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How to Prepare a Disclosure Schedule

We most often come across “Disclosure Schedules” in the context of a Preferred share or institutional (VC) financing.

In that context, an investor is buying shares from a corporation under a share purchase agreement. The share purchase agreement has a section called “Representations and Warranties of the Corporation”. In the CVCA Model Documents (which are the standard base form of agreements in this financing context), this is all found under Section 2.

The Representations and Warranties of the Corporation essentially says that the Corporation is perfect . There is no imperfection whatsoever. All bills are paid, taxes satisfied, there’s no litigation, IP is properly owned, there are no defaults under any agreements, and everything has been properly documented and managed according to best practices. If there are any exceptions to that, any imperfections in the Corporation, they need to be expressly stated in a Disclosure Schedule that gets attached to the share purchase agreement.

Additionally, the Corporation is required to highlight a number of additional items that allow the Investor to have a full view of the corporation they’re investing in. This doesn’t just mean disclosing the negative things about the Corporation, but also any material (i.e. important) things to know about the Corporation.

WHY IS THERE A DISCLOSURE SCHEDULE?

What’s the point of this? Well, it simplifies the Investor’s due diligence process.

The Investor will likely still do some basic due diligence and review the Corporation’s data room (where all the investment material is stored), but by requiring this Disclosure Schedule structure, it shifts the burden of responsibility to the Corporation to proactively present to the Investor everything that might affect their investment decision. If the Corporation fails to disclose something, that could amount to a material breach of the agreement giving rise to significant recourse against the Corporation (including a requirement to return the Investor’s money).

As a result, if you’re raising capital, and you receive this kind of share purchase agreement, this Representations and Warranties section is the most important for you to review.

HOW DO YOU GET STARTED IN PUTTING TOGETHER A DISCLOSURE SCHEDULE?

While your lawyer can help you with the process of putting your Disclosure Schedule together, much of this exercise is yours to do as the founder or director of the corporation raising capital. No one will know as much about the corporation as you do.

So to get started in building that out, we’ve summarized some of the key items to collect in our list below.

Note: This is not a comprehensive list, but a starting point. It is really important to discuss this with, and get this reviewed by, your lawyer. There may be differences between versions of the share purchase agreement, and so there may be different requirements between each.

1. Cap Table: A post-closing Cap Table is required to be included in the Disclosure Schedule, fully-diluted, as-converted. All outstanding options, warrants, rights, or agreements for shares or any security convertible or exchangeable into shares should be included in this Cap Table.
2. Acceleration of Vesting: If any of your vesting agreements have an acceleration provision, they need to be identified (note that it is common for Founder Vesting Agreements to have an acceleration provision).
3. Repricing Shares: If the Corporation has ever repriced stock option exercise prices, that needs to be disclosed.
4. Litigation: Any pending or actual litigation or claims against the Corporation or its key people needs to be disclosed.
5. Intellectual Property: IP Ownership is critical. The Corporation needs to expressly identify the IP that it owns in the Disclosure Schedule (all patents, trademarks, licenses, etc.). The Corporation also needs to confirm that all employees and consultants have properly assigned IP to the Corporation under written contracts, and that the Corporation is not infringing any third party IP rights. The Corporation needs to confirm that no university has any right in or to the IP. If you have a problem with any of these things, they need to be resolved before providing the Disclosure Schedule, or otherwise they need to be disclosed.
6. Contract Compliance: If the Corporation is in breach or default of any contract or formal legal requirement, it needs to be disclosed.
7. Material Contracts: All significant contracts need to be disclosed (even if not yet entered into, but pending), whether for a large monetary amount, a long term, a significant liability exposure (ex: indemnification rights), extraordinary right grants (ex: exclusive license, guarantees, release of future claims, or non-competes), or closeness of contracting party (ex: a contract between the Corporation and its own director).
8. Encumbrances: If any of the Corporation’s assets are encumbered or have a charge against them by a lender, for example, those encumbrances need to be disclosed.
9. Financial Information: You are required to provide your latest financial statements. You must also disclose in your Disclosure Schedule every major change that’s occurred financially since the date of those financial statements – any costs outside of the ordinary course, any new debts, any new dividends, etc. Also, if the Corporation is delinquent in making any payments (such as to employees, vendors or the government), that needs to be disclosed.
10. Employees: You are required to disclose any special entitlements held by any employees that go beyond their minimum entitlements, such as special severance pay. Key employees should have signed non-competes and non-solicitations, so you’ll need to disclose any that haven’t.
11. Catch All: List any other imperfection or issue that may exist that hasn’t been covered by the list above. Err on the sides of over-disclosure instead of under-disclosure.

HOW DO I ORGANIZE ALL THIS INFORMATION?

Now you have all the required information, it’s time to put it all in the form of a Disclosure Schedule. The way this is required to be presented is by headlining the Subsection of the share purchase agreement that corresponds with the disclosure. If you’re not sure about this, get your lawyer to help with this step.

Ink LLP is a business law firm that acts as strategic counsel to ambitious entrepreneurs, investors, and high-growth companies. Contact one of our lawyers to discuss your business and how our team might be able to help you tackle the challenges of your business and the opportunities for growth.

This information is provided for informational purposes only and is not legal advice.