If selling your company were a vacation, preparing disclosure schedules would be the part where you plan what to bring. Pack too much and it might be a burden; pack too little and you might miss something that you really need. Not to mention that packing isn’t particularly exciting, although I have been told that some would disagree. Whichever side of that debate you may land on, you will likely have to admit that packing is, nevertheless, necessary. Similarly, disclosure schedules will be a necessary part of almost every exit transaction.

What are disclosure schedules and what is their purpose?

An agreement for the purchase and sale of a company – whether that purchase and sale be structured as that of equity or assets – is ultimately an agreement regarding the allocation of risk among the seller and the buyer. An analogy can be drawn to the sale of a farm – let’s call it Greenacre: a buyer will want to know that, having paid the price agreed on with the seller, she will receive the legal title to Greenacre and that the land itself would not be saddled with surprises. This latter point is where disclosure schedules come into play.

To use an extreme example, if a buyer thinks she is buying Greencare, which looks like a lush parcel of grassland, but it turns out after it is bought that it’s actually a landfill, she will likely be upset. Of course, visiting Greenacre and seeing that it is, in fact, lush grassland – in other words, conducting due diligence – would allay a buyer’s more obvious concerns. However, solving the issue in this manner has its limitations. To boot, a buyer wouldn’t know from visiting if Greenacre has always been pristine grassland. To allocate risk of the potentiality that it may have been a landfill in the past, the buyer could ask the seller to make a simple representation. For example, that “the seller warrants to the buyer that Greenacre has always been a lush grassland”. This would seem fair in the event where the seller knows much more than the buyer about Greenacre. If it turns out that Greenacre was in fact a landfill at some point, the buyer would sue the seller for breach of the representation that it had always been a lush grassland, on the basis that the buyer wouldn’t have paid as much had it known this fact. Thus, the risk is allocated to the seller.

Naturally, an operating business is not a plot of land and, as a result, many more unknown facts influence a buyer’s decision to buy a business and what to pay for it. As a result, agreements of purchase and sale will often have scores of representations and warranties. The buyer negotiates for the representations and warranties to be as broad as possible to shift the greatest amount of risk on the seller. The seller has the opposite interest. In most cases, the representations will be broad, but qualified. To use the prior example, “Greenacre has always been pristine grassland, except between 1992 and 1994, when it was used as farmland”. It is fairly customary to list such qualifications in a disclosure schedule, so that the representation in the text of the agreement would look slightly different: “except as set forth in section “x” of the disclosure schedule, Greenacre has always been pristine grassland”. The respective section of the disclosure schedule would then list all instances where the representation was not true.

However, this is not the only use of disclosure schedules. In other circumstances, the disclosure schedule will provide a list of subject matter items covered by the representation that would not otherwise be practical to include in the text of the agreement of purchase and sale itself. For example, a representation regarding owned trademarks might point to a section of the disclosure schedule providing a list and particulars of the trademarks by jurisdiction. For a company that sells consumer products, this list may be very extensive and would not lend itself to being included in the body of the agreement of purchase and sale. Instead, the representation in the text of the agreement is drafted to speak to certain attributes of those trademarks listed in the disclosure schedule.

Practical considerations

While the representations in the agreement of purchase and sale are often negotiated by counsel with guidance from the seller, it is commonplace for operations personnel of the seller who have an intricate knowledge of the business to be the ones who prepare disclosure schedules with assistance from counsel. In doing so, the seller should consider what the scope of disclosure should be.

Generally, in most cases, it is favourable to the seller to over-disclose, because most items included in disclosure schedules are carve-outs, rather than informational lists. While it may technically be true that a representation requiring a list of items to be disclosed in the disclosure schedule will be narrower if fewer items are disclosed, in most cases a technical breach will occur in any case if items that should have been disclosed in a list are not included. Similarly, if an issue exists, having it disclosed may afford the sellers an argument that the purchaser was aware of the issue and should not be entitled to claim against the seller in the face of such knowledge (this being subject to inclusion of clauses in the agreement of purchase and sale that address such situations).

However, in some narrow circumstances, over-disclosure will lead to an extension of representations to items for which risk was not intended to be allocated to the seller. The simplest example would be representations regarding certain contracts listed in a schedule, which are not intended to cover non-material contracts. A breach of a representation may occur if a contract for restocking the company’s break room vending machine is unnecessarily listed in the a disclosure schedule and has lapsed, where the representation speaks to it as being in force. Even in these circumstances, however, there is question as to whether damages would arise, so over-disclosure may still be harmless.

Some worst case scenarios involving over-disclosure may, however, result in real deal issues. An example could be where a consent of a third party is unnecessarily included in a list of consents in the disclosure schedule which the seller is required to obtain in order for the buyer to be required to close the transaction, and the seller subsequently fails to obtain such consent resulting in a technical walk right for the buyer.


At the bottom line, disclosure schedules often end up quite cumbersome, voluminous and time-intensive. Often, preparing these can be disheartening work. Despite this, disclosure schedules should be prepared in a thorough and careful manner for all of the reasons discussed above.

After all, selling a company is not akin to going on a gap year, albeit it isn’t clear which one involves more risk.

The author would like to thank Jenny Ng, Articling Student, for her assistance in preparing this legal update.

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