Page 25 - M & A Disputes

Disclosure Schedule

The disclosure schedule is typically included as an appendix to the agreement and is used to specifically
identify disclosed items pursuant to the representation and warranties. Commonly, the disclosure sched-
ule will address such matters as excluded assets or liabilities, environmental matters, legal proceedings,
material agreements or contracts, and tax matters. Items identified in the disclosure schedule are often
intended only to qualify and limit the representations and warranties made by the seller in connection
with the acquisition agreement. Typically, these items represent areas for the buyer to concentrate due
diligence efforts in order to further understand the disclosed items.

M&A Disputes

Although M&A disputes are unique from one transaction to the next, they are not amorphous, and they
commonly arise from one (or more) root causes of disagreement. Depending on whether the contemplat-
ed transaction has closed, M&A disputes may be classified as preacquisition or postacquisition. Preac-
quisition disputes occur when one party seeks to withdraw from a transaction (without the counterpar-
ty’s agreement) subsequent to the execution of an acquisition agreement but prior to the transaction’s
close. Conversely, postacquisition disputes arise subsequent to the close of the transaction and will typi-
cally result from either (a) a disagreement over the execution of postacquisition terms of the agreements
(for example, the calculation of postclose purchase price adjustments or earnouts) or (b) an alleged
breach of contract by one of the parties.

Preacquisition Disputes

By their definition, preacquisition disputes are disputes that emerge prior to the close of a transaction.
Preacquisition disputes occur when one party elects to withdraw (against the other party’s wishes) from
an agreed-upon transaction prior to its close. Specific reasons for such withdrawal may vary significant-
ly. However, the overall basis for withdrawal after a contract has been signed is commonly either the al-
leged occurrence of a MAC or an alleged fraud by the counterparty. When a party withdraws for either
of these reasons, disputes about the basis of its withdrawal and resultant economic damages incurred of-
ten ensue.

Many agreements incorporate MAC clauses, which allow for either party to withdraw from the transac-
tion before the close of the deal. Either party may withdraw in the event that a material adverse change,
event, or effect occurs that damages the counterparty’s business. These provisions are included in
agreements to protect the parties to a transaction during the interim period between the time that an
agreement is executed and the time that a deal closes. When a party withdraws from a merger, an asset,
or a stock purchase agreement, it is often because that party believes that a MAC, as defined by the
agreement between the parties, has occurred.

When a party invokes a MAC clause, the practitioner may be called on to assist in an evaluation of the
asserted MAC. This area of dispute is addressed in further detail in chapter 4, "Material Adverse Change
Clauses," of this practice aid.

Postacquisition Disputes

Postacquisition disputes arise subsequent to the close of the transaction. These disputes may involve
disputes over contractually prescribed adjustments to, or components of, the purchase price, as well as
claims for indemnification from alleged breaches of representations and warranties.

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