During the process of selling or buying a business, the main focus for business owners in Ontario will always be on the bottom line, the total cost of the deal, the terms of payment, and the closing date. However, it can be argued that the schedules accompanying the agreement of sale are equally important. Ignoring them could be a serious mistake.
Schedules are very important for all business transactions. The absence of schedules renders the purchase agreement incomplete, as it will lack specific terms. The schedules become the foundation of the business transaction that should remain stable for many years ahead.
Consider a purchaser from Hamilton buying a medium-sized manufacturing company. All documents have been signed; money has changed hands, and the company is under his control. After three months, the buyer realizes that one of the company’s material contracts contains a clause prohibiting assignment to another party without the supplier’s prior written consent. This information was not contained in the schedules of material contracts. The supplier withdraws from the contract, leaving the purchaser without an important supplier of raw materials. Had a complete list of material contracts been provided, the problem could have been detected before the transaction was closed.
That kind of scenario is not unusual. It is precisely why Ontario lawyers and buyers treat complete schedules as the backbone of any strong business purchase agreement.
What Are Schedules in a Purchase Agreement?
Schedules in a business purchase agreement are official documents that provide the details necessary to prove the truth of the representations and warranties set forth in the main body of the contract. While the main agreement establishes the legal context for the sale, the terms of payment, and any other representations, the schedules puts out that context with substantive details.
Here’s how you can understand it: The main agreement will say something like, “The Seller guarantees that all material contracts are listed in Schedule C.” Schedule C contains each of those contracts, along with its counterparties and obligations. If there were no Schedule C, that guarantee would be empty, or even worse, an invitation for litigation after closing.
Supporting documents in agreements, such as purchase contracts, are not decoration. They are the evidentiary backbone of everything the parties have agreed to.
Why Complete Schedules Are Critical
The importance of a schedule extends far beyond mere organization. Complete schedules fulfill three important purposes when completing an acquisition in Ontario. They conduct proper due diligence, determine the scope of the representations and warranties, and apportion risks effectively between the buyer and the seller.
Due Diligence: Due diligence is necessary because both the buyer and his lawyer want to know what exactly they are buying and what their liability may be. Incomplete schedules mean incomplete due diligence. The buyer is entering the deal without knowing what its true liability will be – it might even assume liabilities it did not agree to be responsible for.
Representations and warranties: They need full schedules for them to be binding. In cases where the vendor assures there is no existing litigation but forgets to include the existing suits in the schedule of litigation, the warranty becomes false. Under Ontario law, the seller becomes liable for post-closure claims, regardless of whether he intended to mislead the buyer. It works out for both sides one gets information, and the other minimizes risk.
Risk allocation: The concept of risk allocation includes liability disclosures, basket indemnity, and survival periods. Such elements are defined relative to whether certain liabilities were disclosed in the schedules. This means that where the schedule fails to reveal a particular liability, then that party cannot claim that the buyer assumed that risk because it was known. Contract transparency can thus be achieved through the accuracy and completeness of schedules.
Key Types of Schedules in a Purchase Agreement
There are several different kinds of schedules that are usually found in business purchase agreements in Ontario. The type of transaction will determine which schedules are used. Each one serves a unique purpose.
Asset Listing in Contracts: When the transaction involves an asset sale, Schedule A typically lists the assets to be purchased. Everything from computers, equipment, trademarks, vehicles, and other things that are sold by the seller to the purchaser needs to be listed in detail in the schedule. A list of assets that lacks sufficient information can create conflicts after closing.
Schedule of Assumed Contracts: The contract schedule lists the third-party agreements the buyer must take over. These include supplier agreements, customer contracts, leases, and other service contracts.
Schedule of Employees and Employment Obligations: Under the Employment Standards Act, 2000 of Ontario, the purchaser of assets in the transaction is bound by certain commitments to the company’s employees. The schedule should include all employees, their remuneration, benefits, duration of service, and any contracts of employment.
Schedule of Intellectual Property: The intellectual property schedule includes trademarks, patents, copyrights, domain names, proprietary software, and trade secrets. The list is crucial for any business with a brand, a website, and any technological components.
Liability Disclosures Schedule: It is where the seller provides information on ongoing or potential liabilities, including lawsuits, regulatory actions, disputes with authorities, warranties, environmental concerns, or contract violations. An exhaustive list of liabilities helps the buyer understand what they are getting themselves into and allows them to make concessions on pricing, indemnifications, or escrows.
Schedule of Financial Statements: Past audited or reviewed financial statements for the last two or three years, along with the interim statements prepared by the management, are always part of the financial statements schedule. These are used to support claims about the business’s financial status.
Permitted Encumbrances Schedule: If a share sale is being negotiated, the schedule of permitted encumbrances will disclose all the security interests, liens, and other charges over the company’s property or its shares. In Ontario, a search under the Personal Property Security Act can be employed to confirm this schedule.
What Makes a Schedule “Complete”?
The schedule is said to be accurate, up-to-date, and complete enough that a reasonably prudent buyer, basing his understanding solely on the schedule, would obtain a substantially correct picture of the asset or liability in question.
This might sound very simple, but there are key aspects to consider.
