Disclosure Schedule to Asset Purchase Agreement

Summary

This disclosure schedule template is intended to be used with asset purchase agreements. This disclosure schedule template is annotated based on the Asset Purchase Agreement (Pro-Buyer) (DE) and should be modified and tailored to the asset purchase agreement to which it will be attached. This template includes practical guidance and drafting notes. Disclosure schedules are an integral component of any M&A acquisition agreement. They play a pivotal role in the due diligence process as well as serve as a risk allocation mechanism. It is important for both buyer and seller counsel to conduct a thorough review of the books, records, contracts, and operations of the target company to adequately draft or review the disclosure schedules. For further discussion about due diligence, see Disclosure Schedules: Preparation and Review, Due Diligence Work Product in M&A Deals, Due Diligence Basics in M&A Deals, and Due Diligence Review Tools in M&A Deals. Purpose of Disclosure Schedules In an asset transaction, disclosure schedules serve two primary purposes: (1) informational disclosures (often referred to as "affirmative disclosures," which provide details about a particular asset class or topic, such as a list of the target's registered intellectual property or material contracts), and (2) disclosure of any exceptions to the representations and warranties (often referred to as "negative disclosure," such as a list of all pending litigation and administrative proceedings). The asset purchase agreement may require the seller to list and itemize in detail the assets that will be conveyed, sold, assigned, and transferred to the buyer at the closing. The buyer may require the seller to identify certain assets with details such as market values, serial numbers, registration information, location information, liens, etc. The seller should be responsive to the details agreed to in the drafting of the asset purchase agreement but not feel compelled to over-disclose if such detail would be cumbersome to provide. During the negotiation of the asset purchase agreement, the seller and its counsel should carefully review the proposed descriptions of the purchased assets and push back on details that would be overly burdensome for the seller to collect and describe on a schedule. On the other hand, the buyer may want to account for each purchased asset, particularly if the business is an asset-intensive business (i.e., rolling stock, inventory, tooling equipment, machinery, multiple facilities, furniture, etc.). In transactions where the buyer is purchasing all or substantially all of the seller's assets, a detailed listing of purchased assets may be less important to the parties except to the extent specific assets will be excluded, in which case a detailed listing of excluded assets may become necessary. The parties usually have an interest in clearly describing any assets that will be excluded from the asset transaction to avoid any potential successor liability issues. Disclosure schedules are considered part of the acquisition agreement itself and are incorporated by reference into the agreement in their entirety. Disclosures in the disclosure schedules are used to qualify or elaborate upon the representations and warranties made by the party drafting the corresponding disclosure schedule. Certain representations and warranties may also require the party to list specific items such as material contracts, suppliers and vendors, benefit plans, employees, leased and owned real property, etc. In either case, the seller and its counsel must carefully review the representations and warranties. If any statement is untrue, the seller should disclose the fact. The seller should be cautious about over-disclosing matters that may be subject to future litigation or investigation, as the disclosure schedules are generally discoverable. However, sellers usually want to err on the side of caution and disclose as much as possible to avoid post-closing indemnification claims made by the buyer. Public Company Considerations If one or more parties is a U.S. public company, the required representations and warranties and the corresponding disclosure schedule will differ from those of a private party. In general, the representations and warranties in the acquisition agreement and the disclosure schedule tend to be much shorter than private transactions. Public companies make extensive disclosures about their businesses in SEC filings (e.g., the company's 10-K, annual proxy statement, and 8-Ks), and these disclosures form the basis for due diligence, drafting representations and warranties, and disclosure schedules. As such, the representations and warranties for a public seller are often covered by its public filings, and most public company acquisition agreements provide that information contained in the seller's SEC filings will serve as the completions of or exceptions to the seller's representations and warranties and cannot serve as a basis for a breach of a representation or warranty. Note, however, that public company sellers may have to make additional representations and warranties that address federal securities laws obligations and other topics relevant only to public companies. For example, the Sarbanes-Oxley Act of 2002 requires public companies to evaluate the effectiveness of their disclosure controls and procedures on a quarterly basis, assess the effectiveness of internal controls over financial reporting on an annual basis, and report the results of these evaluations and assessments. If the buyer is buying all of the assets of the seller or an entire business, the buyer will need this confirmation from the seller and will include this rep in the agreement. Just because the representations and warranties tend to be shorter and less negotiated does not mean that the due diligence process is shorter. While a public company seller can respond to requests for documents during diligence by referring buyer and buyer's counsel to its public filings, the buyer will typically have to review the filings and confirm that no additional materials must be provided. Many contracts, reports, exhibits, schedules, and other materials filed with the SEC are redacted or excluded for confidentiality reasons, so the buyer may have to seek further documentation during the diligence process for information that is not publicly available. In addition, there is no post-closing indemnification in a public transaction given the large number of public shareholders. As a result, the buyer must be comfortable that it is aware of the potential post-closing liabilities associated with the assets, and that the purchase price reflects such potential liabilities. For more information, see Due Diligence Considerations in a Public Company Deal and Representations and Warranties in Acquisition Agreements — Role of Due Diligence and Disclosure Schedules. Because of the heavy disclosure obligations of public companies, the representations and warranties and disclosures in the schedules tend to be less heavily negotiated than private companies. The parties may need to confirm that the materiality determinations made for public filings conforms to the buyer's idea of materiality for the transaction. Another key negotiating issue in a public transaction is the extent to which the seller can qualify its representations or disclosures by reference to its public filings. The seller may wish to refer to its public filings generally, while the buyer may require reference to specific filings under each section of the disclosure schedule (e.g., 8-Ks dated as of a certain date, the 10-K for a particular fiscal year). In addition, public companies may have required SEC filings in relation to the acquisition agreement, the disclosure schedules, or the specific information disclosed. The company may be required to file an 8-K announcing the entry into the acquisition agreement and will be required to file the agreement as an exhibit. Disclosure schedules, which often contain a great deal of confidential information about the parties and/or the transaction, do not have to be attached to the publicly filed agreement so long as it does not contain material information that is not otherwise disclosed. For more information on SEC filings in an M&A context, see Disclosure Requirements in Public Company M&A Transactions. For a discussion of the materiality of disclosure schedules prohibiting their exclusion, see In re Bank of Am. Corp. Sec., Derivative, & ERISA Litigation, 757 F. Supp. 2d 260 (S.D.N.Y. 2010). Using Annotated Disclosure Schedules When presenting a first draft of the disclosure schedule template to a client, counsel will typically annotate each section of the disclosure schedule to incorporate the text of the provision or representation and warranty. This is a convenient way for the client and its counsel to draft and review the asset listings and disclosures that are required by the terms of the asset purchase agreement. Using an annotated disclosure schedule template assists a client in focusing on the language of the representations and warranties and requesting additional qualifiers or revisions. Prior to finalizing the disclosure schedule and sharing with the other party, the annotated language from the asset purchase agreement should be deleted. This disclosure schedule template is annotated based on the Asset Purchase Agreement (Pro-Buyer) (DE). This template should be modified and tailored to the related asset purchase agreement, including the use of section references, the required asset listings and related descriptions, and the use of defined terms. For a full listing of corporate and M&A drafting guidance, see Asset Acquisition Resource Kit, Stock Acquisition Resource Kit, Private Merger Transaction Resource Kit, Public Merger Transaction Resource Kit, and M&A Provisions Resource Kit. For more information about disclosure schedules, see Disclosure Schedules for M&A Transactions, Disclosure Requirements in Public Company M&A Transactions, Disclosure Schedules: Preparation and Review, Material Adverse Change Definitions, and Representations and Warranties in Acquisition Agreements.