Care and diligence must be used when crafting disclosure schedules in merger and acquisition documents. Unclear or incomplete disclosure schedules can have drastic implications for future litigation. Poorly crafted disclosure schedules can lead not only to indemnity litigation, but often lead to fraud and breach of warranty claims.

It is important to take the time to list disclosed items carefully and fully. Incomplete or misleading disclosure schedules can have heavy penalties. For example, Morgan Lewis was recently able to pursue millions of dollars in indemnity obligations on a company buyer’s behalf when the sellers of the company failed to clearly and thoroughly disclose potential litigation and state-level tax obligations.

As another example, in Powers v. Stanley Black & Decker Inc., the seller of a corporation breached its agreement by failing to disclose anti-dumping duties and pending patent litigation in the parties’ disclosure schedules. Accordingly, the purchaser was able to pursue diminution damages and withhold escrow funds on the theory that these failures to disclose diminished the value of the purchased corporation.

Similarly, in Instrumentation Lab. Co. v. Binder, the seller of a California corporation attempted to use a disclosure schedule to provide a buyer with a list of all written documentation in the possession of the company related to any claim or dispute. However, because the seller failed to list both board minutes and an email that referenced a potential lawsuit overseas, a court held that the seller breached its agreement by making incomplete disclosures.

As shown by the examples above, care must be taken to create complete and accurate disclosure schedules, which are often mistakenly viewed as an afterthought.

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