The results of an Acquirer’s due diligence are first incorporated in the reps and warranties in the Stock or Asset Purchase or Merger Agreement, in particular in the Disclosure Schedule or Exhibits.

Reps and warranties are the portion of the Purchase Agreement which delineate and confirm what the Target is selling. Often long-winded, they are the meat of any M&A deal.

There are essentially two types of Disclosure Schedule or Exhibits:

(1) detail of assets, for example lists of contracts or of patents and applications; and

(2) exceptions to the reps and warranties.

The first type of Schedule is a simple compilation. If the contract calls for an all-inclusive list of patents and applications worldwide, the Target’s patent counsel will typically supply a print-out to be inserted. One issue here is whether to include the list as a part of the contract or refer to is as an outside document. The latter is useful for reducing the length of a contract. I have worked on a 2000+ page Stock Purchase Agreement, including several lists of assets!

The second type of Schedule interacts more sensitively with the Purchase Agreement. To illustrate, an Asset Purchase Agreement will usually rep. that all the contracts of the Target’s business to be acquired are assignable to the purchaser, except as set forth in the Disclosure Schedule. What is then disclosed in that portion of the Schedule is a not a list of all the contracts of the Target’s business, but only those which by their terms cannot be transferred to the Acquirer. Identifying which contracts fit that description is a part of the Acquirer’s due diligence.

The point of including due diligence results is to ensure that the Purchase Agreement accurately summarizes what is being purchased and sold.

Suppose that one of the Target’s major customer contracts is not assignable. This does happen, for example when the customer particularly wants to be buying from the Target, and nobody else. The Acquirer needs to know that this is one Target customer which it will not be buying, at least not without negotiating first with the customer.

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