The obligation of the seller to provide information reaches beyond the provision of documents in an electronic data room

published on 20 October 2023 | reading time approx. 2 minutes

Setting up an electronic data room is very important for a due diligence carried out as part of a real estate or an M&A transaction since it enables prospective buyers to access documents that are of decisive importance for the acquisition of the target. This is deemed to reduce or even eliminate the seller’s liability, amongst others. The question arises, whether, in doing so, the seller always fully meets his obligations to provide information on circumstances that are decisive for the acquisition and must be disclosed, and whether liability or a risk of the recission of the purchase agreement can thus be excluded. According to consistent case law of the German Federal Supreme Court (BGH), the fact that the buyer is able to obtain by himself knowledge of the circumstance that must be disclosed does not automatically exclude the seller’s obligation to disclose information that is material for his decision to purchase. The Federal Supreme Court clarified and confirmed this fact one more time.

BGH judgment dated 15/9/2023 – V ZR 77/22

According to the facts and circumstances of the ruled case, the buyer purchased several commercial units in a large building complex. In the purchase agreement, the seller guaranteed that no resolutions had been taken which would give rise to extra costs payable in the future, and that the buyer had received the minutes of the condominium owners' meetings for the past three years. In the purchase agreement, any material defect liability was excluded and, in addition, it was stated that the buyer took notice of the content of the documents made available to him in the data room.

The parties disputed about the minutes of the condominium owners’ meeting which the seller had uploaded to the electronic data room only three days before signing.

The minutes in dispute and the resolution of the condominium owners’ meeting included there brought about an extra cost of initially EUR 750,000 – up to EUR 50 million, if need be – for maintenance and refurbishment measures related to the community property. Based on this, the payment of the cost was also claimed against the buyer. As a result, the buyer declared a rescission of the purchase agreement on the grounds of fraudulent misrepresentation and, for the sake of precaution, withdrawal from the purchase agreement.

In this judgement, the Federal Supreme Court ruled that the seller by providing a data room not necessarily always fully meets the obligations to provide information about circumstances that must be disclosed. Only if it can be reasonably expected in the individual case that the buyer will notice certain pieces of information provided by the seller in the data room – e.g. as part of a due diligence – and consider them in his purchase decision, is the seller no longer obliged to provide separate information. The specific ruling shows that the Federal Supreme Court is now taking into consideration also the time at which documents of decisive importance for the purchase are uploaded to the data room. If they are uploaded at short notice, the seller may not expect the buyer to take notice of documents that might be of decisive importance for the purchase without explicit suggestion to do so.

The Federal Supreme Court has also emphasised that the seller is obliged to provide the data room and access to it in a structured and organised manner. Whether the seller meets his obligation to provide information by providing access to an electronic data room also depends on whether the seller may reasonably expect the buyer by inspecting the data room to sufficiently learn of the circumstance that must be disclosed. The Federal Supreme Court also requires that information of importance for the buyer must be easily detectable in the data room.

Conclusion

Whether obligations to provide information are met or not, still depends on the specific individual case. Therefore, sellers of companies and real estate are well advised, apart from making documents available in an electronic data room, to explicitly and additionally point out to the buyer any circumstances of decisive importance for the purchase decision. They may do so in a documented form immediately before signing the purchase agreement or, possibly, in the purchase agreement itself. When documents of decisive importance for the purchase are uploaded immediately before signing the purchase agreement, the seller should not rely on that the buyer had the possibility to find and legally assess them. The Federal Supreme Court also left no doubts that the clause being usually included in (company) purchase agreements and stating that “the buyer has received all documents and any further liability shall be excluded” is no effective remedy to avoid possible recission of the purchase agreement based on the principle of culpa in contrahendo due to failure to furnish information.