Doing the Deal 101: Disclosure Schedules in Acquisition Transactions

The first blog in an eight-part series about Doing the Deal 101 from experts DealStage, Disclosure Schedule in Acquisition Transactions discusses disclosure schedule preparation, review and impact on the timing and structure of a deal.

Among the many acquisition agreement features that junior lawyers work on, and one that can be quite vexing for those lawyers, is the preparation and review of disclosure schedules. By way of background, in the sale of a privately-held company, it’s almost certain that the seller and its counsel will carefully prepare a schedule of disclosures about the company being sold (the “target” company) and the buyer and its counsel will equally carefully review that disclosure schedule.

Disclosure schedules work hand-in-glove with the representations and warranties (a/k/a “reps and warranties”) in the acquisition agreement. These reps and warranties make statements of fact about the target company upon which the buyer relies in assessing the target company’s condition (financial, legal, operational, etc.). Should the buyer incur costs and liabilities after the deal closes due to things that the seller should have disclosed, the buyer may have legal recourse against the seller.

Thus, it’s incumbent upon the seller and its counsel to review the reps and warranties carefully and to negotiate the inclusion of exceptions (“carve outs”) to what would otherwise be an unqualified (“flat”) rep or warranty. For example, a representation in the acquisition agreement might, if “flat,” state that the target company is not subject to any pending or threatened litigation. However, if such pending or threatened litigation did exist, the seller and its counsel will insist that the representation be qualified with language stating that, “except as set forth in that part of the disclosure schedules relating to litigation” (or words to that effect), the selling company is not subject to pending or threatened litigation. Below is a brief list of factors that junior lawyers on the seller and buyer side of a deal should bear in mind when it comes to the preparation and review of the disclosure schedules.

From the Seller Counsel’s Point of View:

  1. Careful attention should be given to the language of the reps and warranties in the acquisition agreement because those provisions often govern, among other things, how particularized the disclosures have to be and what dollar amount or other kinds of stated thresholds affect the items disclosed. For example, do the reps and warranties dealing with target company borrowed money obligations speak to all such obligations to which the target company is subject or do they speak only to obligations in excess of, for example, $250,000. Seller’s counsel (and, buyer’s counsel, too, for that matter) should also be aware that the first draft of what might be many “turns” of the disclosure schedules can affect how the parties negotiate changes to the reps and warranties and other provisions in the acquisition agreement.
  2. Although it’s not unusual for a junior lawyer to take the first pass at preparing the initial draft of the disclosure schedules, it is essential that the target company’s business people review those schedules with care. This is so because seller’s business people have a far deeper understanding of the facts affecting the target company’s condition and it’s those facts, of course, to which the reps and warranties speak. However, because many target company business people have little experience with acquisition transactions, their disclosure schedule review should be carried out with seller counsel’s active involvement and advice, particularly when it comes to drafting the appropriate exceptions to reps and warranties and describing the disclosures made in the schedules.
  3. The first draft of the disclosure schedules (although not “binding” on the parties) can, if sloppily prepared, put the deal at risk or pose other deal problems. Overly broad or ambiguous disclosures can rattle the buyer unnecessarily and make the buyer question the competence of seller and its counsel. Even worse is the situation where the schedules’ first draft fails to disclose matters that only “surface” later in the stages of the deal’s negotiation. This latter situation not only embarrasses seller and it counsel, but may also lead buyer to question seller’s bona fides and then even question whether it’s worth closing the deal.
  4. Finally, the expectations of all parties should be managed by seller’s counsel to allow adequate time for lawyers outside the seller counsel’s immediate deal team (whether inside seller counsel’s firm or at outside firms acting as special counsel) to review the disclosure schedules in order to bring their substantive expertise to bear. So, be sure litigators, environmental law counsel, and other special counsel have adequate time to examine the disclosure. Speaking more generally of timing considerations, it often falls to junior lawyers on each side of the deal to manage disclosure schedule and other document delivery deadlines so as to avoid frustrating the other side’s deal team and also avoid the anger and finger-pointing that often accompanies such frustration.

From Buyer Counsel’s Point of View:

  1. As with seller’s counsel’s preparation of disclosure schedules, buyer’s counsel should also (i) involve buyer personnel as early as possible in the review of business related disclosures and be prepared to assist buyer in evaluating the risks associated with disclosures that, like disclosures relating to litigation, are heavily affected by legal analysis and (ii) also involve non-deal team lawyers (such as litigators) as early as possible in the review of disclosures affected by areas of legal expertise beyond the competence of the immediate deal team.
  2. Buyer’s counsel generally wants the disclosures in the schedules to be tied directly to expressly identified reps and warranties appearing in the acquisition agreement. In other words, buyer and its counsel, who look to the reps and warranties to identify possible risks affecting the target company, don’t want to have to try to “guess” or otherwise try to piece together how a laundry list of disclosures match up with exception language appearing in particular reps and warranties.
  3. Care should be taken to make sure that seller doesn’t “double dip” when it comes to limiting disclosures with materiality qualifications. For example, if there are dollar thresholds set forth in particular reps and warranties (that is to say, a rep calls for disclosure of each borrowed money obligation of the target company involving in excess of a stated dollar amount of loan principal), those thresholds themselves constitute the parties’ view of what is and is not a material borrowed money obligation. Therefore, buyer’s counsel will generally insist that no further materiality qualifications appear in disclosures relating to that rep.

The task of drafting and reviewing acquisition agreement disclosure schedules isn't an aspect of lawyering that generally gets taught in law school. Nevertheless, it's an aspect of lawyering in which junior lawyers who work on acquisition transactions often play an important role. We hope the points discussed above help those junior lawyers get off on the right foot in dealing with this task.

About DealStage: DealStage is an interactive deal checklist, designed by deal lawyers, that helps lawyers and other deal professionals manage the deal process from drafting to closing. DealStage automates what had been manual task handling and replaces one-off communications with a tool that drives situational awareness across the deal team and reduces repetitive actions.

Among the DealStage features available to lawyers and other deal participants are document status and responsibility tracking, signature page signing and delivery and deal closing-book creation. DealStage can be used internally by one team or across all parties to the deal. Visit to learn more about DealStage and to request a demo.

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