Due Diligence vs. Disclosure Schedules: Why Both Matter in a Purchase Transaction

From a point of view buying and selling shares or assets can be quite complicated.

Buyers and sellers work in an environment that is influenced by federal and provincial laws changing market expectations and more complex risk management.

Two key concepts are important in this process: diligence and disclosure schedules.

They are often talked about together, sometimes mixed up with each other and occasionally used as if they are the thing.

In reality they serve related purposes and both are essential to a well-structured transaction in Canada.

Understanding Due Diligence

Due diligence is the buyer's investigation process.

It is the stage where the buyer, with the help of its advisors and law firms, looks closely at the target business to verify what is being purchased and to identify risks.

This process typically includes a review of:

* statements

* Material contracts

* Employment arrangements

* Intellectual property

* Litigation exposure

* Regulatory compliance

* Tax matters

In Canadian transactions due diligence is shaped by local conditions.

For example employment standards laws vary by province and issues like unionization, pension obligations or privacy compliance can differ significantly between provinces like Ontario and British Columbia.

A buyer that does not conduct thorough diligence may later discover liabilities that could have been addressed through pricing adjustments, indemnities or deal structure.

From a standpoint due diligence is also about asking the right questions.

The buyers counsel plays a role in identifying potential problems advising on risk tolerance and ensuring that findings are properly reflected in the purchase agreement.

However, even thorough due diligence has limits.

Buyers are constrained by time access to information and the sellers willingness or ability to provide records.

What Are Disclosure Schedules?

Disclosure schedules on the hand are the seller's response to the representations and warranties in the purchase agreement.

They form part of the contract itself. Are legally binding.

While due diligence is investigative, disclosure schedules are declarative.

In terms disclosure schedules qualify the sellers representations.

For example if the agreement states that the target has no litigation the disclosure schedules may list existing or threatened claims.

If the seller represents that it complies with all laws the schedules may disclose specific non-compliance issues or past violations.

Canadian law firms often stress that disclosure schedules are not administrative attachments.

Courts tend to treat them as integral to the agreement meaning inaccuracies or omissions can give rise to indemnification claims or in some cases allegations of misrepresentation.

From the sellers perspective drafted disclosure schedules are a primary line of defence against post-closing liability.

Why Due Diligence Is Not Enough

It is tempting for buyers to rely heavily on diligence and view disclosure schedules as secondary.

This is a mistake.

Due diligence reflects what the buyer discovers; disclosure schedules reflect what the seller knows and is willing to disclose.

Some risks may not surface during diligence because they are not documented, are embedded in informal practices or depend on management knowledge.

Disclosure schedules force the seller to think about exceptions to its representations and to put those exceptions on the record.

Moreover in transactions purchase agreements often include knowledge qualifiers—such as matters known to senior officers.

Disclosure schedules help define and document that knowledge at signing.

Without them disputes can arise about whether an issue was disclosed or merely hinted at during diligence calls or data room uploads.

Why Disclosure Schedules Are Not Enough Either

From the buyers perspective disclosure schedules should never replace diligence.

Sellers may unintentionally omit information, interpret disclosure obligations narrowly or lack visibility into historical issues.

Well-advised sellers can make mistakes.

Due diligence allows the buyer to test disclosures against reality.

If a disclosure schedule lists "no material contracts outside the course " but diligence reveals side agreements or unusual customer arrangements the buyer can address the discrepancy before closing.

In this way due diligence acts as a verification mechanism for the disclosure process.

Canadian deal practice also recognizes that disclosure schedules are negotiated documents.

Materiality thresholds, timing limitations and formatting requirements all affect what is ultimately disclosed.

Due diligence helps buyers assess whether those negotiated disclosures truly capture the risk profile of the business.

The Legal and Commercial Balance

At their best due diligence and disclosure schedules work together.

Due diligence informs the drafting of representations and warranties while disclosure schedules refine and qualify them.

Together they shape indemnity provisions, purchase price adjustments, escrow arrangements and insurance solutions such as representation and warranty insurance.

From a law and risk-management perspective this balance is critical.

Canadian courts generally expect sophisticated parties to protect themselves through contract.

Buyers who skip diligence or fail to review disclosure schedules carefully may find sympathy after closing.

Similarly sellers who treat disclosure as an afterthought may face exposure.

Conclusion

In a purchase transaction, due diligence and disclosure schedules are not competing tools—they are complementary safeguards.

Due diligence allows buyers to investigate and understand the business they are acquiring.

Disclosure schedules compel sellers to be transparent and precise about known risks.

Together they create an allocation of risk and a stronger foundation for the deal.

For both buyers and sellers working closely with law firms ensures that neither process is rushed or undervalued.

In a landscape where certainty is rare and risk is inevitable the thoughtful use of both due diligence and disclosure schedules remains one of the most effective ways to protect your interests and close a successful transaction.