M&A Vocabulary – Experts explain: Seller’s Knowledge

​published on 11 January 2022 | reading time approx. 5 minutes

​In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

Introduction

The essential nature of warranties (Garantie) is that a warrantor is liable for a breach, regardless of whether he:

• is responsible for its occurrence; and/or
• knew or did not know of the underlying facts.

In the opinion of many sellers, this far-reaching liability is too extensive and they therefore seek to limit it. One way of limiting a warranty is to focus on the seller's knowledge of the subject matter of the warranty. And this is often achieved by the limiting it to the “knowledge” or “best knowledge”.

The following cases can be distinguished, which make this restriction appear reasonable:

• the facts of the warranty include circumstances which are not within the purview of the seller; and
• the facts of the warranty include circumstances that can hardly be fully considered by the management of a company.

How exactly these terms are used depends not least on which law governs the SPA.

Terms in German SPAs

If the terms “Kenntnis” and “Bestes Wissen” are not defined in a German law governed SPA or if the definition used is not complete, the terms are to be interpreted in accordance with the statutory German regulations.

In principle, “Kenntnis” is understood to mean the actual knowledge of information. Whereas “Bestes Wissen” also includes negligent ignorance (fahrlässige Unkenntnis) - therefore it is broader and thus less favourable for the seller.

However, it should be noted that even if a warranty is limited to “Kenntnis”, a seller cannot rely on not knowing about a fact. This is particularly true if the seller is also a (managing) director of the target company. In this case, the knowledge of his “organisation” - i.e., the knowledge available in the target company - may be imputed to the managing director. This imputation occurs if it is information that the seller, as part of the organisation, should be aware of in order to carry out his activity as managing director. Consequently, the limits of the term “Kenntnis” of a warranty are not as far as often assumed.

However, if the term “Kenntnis” is understood to go so far, the question arises as to where the difference lies between “Kenntnis” and “Bestes Wissen” - which also includes negligent ignorance. Here it is important to understand that negligent ignorance does not end with having overlooked something. Rather, the criterion of negligent ignorance results in a duty to investigate, i.e., the seller has to check whether there are facts that make the occurrence of the warranty seem likely and whether the warranty given is in order in terms of its scope. Only if this examination has been carried out successfully has the seller fulfilled his obligation in this respect.

Terms in English SPAs

Knowledge of the seller’s representatives

Since a seller does not usually manage the sale of his company alone, the buyer has an interest in attributing the specialized knowledge of the seller's advisers to the seller. In particular, these are usually the lawyers and tax advisors advising the seller on the sale and, in addition, the management of the target company or important experts of the target company who were involved in the sale. It is in the interest of the seller to keep this group of persons as manageable as possible. After all, the seller is not always fully aware of what all these persons involved in the transaction may know.

In SPAs governed by German law, however, it is always advisable for the seller - who is also (managing) director of the target company - to allow a clause to this effect. At first sight, this seems to extend his liability; however, in the absence of such a provision, an interpretation of the terms “Kenntnis” and “Bestes Wissen” may lead to the aforementioned extension of liability for this seller if the knowledge of a further group of persons is added. In this case, the extension of liability by interpretation can be significantly wider than a balanced contractual provision.

In SPAs governed by English law, the extension of the seller’s knowledge to include seller’s representative’s knowledge would not apply, unless expressly provided for. However, sellers will usually resist such a broad definition of knowledge. 

Conclusion

It is advisable, regardless of whether a contract is governed by German law or the law of England and Wales, to always define the terms “Knowledge” or “Best Knowledge” precisely in the SPA. The group of persons representing the knowledge should eventually be named too, ideally mentioning their names.