Business & Corporate Articles


Client Management in Disclosure Schedules

The preparation of disclosure schedules is typically one of the most time-intensive aspects of a financing or M&A transaction. In larger firms, this process is often in the hands of a junior associate, since the junior associate is usually the closest to the diligence materials that are the source of much of the information in the schedules. However, this practice gives the misleading impression that disclosure schedules are a straightforward exercise. In fact, the preparation of disclosure schedules often involves some tricky client management issues that can challenge even senior lawyers.

  • Process Management. The division of labor between the company and its counsel in disclosure schedules is not obvious, and the right approach may vary from deal to deal. This is different from many other transaction documents, which are simply drafted by the attorneys subject to the client’s review. Sometimes it may make sense for the attorneys to take the first cut at drafting the disclosures, particularly if the attorneys have significant institutional knowledge of the company. Sometimes it may be appropriate for the company to do the first draft, with the lawyers then taking the role of wordsmithing what the client has prepared. Sometimes the best approach will be for the lawyers to draft some of the disclosures first (e.g. those involving corporate organization, litigation that the firm has handled, etc.), with the company taking the lead on others (e.g. those involving commercial contracts or other operational matters that the outside lawyers are not close to). While the ideal approach varies from deal to deal, it’s crucial that the division of labor is decided early on so that the responsible parties can start making progress on the disclosures. If the company is not familiar with the disclosure schedule process, they may well underestimate the amount of time and effort that a disclosure schedule entails, especially for a mature company. Even if the company offers to take the lead on some or all of the disclosures, the attorney should stay close to the process, to avoid the scenario where the company volunteers to handle the disclosure schedules in an effort to reduce legal fees and then, at the last minute, gets overwhelmed with the process and pushes this project back to the lawyers; this puts the lawyers in the undesirable position of having to complete a disclosure schedule on short notice when they likely haven’t done the necessary underlying review, and may already be fully occupied with negotiating and finalizing other deal documents.
  • Full Disclosure. There is often a tug-of-war between the attorney and the company on the amount of disclosure to provide. The attorney is typically pushing for maximum disclosure, since this gives the client maximum protection by putting the buyer on notice of any issues. The company may desire to limit disclosure, so as to avoid airing out “dirty laundry” for a buyer or investor that they are trying to impress. Attorneys helping their clients with disclosure schedules need to be able to go beyond simply gathering and organizing information, and advise the client on why failure to disclose could lead to the client having to deal with indemnification or even fraud claims.
  • Monday Morning Quarterbacking. One aspect of the “full disclosure” argument that can be a particular flashpoint between attorneys and their clients are disclosures regarding corporate-level matters – e.g. ambiguities or gaps in capitalization documents, non-observance of corporate formalities, etc. Often, the attorneys representing the company on a major transaction have not been closely involved with the company throughout its history, and in the course of their deal work may notice errors or omissions on corporate matters that they believe need to be disclosed. Clients can sometimes take these kinds of disclosures personally, and see them as gratuitous faultfinding by the lawyer who is supposed to be on their side. This kind of issue therefore requires the attorney to exercise some diplomacy in explaining to clients why these disclosures are important, without the client viewing them as a Monday morning quarterback, which can have a negative effect on the attorney-client relationship as a whole.
  • Understanding What a Data Room Does and Doesn’t Do. Clients sometimes have the impression that, if a document is included in the data room (or whatever method by which diligence materials are provided to the buyer/investor), that is as good as disclosing the document in the schedules. This is almost never the case. While posting a document in a data room (or whatever is the manner of providing diligence materials in a particular deal) may be helpful in showing that the company wasn’t trying to defraud the buyer or investor by affirmatively hiding something, the company and its attorney still need to go through the (sometimes arduous) process of preparing a disclosure schedule that is complete and correct in order for it to provide the desired level of legal protection.

-- Aaron Sokoloff 

**This article is for information purposes only and does not contain or convey legal advice.  The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting an attorney. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**