When buying and selling a business, the parties are right to focus on the purchase and sale agreement, as it contains the transaction’s definitive deal terms, including the purchase price, and the parties’ pre- and post-closing obligations. It also allocates liability between the buyer and seller for pre-closing operations of the business by requiring the seller to make representations about the business being sold and permitting the buyer to seek indemnity from the seller if those representation are untrue. For example, if a business owner represents that there is no pending litigation affecting the business being sold, the buyer typically will seek indemnification for damages related to any litigation that actually existed. This is where disclosure schedules fit into the transaction process.
Disclosure schedules supplement the purchase and sale agreement by incorporating disclosures about the business being sold. Generally, each disclosure schedule falls into one of two categories: a “list” or an “exception.” A “list” schedule makes a representation that the schedule contains a complete record of certain aspects of the business (i.e., a list of leased or owned real property, registered intellectual property, insurance policies, employee benefit plans, etc.). An “exception” schedule allows the seller to qualify a representation made in the purchase and sale agreement and, therefore, limit the seller’s potential liability.
Disclosure schedules shift risk from the seller to the buyer.
Going back to the example above, the business owner could disclose the pending litigation on an “exception” schedule, meaning the litigation representation (as qualified by the disclosure) would be a true statement. The buyer would then be on notice of the pending litigation before purchasing the business and, absent a special indemnity negotiated by the buyer to cover that litigation, the risk of the pending litigation is shifted to the buyer.
From the seller’s perspective, therefore, disclosure schedules need to be complete, comprehensive and clear. Those with knowledge of the business should prepare any schedules and involve those with specialized expertise to assist with those that complement the tax, environmental, intellectual property, employee benefits and other specialized representations in the purchase and sale agreement.
From the buyer’s perspective, the buyer and its advisors should carefully review a seller’s disclosure schedules so that it has a clear understanding of the disclosures being made and the impact, if any, on the allocation of risk between the parties. In some cases, a buyer may request that a seller provide special indemnification to cover the buyer from losses relating to a problematic matter described in the disclosure schedules.
Understanding how disclosure schedules complement a transaction’s purchase and sale agreement is necessary for parties when buying and selling a business. Please reach out to the experienced mergers and acquisitions attorneys below if you would like more information about the purchase and sale process.
Greg Mennerick is a partner in Thompson Coburn’s Corporate & Securities practice. You can find Greg on LinkedIn, and reach him at (314) 552-6542 or firstname.lastname@example.org. Jesse Doggendorf is an associate in Thompson Coburn’s Corporate & Securities practice. You can find Jesse on LinkedIn, and reach him at (314) 552-6129 or email@example.com.
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