What Disclosures Are Required
in a Merger or Acquisition?
Disclosures are an integral part of a merger or acquisition transaction. Mergers and acquisitions (M&A) have many interconnected parts, which means there is always a risk of things going wrong. Disclosure schedules, along with due diligence, are the foundation of any M&A transaction because disclosures support a seller’s warranties.
Given the importance of disclosures in mergers and acquisitions, a poorly drafted disclosure schedule could make a seller exposed to liability. That is why it is critical to understand what disclosure schedules are required in a merger or acquisition and how they must be prepared in order to protect yourself and ensure a smooth transaction.
At Coppaken Law Firm, our business law attorneys assist clients with preparing disclosure schedules. We help clients in Overland Park, Kansas, and Kansas City in Missouri structure mergers and acquisitions and navigate the complexities associated with the business transaction process.
What Are Disclosures?
Disclosures refer to making certain facts known to a potential buyer in a merger or acquisition transaction. Disclosures are made deliberately to help buyers better evaluate the costs and risks of the transaction. When a disclosure is made, the buyer cannot make any claims for liability against the seller for any facts disclosed to the buyer because the disclosed facts are known and accepted by the buyer.
According to the Institute for Mergers, Acquisitions & Alliances, over 790,000 M&A transactions have been announced worldwide since 2000. Disclosure is one of the most critical features of a merger and acquisition transaction because of warranties, which refer to the statement of fact in a contract. If the buyer later finds a warranty to be untrue, they could file a claim against the seller for a breach of contract.
The term “disclosure schedules” refers to legal attachments that support a formal agreement in a merger or acquisition. Typically, disclosure schedules can be incorporated into the agreement. Disclosure schedules give fact-specific disclosures related to the seller’s warranties.
The Importance of Disclosures
Disclosure schedules provide factual information that supports warranties and representation made by the seller. Typically, disclosure schedules contain information about the company’s debts, stockholders, contractual obligations, intellectual property, and other critical facts about the business or its assets. Disclosures in a merger or acquisition are important for the buyer and seller:
The buyer. The buyer needs to know all material information about the company before the merger or acquisition occurs to evaluate the potential risks and benefits of the transaction. Warranties and representations made by the seller about the company will protect the buyer against liabilities that may exist in that company. Through disclosures, the buyer can obtain accurate and reliable information covering all aspects of the business being acquired.
The seller. Making accurate disclosures is also important for the seller. In fact, it is best to make relevant disclosures as detailed as possible to avoid potential claims of misrepresentation or fraud.
As a rule of thumb, the buyer wants to use disclosures to learn as much information as possible before the transaction occurs. The seller, on the other hand, may try to limit their scope, especially if certain information about the company could paint it in a bad light and carry the risk of terminating the merger or acquisition deal.
Types of Information in Merger
& Acquisition Disclosures
The contents of disclosure schedules and the extent of information disclosed by the seller depend on the deal and the type of the company. However, it is not uncommon for merger and acquisition disclosures to contain the following types of information:
Contracts that reveal the company’s contractual obligations
Licenses and permits
Assets and property
Disclosure schedules in merger and acquisition transactions provide information about any exceptions to warranties made in the agreement. For example, an agreement may contain a statement indicating that the company is not involved in litigation except as provided in disclosure schedules.
What Happens if Disclosure Schedules Do Not Contain Required or Accurate Information?
A seller can be held liable for breaching the underlying warranty or representation if any of the following is true:
The seller fails to disclose information required by the warranty or representation; or
The information is disclosed incorrectly or contains inaccurate information.
The seller is obligated to indemnify the buyer if the latter incurs liability as a result of the seller’s failure to provide required or accurate information. In addition, the seller can be responsible for committing fraud if they provided inaccurate information or failed to provide to disclose required information recklessly or intentionally.
If you are a seller accused of failing to provide required or accurate information, seek legal counsel to understand how you can protect yourself from liability. If you are a buyer who believes that the seller breached the underlying warranty or representation, an experienced attorney can help you take legal action against the seller.
How Experienced Legal Counsel Can Help
At Coppaken Law Firm, our knowledgeable business law attorneys assist clients with drafting and negotiating disclosure schedules, agreements, and other elements of merger and acquisition transactions. We are dedicated to protecting the rights of our clients at all stages of M&A transactions in Overland Park, Kansas City, and throughout Johnson County and Jackson County. If you live in Kansas or Missouri, reach out to us today to discuss disclosures in your specific case.