Accuracy: Accuracy is critical. All the items must be accurately identified. For example, the contract might not specify the correct renewal period, assets may be identified by incorrect serial numbers, and employees might have inaccurate start dates.
Currency: Currency means that the schedules represent the company’s current status as of the signing date or the closing date, whichever is stated in the agreement. Schedules of contracts that were accurate six months ago but do not reflect a newly formed supplier contract last month are incomplete.
Completeness: Completeness is defined as the condition that all assets that are within the scope of the schedule have been included. There may be instances in which the seller excludes certain smaller contracts, informal agreements made between him/her and his/her employees, or other minor encumbrances, believing that such assets are inconsequential to the transaction process. Materiality of assets does not depend on the seller’s opinion but on the law.
In Ontario, it is a well-settled principle of law that in making any agreement between parties, it is presumed that each party is fully aware of and comprehends the schedules he signed.
Best Practices for Drafting Strong Schedules
From the seller’s perspective, the ideal outcome would be full and accurate disclosure. From the buyer’s point of view, the objective would be to verify that information. Both ends can be achieved through similar means.
Start schedules early: Creating an asset list and contract schedules at the last minute, just days before the closing date, results in mistakes. Sellers should start gathering material for their schedules from the moment the letter of intent is signed.
Use a disclosure checklist: Most commercial attorneys in Ontario have an organized due diligence checklist that aligns the representations and warranties in the deal agreement with the appropriate schedules.
Cross-reference between schedules: If a contract included in the list of assumed contracts is known to have any disputes, then it must also be listed in the liabilities disclosure schedule. If an individual on the employee list is entitled to a special arrangement, they should also appear in the benefit schedule. Internal consistency within schedules is a characteristic of soundly drafted transaction documents.
Verify against public registries: In Ontario, PPSA registrations, the corporate profile report from the Ontario Business Registry, land registry records, and trademark records need to be verified to check for inconsistencies with the schedules. If a particular schedule does not match a PPSA registration, it is not only incomplete but also a misrepresentation that cannot pass due diligence.
Legal review is non-negotiable: The buyer’s lawyer must review all schedules before they are signed, not just the buyer’s. Effective legal risk management during a business acquisition is based on an attorney’s ability to identify what is absent and verify what is present.
How Complete Schedules Strengthen Negotiations
Full schedules serve purposes beyond protecting purchasers post-closing. Schedules enhance negotiation leverage for both parties pre-closing.
Sellers will benefit from full disclosure to demonstrate professionalism and build credibility. A purchaser who receives full schedules meticulously prepared and cross-referenced will find the vendor credible and less likely to insist on indemnification provisions and significant holdbacks. The converse will result in pricing risks into the offer.
For potential buyers, it is quite common in Ontario to use the schedule review approach to actively negotiate terms. If three key customer contracts are approaching expiry within 12 months of the deal completion, as per the contract assumption schedule, the buyer has grounds to renegotiate either the sale price or the payment arrangement. When the potential buyer identifies any pending issue from the liabilities disclosure schedule, they can negotiate a specific indemnity for that issue with a cap and a survival period.
Indeed, complete schedules cannot only reflect the deal but also shape it. In many cases, contractually binding conditions governing future interaction between the buyer and the seller after the transaction are significantly determined by the schedules.
Conclusion
The quality of the schedules that accompany any Ontario business purchase agreement can be an indicator of the deal’s quality. Comprehensive schedules can help shield the buyer from inherited liabilities. At the same time, they can protect the seller against potential claims arising from misrepresentation after the deal closes. Moreover, comprehensive schedules ensure proper documentations for due diligence, support enforceable representations and warranties, and provide transparency.
It would be wrong to consider the schedules in question as boilerplates or formalities. On the contrary, these documents contain all the factual information on what both sides have agreed to. Thus, the importance of such documentation should not be understated, as it relates to the purchase price.
When buying a business with growth prospects or selling a business you have managed over the last two decades, you should pay close attention to the schedules to avoid potential problems.
At Pacific Legal, we assist you with your business transactions from start to finish, including preparing and reviewing all documentation involved. If you’re planning to buy or sell a business, consulting us before schedules are finalized ensures stronger protection, smoother negotiations, and fewer surprises after closing. Book a consultation now!
Frequently Asked Questions
1. What are schedules in a purchase agreement?
These are supplemental documents which contain detailed information, such as contracts, assets, liabilities, and employees, necessary to prove the representations and warranties made in the body of the agreement. Without schedules, the agreement remains incomplete.
2. Why are complete schedules critical in Ontario business acquisitions?
Complete schedules play an essential role in due diligence, making the warranties made valid and ensuring fair risk allocation. Incomplete schedules pose potential threats to both parties.
3. What types of schedules are typically included?
Common schedules include assets, contracts, employees, intellectual property, liabilities, financial statements, and permitted encumbrances, among others. These are used to clearly identify the asset or liability under discussion.
4. What makes a schedule “complete”?
To constitute a complete schedule, the document must be up to date and complete, meaning it must provide a buyer with a sufficiently accurate idea of the item described.
5. How do schedules influence negotiations?
Having carefully prepared schedules enables sellers to establish their credibility and provides buyers with an opportunity to negotiate the deal on certain points, including pricing.
