Disclosure Schedule

What is a disclosure schedule?

Disclosure Schedule (schedule of disclosures) is the annex to a company purchase agreement or participation agreement in which the seller or the company states circumstances that deviate from the warranties given. The terms disclosure letter and letter of disclosure are also in use. A circumstance that is disclosed there in accordance with the contract generally does not give rise to a claim under the warranty concerned. In a similar way, the seller of a used car warrants that the car has been accident-free but notes a repaired body dent in the contract; the buyer cannot later rely on that damage.

The schedule of disclosures forms part of the warranty section of a purchase agreement for shares in a company (share deal, in English share purchase agreement or SPA for short) or for individual assets (asset deal). In shorter form, it is found in the participation agreement of a funding round. It is drawn up in parallel with the due diligence, prepared by the seller's law firm together with the management and negotiated with the buyer. In the US market, the exceptions are usually arranged as annexes following the structure of the warranties; in the British market, they appear in a separate disclosure letter. German contracts use both forms.

Function in the warranty system

Warranties in a company purchase are generally independent warranty promises whose legal consequences the contract regulates conclusively; the statutory warranty law (Gewährleistungsrecht) is largely excluded. They are deliberately worded in the abstract, for example “The company is not party to any legal disputes”. The schedule of disclosures supplements them with the actual circumstances and turns the abstract statement into an accurate one. Two types of annex must be distinguished:

• Schedules as part of the warranty: lists of the material contracts, intellectual property rights or employees. Here the seller warrants the completeness and accuracy of the list itself. If a material contract is missing, that in itself is the breach of warranty.
• Exceptions to a warranty: circumstances to which a warranty is not to apply, for example ongoing litigation, termination by a customer or an open tax audit (Betriebsprüfung).

A disclosed risk is therefore initially borne by the buyer. If the buyer does not want to bear it, the buyer negotiates a lower price or an indemnity (Freistellung), which is intended precisely for known risks.

General and specific disclosure

Sellers aim to have the entire content of the data room, the results of the due diligence and public registers deemed disclosed (general disclosure). Buyers often reject this because a large number of documents does not show which risk relates to which warranty. They insist on specific disclosure against each individual warranty.

A middle way is widespread: the data room is deemed disclosed, but only to the extent that a circumstance is presented there in such a way that a diligent buyer could recognise it and its significance (fair disclosure). For this purpose, the data room is saved on a data carrier as of the cut-off date and kept, so that it can later be established what was disclosed. Material points are additionally disclosed specifically against the warranty concerned.

The buyer's knowledge

For defects, the law excludes the rights of a buyer who knows of the defect when the contract is concluded (Section 442 of the German Civil Code (BGB)). Whether this rule is to be applied by analogy to independent warranties is not conclusively settled. Company purchase agreements therefore regulate the question expressly. Sellers want any knowledge of the buyer, including from the due diligence, to exclude claims. Buyers want only the schedule of disclosures to count, or their knowledge not to affect claims at all.

In Anglo-American usage, asserting a claim despite knowledge is called sandbagging. A pro-sandbagging clause allows the buyer claims despite knowledge; an anti-sandbagging clause excludes them where there is knowledge.

A second knowledge rule concerns the seller. Some warranties apply only “to the best of the sellers' knowledge”. The contract then specifies whose knowledge counts, usually that of a list of named persons. It also regulates whether, in addition to actual knowledge, what would have been known on proper enquiry counts. What these persons know belongs in the schedule of disclosures. Otherwise the warranty is breached precisely because of this knowledge.

A fixed limit applies to the seller. A seller who fraudulently conceals a defect cannot rely on an agreed exclusion of liability (Section 444 BGB). Liability for intent also cannot be waived in advance (Section 276(3) BGB). A warranty insurance (W&I insurance) also generally does not cover circumstances that were disclosed or known to the buyer at signing.

Timing: signing, closing and updating

What counts first is the position at signing. If weeks or months lie between signing and closing, for example because of a merger control clearance, the warranties are often repeated on the closing date. The management then confirms their accuracy in a Bring-Down Certificate. It remains open whether the seller may notify circumstances that arise later.

Sellers want to add new circumstances to the schedule with releasing effect. Buyers reject this because they agreed the price on the basis of the position at signing. Compromises are usual: the update serves for information only and leaves claims unaffected, or it has releasing effect but gives the buyer a right of withdrawal before closing in the case of material new circumstances.

Form and structure of the schedule of disclosures

When shares in a GmbH (German limited liability company) are purchased, the contract, including all ancillary agreements, must be notarised (Section 15(4) of the German Limited Liability Companies Act (GmbHG)). The schedule of disclosures forms part of the agreement and belongs to the deed. Extensive annexes are in practice often included in a reference deed notarised in advance (Section 13a of the German Notarisation Act (BeurkG)).

