Melissa Sawyer, Global Co-Head of M&A at Sullivan & Cromwell LLP, argues for a significant overhaul of the disclosure schedule process in public company mergers and acquisitions, contending that these lengthy documents have become an unnecessary burden, adding little value while increasing costs, risks, and delays. This perspective, building on her prior commentary on the length of merger agreements, suggests a critical re-evaluation of a long-standing practice within the M&A playbook.
The Proliferation of Disclosure Schedules: A Growing Concern
In the intricate landscape of public company mergers and acquisitions, disclosure schedules have traditionally served as a critical component, detailing factual information about the target company and its operations. These schedules typically function in two primary ways: by enumerating exceptions to the representations and warranties (often referred to as "reps") made by the seller, and by providing specific information mandated by those reps. For instance, a target company might list all its registered trademarks or provide detailed accounts of ongoing litigation. The cumulative effect of these detailed enumerations can result in disclosure schedules spanning hundreds of pages, a phenomenon Sawyer describes as a "tree-killer" that offers minimal incremental risk allocation benefit for either the buyer or the seller.
The core of Sawyer’s argument rests on the observation that much of the information contained within these schedules is either immaterial, redundant, or already adequately communicated through established channels. In public company transactions, representations and warranties are almost invariably qualified by reference to the target’s recent filings with the Securities and Exchange Commission (SEC). This means that any material historical information pertaining to the target company should, by definition, already be captured within its SEC filings, adhering to the requirements of the Securities Exchange Act of 1934 and U.S. Generally Accepted Accounting Principles (GAAP). Consequently, the additional information provided in disclosure schedules often comprises lists of immaterial items or contingent matters that are not yet probable or estimable. Such information, by its nature, would not typically necessitate disclosure in a proxy statement or registration statement for the deal, nor would it constitute material non-public information that would trigger a trading blackout period for insiders.
Limited Utility in Public Company Transactions
The function of disclosure schedules in public company deals is significantly diminished when considering the prevalent deal structures. Public company M&A transactions rarely involve the post-closing indemnities, purchase price adjustments, or representations and warranties insurance that are common in private equity or private company transactions. In this context, the primary contractual role of disclosure schedules associated with reps is to limit the scope of information considered when assessing whether closing conditions have been met.
The non-fundamental representations within a merger agreement are typically “brought down” to a “material adverse effect” (MAE) standard for the purpose of closing conditions. This means that only those disclosed items that would constitute an MAE are relevant to the buyer’s ability to walk away from the deal. Therefore, disclosure schedules are only truly “additive” if they contain information that would, in itself, constitute an MAE. Paradoxically, this is precisely the type of material information that one would expect to find already disclosed in the target’s SEC filings. Even in agreements lacking comprehensive fraud disclaimers, the contractual significance of disclosure schedules is confined to information deemed “material” under typical contractual or common law definitions of fraud.
Duplication with Due Diligence Findings
A fundamental flaw in the current disclosure schedule process is the significant overlap with information already provided to the buyer during the due diligence phase. It is highly improbable that any prudent buyer would permit a target to reference information within disclosure schedules that had not been made accessible during the due diligence process. A common, albeit often tedious, task for junior members of a deal team, or potentially an artificial intelligence (AI) agent, is to meticulously map the index numbers of data room documents to each item listed in the disclosure schedules. This ensures alignment and confirms that all disclosed items have indeed been reviewed.
While some buyers may leverage disclosure schedules as a mechanism to compel targets to organize and present responsive information within a data room, the overwhelming majority of the informational effort flows in the opposite direction. Insights and data gleaned from the comprehensive data room are then painstakingly transcribed and elaborated upon within the disclosure schedules. This creates a redundant layer of documentation that does not necessarily enhance the buyer’s understanding or risk assessment beyond what was already achieved through diligent data room review.
The Human Cost: Expanding the "Tent"
The assembly of extensive disclosure schedules necessitates the involvement of a broad spectrum of subject matter experts from the target company’s management team. This typically includes individuals from human resources, intellectual property, facilities management, information technology, litigation, finance, commercial contracts, and environmental compliance departments. For the most part, these are individuals whose direct involvement is ancillary to the negotiation of the core risk allocation provisions of the merger agreement. Their participation may not otherwise be required for the high-level management due diligence sessions that are characteristic of public company deals.
Furthermore, it is often possible to solicit information for a data room without explicitly revealing the ultimate purpose, perhaps framing it as a corporate record-keeping cleanup or an ordinary course financing transaction. However, maintaining such a subterfuge becomes considerably more challenging when employees are asked to review and attest to the accuracy of draft disclosure schedules. Consequently, the disclosure schedules act as the primary catalyst for bringing a significant number of additional individuals "under the tent" of the M&A transaction.
