure schedules fill in those exceptions and supply lists the agreement calls for, such as all material contracts, all registered IP or all employees and their compensation.
Representations and warranties are different from covenants. Representations and warranties describe facts about the business; covenants are promises to do or not do something, such as operating in the ordinary course before closing.
Why Disclosure Schedules Matter to the Seller
In many private deals, part of the purchase price is placed in escrow or held back for a period after closing, often a year or more, to cover indemnification claims. If a representation turns out to be inaccurate, the buyer can make a claim against that escrow and, depending on the agreement, against the sellers directly.
A complete, accurate disclosure is the seller’s main protection. If the seller disclosed a pending dispute, a customer contract with an assignment restriction or an open-source license issue, the buyer generally cannot later claim the representation was breached by that disclosed item. The buyer may instead negotiate a price adjustment or a specific indemnity before signing, which is a known, bounded cost rather than an open-ended claim.
What Disclosure Schedules Usually Contain
- Exceptions to representations, such as known disputes, defaults, liens or compliance issues.
- Required lists, such as material contracts, registered IP, real property leases, employee benefit plans, insurance policies and bank accounts.
- Capitalization details, including the cap table, options and other convertible securities.
- Consents and notices required for the transaction under the company’s contracts.
- Change-of-control payments and arrangements that may raise Section 280G issues.
Drafting Principles for Sellers
Be Specific and Accurate
Describe each item clearly enough that a reader understands the issue. Vague disclosures, such as “the company may be subject to various claims,” are often negotiated out or found ineffective. List the parties, dates and nature of each matter.
Cross-Reference Carefully
Agreements differ on whether a disclosure in one section qualifies other representations. Some require express cross-references; others allow a disclosure to apply wherever its relevance is “reasonably apparent.” Sellers should negotiate for the broader standard and still cross-reference important items.
Mind Materiality and Knowledge Qualifiers
Representations may be limited to “material” items or to matters within the seller’s “knowledge,” and the agreement defines whose knowledge counts. Buyers often ask for a “materiality scrape,” which ignores materiality qualifiers when calculating losses or determining breach. These provisions change what the schedules need to cover.
Do Not Use the Schedules to Make New Promises
Schedules should disclose and list, not add new representations. Statements in the schedules can be read as additional assurances if drafted carelessly.
Update Between Signing and Closing
When there is a gap between signing and closing, new facts may arise. Whether the seller may update the schedules, and whether an update cures a breach for indemnification purposes, depends on the agreement. Sellers should address this in negotiation rather than assume it.
The Bigger Picture: How Risk Is Allocated
The schedules work together with the rest of the agreement’s risk allocation:
- Survival periods limit how long the buyer can bring claims for breach of representations.
- Baskets and caps set thresholds and limits on indemnification, often with separate treatment for “fundamental” representations such as capitalization and authority.
- Representation and warranty insurance may shift some risk to an insurer, but policies generally exclude matters known to the buyer, so disclosure still matters.
- Fraud is typically carved out of limits, and courts generally will not let contract terms shield intentional misrepresentation. Accurate disclosure reduces the risk of a fraud claim.
- “Sandbagging” provisions address whether a buyer can recover for a breach it knew about before closing. The answer depends on the contract and the governing law.
Practical Steps
- Start the schedules early, alongside the data room. A sell-side contract review helps identify what must be listed.
- Assign each representation to someone in the company who knows the facts, and have counsel review every response.
- Reconcile the schedules against the data room so that what is disclosed matches what was made available.
- Keep a record of what was provided to the buyer and when.
The Takeaway
Disclosure schedules are not a formality. They define the seller’s exposure after closing. A seller who discloses fully and precisely, and who negotiates the cross-reference, update and materiality terms, is in a much better position to keep its escrow and avoid post-closing disputes.
Frequently Asked Questions
What is a disclosure schedule in an acquisition?
A disclosure schedule is a document attached to an acquisition agreement that lists exceptions to the seller’s representations and warranties and provides required lists, such as material contracts and registered IP. Properly disclosed items generally cannot later support a claim that the representation was breached.
Who prepares the disclosure schedules?
The seller and its counsel prepare them, based on input from the people in the company who know the facts. The buyer and its counsel review and negotiate them before signing.
Can disclosure schedules be updated before closing?
It depends on the purchase agreement. Some agreements allow updates for new events between signing and closing, but whether an update limits the buyer’s indemnification rights is a negotiated point.
What happens if something is left off the disclosure schedule?
If an omitted item makes a representation inaccurate, the buyer may have an indemnification claim, often against the escrow or holdback and subject to the agreement’s baskets, caps and survival periods.
How Sutter Law Can Help
Sutter Law represents sellers and buyers in mergers and acquisitions, including drafting and negotiating disclosure schedules, representations and indemnification terms. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
