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published on 16 February 2023 | reading time approx. 4 minutes
Sometimes disagreements arise between the parties after the conclusion of a company purchase agreement. This can happen for many reasons. For example, the parties include vague provisions and terms in the agreement, or there are problems with defining the scope of liability when agreeing limitations of liability in a company purchase agreement.
As a rule, the parties to company purchase agreements do not settle their disputes before common (i.e. state) courts, but before private arbitration courts in such cases. State courts therefore rarely handle such legal issues.
Therefore, decisions of common courts in M&A-related matters are all the more meaningful and welcome. Particularly for contract drafting practice, these decisions can be trailblazing and be an important aid in drafting certain contract clauses.
This article addresses the decision of the 24th Chamber of the Düsseldorf Regional Court of 18/08/2022 - File no.: 24 S 1/221.
The case dealt with the question of how certain contractual disclaimers of liability affected liability of sellers after signing and closing a company purchase agreement.
The facts and circumstances of the dispute can be summarised as follows:
The applicant, who purchased shares in a company, raised a claim against the sellers for damages for depreciation in the value of the acquired shares and requested that they be secured in rem.
The parties concluded a share purchase agreement for 80% of the shares held by the sellers in a limited liability company [GmbH] (further: “Target”) for a purchase price of over 250 million euros. The Target was a parent company in a group of other companies (further: “Target Group”).
The purchase agreement excluded any claims for damages for the depreciation in the value asserted by the buy-side. Otherwise, the parties limited liability to a specific amount. The limitations of liability should – as is usual in practice – not apply in the case of malice, intent, and a criminal offence committed intentionally by one of the sellers or their representatives.
After the purchase agreement had been closed the buyer claimed that the company representatives of the sellers had intentionally overstated the EBITDA of the Target Group by making a total of 22 false postings and that the enterprise value would have been zero without these manipulated postings. Therefore, the buyer believed that the agreed-upon limitations of liability for contractual claims for damages, in particular for the aspect of the depreciation in the value, did not apply.
Due to the contractually agreed limitation of liability and the applicant's failure to prove that the sellers acted maliciously or intentionally, the Düsseldorf District Court in the first instance and the Düsseldorf Regional Court in the appeal instance dismissed the buyer's application.
The Düsseldorf Regional Court justified its decision pointing essentially to two core aspects:
The chamber clarifies that the burden of presentation and proof with regard to the absence of intent lies in principle with the obligor, i.e. here the sellers. If intent was ascertained, the contractually agreed limitation of liability would not apply, since the law does not release the obligor from liability for intent in advance (cf. Sec. 276 para.3 of the German Civil Code (BGB)).
However, the chamber believed that the question was not whether the present case involved liability for intent as per Sec. 276 para. 3 BGB, but rather whether the sellers themselves acted intentionally through their governing bodies.
It should be noted here, however, that the parties waived the contractual limitations beyond the scope of the above-mentioned rule of law also for intentional acts of the governing bodies. Therefore, the question arose whether, due to intentional conduct of a governing body of the Target Group, the contractual limitations of liability did not apply by way of exception. Eventually, however, the answer to this question was “they did apply”, as the parties effectively excluded the liability for vicarious agents in the agreement.
Since, in the court's opinion, this exclusion did not refer to liability for fault on the part of vicarious agents, the allocation of the burden of proof as agreed between the parties did not correspond to that of Sec. 280 para. 1 sentence 2 BGB, but to that of Sec. 444 BGB. In this respect, the Regional Court relied on the established case law of the Federal Supreme Court (BGH) with regard to Sec. 444 of the German Civil Code (BGB), according to which the buyer – in this case the applicant – is required to present and prove the existence of all criteria of malice and thus also the knowledge of the seller.
According to the chamber, a contractually agreed limitation of liability should be interpreted to mean that the limitations of liability do not apply only if a given case sufficiently meets the criteria of malice, intent, or a criminal offence committed intentionally by the sellers.
Thus, a contractually agreed limitation of liability only applies if the sellers can be accused of intentionally breaching a contractual obligation in the full scope. Therefore, the seller is not entirely wrong to invoke contractual limitations of liability if, for example, he can be accused of intentionally breaching only certain obligations. This is the conclusion reached by the 24th Chamber of the Düsseldorf Regional Court based on narrow, systematic and teleological interpretation in good faith with regard to the customary practice. A limitation of liability would therefore not apply only in the event of full malice, intent, or an intentionally committed criminal offence.
In M&A business it is rather customary that parties replace the liability codified in the German Civil Code (BGB) – as far as possible – with their own liability regime using their own guarantees with limitations of liability. This had also been the intention of the parties in the present case. However, the applicant failed to prove full intent.
The decision once again highlights the importance of seeking legal advice in the context of corporate transactions. In particular, it becomes clear what effects the use of vague provisions in the contract might entail. In its decision, using the words: “If the contracting parties had intended the latter, they would have included it in the provision [...]”, the 24th Chamber of the Düsseldorf Regional Court clarifies the importance of sufficiently specific and complete provisions, which help avoid certain inconsistencies from the outset. Perhaps, if the limitation of liability had been defined only slightly differently, the burden of proof would have been distributed differently and thus the result would have been more favourable for the applicant, which, given the significant amount in dispute, could significantly or even entirely change the outcome of the proceedings.
Thomas Löhrer, LL.M. (Singapore)
Associate Partner
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