The more individuals brought into a deal, the greater the inherent risk of information leakage. This expansion also escalates the administrative burden on project leads. These additional personnel may need to execute internal non-disclosure agreements (NDAs), be added to restricted trading lists for insider trading policy administration, and, if new to M&A, receive basic training on the intricacies of merger agreements and disclosure schedules. These individuals are already occupied with their demanding day jobs, and becoming deeply involved in the M&A process can represent a substantial distraction. Moreover, involving large teams in the granular details of the transaction early on may compel the target’s board of directors to implement retention arrangements for key personnel prior to the public announcement of the deal, adding another layer of complexity and cost.
Delaying the Announcement: A Significant Bottleneck
In public company M&A, merger agreements themselves can often be drafted and negotiated with remarkable speed, sometimes within a matter of days. In stark contrast, the preparation of disclosure schedules and their associated representations can extend over weeks. The complexity can be further exacerbated in deals involving "clean team" information, where two distinct versions of the schedules—a regular version and a clean-team-only version—must be maintained separately.
The disclosure schedules are almost invariably the workstream that leads to all-nighters on the eve of signing. They so frequently lag behind all other elements required for deal execution that they may only be finalized after the target’s board has already formally approved the transaction. This sequencing issue has, in the past, been a subject of judicial scrutiny in Delaware courts, highlighting the potential for procedural irregularities arising from the delayed finalization of critical deal documentation.
The Financial Burden of Preparation
The unwieldy nature of disclosure schedules translates directly into substantial legal fees. While much of the information gathered during due diligence can be sourced with minimal involvement from external legal counsel, the production of detailed disclosure schedules can consume a significant amount of outside counsel time and resources. Ultimately, these costs are borne by the buyers, who should critically assess whether the granular information obtained at signing is truly worth the expense, as opposed to being acquired through orderly integration discussions between signing and closing.
While the advent of AI holds the potential to streamline the disclosure schedule preparation process, even well-prompted AI tools would require unfettered access to all of the target’s IT systems and institutional knowledge repositories to extract the underlying responsive information. Furthermore, the resulting data dump would necessitate rigorous review for accuracy, responsiveness to the representations, and overall common sense, requiring human oversight.
Exploring Alternative Approaches
To mitigate the inefficiencies and costs associated with extensive disclosure schedules, dealmakers can consider several alternative approaches. These strategies aim to streamline the process without unfairly disadvantaging either party.
One potential alternative involves a more robust reliance on the target company’s public disclosures. Under this model, targets would be expected to provide greater comfort regarding the accuracy and completeness of their SEC filings and other public statements. Buyers, in turn, would need to temper their demands for highly granular representations concerning immaterial aspects of the target’s business.
Another approach could involve a more targeted and limited set of disclosure schedules, focusing solely on genuinely material items that are not already covered by SEC filings. This would necessitate a clearer definition of "materiality" within the context of the deal.
A hybrid model could also be implemented, where certain categories of representations are subject to detailed disclosure schedules, while others are addressed through more general assurances or by reference to publicly available information. This would require careful calibration to ensure that critical risks are adequately addressed.
A further possibility is to shift the burden of identifying and presenting relevant information more towards the buyer’s due diligence process. Buyers could define specific categories of information they require to be produced and then rely on their own internal review to identify potential issues, rather than expecting the seller to proactively enumerate every conceivable exception.
These approaches, when administered thoughtfully, are designed to strike a more equitable balance. Targets would need to become more comfortable standing behind their public disclosures and potentially their due diligence production, depending on the specific alternative adopted. Concurrently, buyers would need to recalibrate their expectations, moving away from demanding highly specific representations on matters of minimal consequence.
It is important to acknowledge that these alternatives may not entirely eliminate disclosure schedules. Certain schedules, such as those detailing exceptions to interim operating covenants or listing required regulatory filings, may remain necessary for the effective management of the transaction.
Conclusion: A Call for Modernization
In a significant portion of public company deals, the disclosure schedules attached to the representations are seldom revisited once the transaction is signed. This observation underscores the argument for their elimination or substantial reduction. Streamlining the M&A process by paring back these burdensome schedules presents an evident path toward reducing costly distractions, mitigating leak risks, and accelerating deal execution. As the M&A landscape continues to evolve, a critical re-examination of long-standing practices like the extensive use of disclosure schedules is not only warranted but essential for fostering greater efficiency and effectiveness in public company transactions.