In content, the schedule follows the structure of the warranty catalogue. Each disclosure describes the facts precisely enough for the nature and extent of the risk to be recognisable, refers to the location in the data room and refrains from any legal assessment. An entry reads, for example: “In respect of clause 7.3 (Litigation): A supplier claims EUR 150,000 from the company before the regional court under a supply contract. Documents: data room, index 4.2.1.” Contracts regularly also clarify that a disclosure is not an acknowledgement of an obligation or liability towards third parties.

Worked example: disclosure, threshold and liability cap

A company is sold for EUR 20 million. The contract provides for a de minimis threshold (De Minimis) of EUR 25,000 per individual claim. In addition there are an overall threshold (Basket) of 1% of the purchase price and a liability cap of 10% of the purchase price. The overall threshold is designed as a tipping basket (Freigrenze): if it is exceeded, the entire loss is recoverable from the first euro. With a deductible (Freibetrag), by contrast, only the part above the threshold would be recoverable. After closing, three losses occur. A dispute with a supplier over EUR 150,000 had been disclosed against the litigation warranty. Not disclosed were a back-claim for social security contributions for freelancers of EUR 240,000 and a licence breach with damage of EUR 18,000.

• Threshold: 1% of EUR 20 million = EUR 200,000; liability cap: 10% of EUR 20 million = EUR 2 million
• Dispute: disclosed, therefore no warranty claim
• Licence breach: EUR 18,000 is below the de minimis threshold of EUR 25,000 and is disregarded
• Contribution back-claim: EUR 240,000 exceeds the tipping basket threshold of EUR 200,000 and is therefore recoverable in full
• Without disclosure of the dispute, 150,000 + 240,000 = EUR 390,000 would have been recoverable
• With a deductible instead of a tipping basket, only 240,000 minus 200,000 = EUR 40,000 would be recoverable

The disclosure of the dispute relieves the seller of EUR 150,000 in the example. For the buyer, the calculation shows why known risks are secured not through warranties but through the purchase price or an indemnity.

Distinctions: disclosure schedule, warranty and indemnity

• Warranty: the seller's statement about a condition of the company. The schedule of disclosures determines the extent to which it does not apply.
• Indemnity: assumption of a specific, usually known risk. It does not require a breach of warranty and also applies to disclosed circumstances.
• Vendor Due Diligence: a review report commissioned by the seller for the bidders. Whether it counts as disclosed is negotiated separately; buyers usually accept this only for specifically described matters.

Common mistakes

• Schedule prepared under time pressure. If it is only prepared in the last days before signing, matters that are known within the company are missing, and every gap becomes a liability risk.
• Blanket references. The mere listing of documents without a description of the risk often does not satisfy the standard of fair disclosure.
• Only the management asked. Threats of termination by customers, conflicts with employees or licensing problems are often known only in sales, HR or technology.
• Old schedule carried over. A disclosure from an earlier funding round does not reflect the company's current position.
• Assessment instead of description. Wording that admits a legal breach can be understood as an acknowledgement towards third parties. The schedule describes facts.

Frequently asked questions

Does a disclosure protect against all liability?

No. It only excludes claims under the warranty concerned, and only to the extent that it satisfies the contractual requirements. Indemnities, purchase price adjustments and liability for fraudulent conduct remain unaffected.

Is a long schedule of disclosures a bad sign?

No. For growth companies, buyers expect a number of disclosures and pay more attention to the quality of the presentation than to the number of items. They view disclosures that come late or only hint at risks critically.

Is the schedule of disclosures public?

No. The purchase agreement and annexes are not filed with the commercial register; after closing, only the new shareholder list appears there. The tax office receives a copy of the deed (Section 54 of the German Income Tax Implementation Ordinance (EStDV)).

Is there a schedule of disclosures in funding rounds as well?

Yes, in shorter form. In the participation agreement, the company and often the founders give warranties against which they disclose exceptions. Because of the usually lower liability caps, the schedule is briefer but follows the same rules.

Until when can the schedule be supplemented?

Until signing, to the extent that the buyer accepts the supplement, because the schedule is part of the contract. After that, only under the contractual updating rule. If the warranties are repeated at closing and there is no such rule, the seller is also liable for circumstances that arise only after signing.

The Roemer Capital view

At Roemer Capital, the schedule of disclosures is not created at the end but in parallel with the due diligence question list. Every finding that is made with the management during preparation receives a note on whether it is remedied, reflected in the price or disclosed. The draft thus grows out of the review and not from memory shortly before notarisation.

The wording of the disclosures and the negotiation of the knowledge and updating rules lie with the client's law firm. Roemer Capital supplies the facts and figures for this and calculates what effect a disclosed risk, in combination with the tipping basket, liability cap and possible indemnity, has on the seller's proceeds.