Company sellers are subject to increased obligations to provide information

​​published on 10 February 2022 | reading time approx. 4 minutes 

In principle, in the corporate transactions practice, it is often the case that parties do no pay closer attention to the company purchase agreements after the transaction is closed. Therefore, the parties to the transaction often do not even address potentially contestable material aspects.

However, if a company buyer nevertheless decides to assert claims arising from a company purchase agreement, most of these disputes are settled out of court. The reason for this is that the majority of company purchase agreements contain provisions for the out-of-court settlement of such disputes. This is why disputes do not usually "end up" before the ordinary courts but are resolved by (in some cases purely private) arbitration courts, provided that the parties do not reach an out-of-court agreement otherwise. Thus, M&A disputes are referred to ordinary courts only in exceptional cases.

Decision of the Higher Regional Court Munich

Court decisions in this area are therefore all the more welcome, such as the decision of the Higher Regional Court (OLG) of Munich dated 3 December 2020 (file no.: 23 U 5742/19).

The subject of the decision were false statements made by a seller of a company in the context of a corporate transaction to the purchasers about the economic situation of the target company and failure to provide information about existing indications for a financial crisis at the target company.

In the decided case, the seller had already held out the prospect of a "very quick return on investment" to the potential buyers before the purchase agreement was concluded. The seller did this even though the target company had never achieved a positive annual result in the history of its existence and was also in considerable financial distress. During the contract negotiations, the seller showed the buyers business analyses showing high negative operating results of the target company for the current year. When the buyers asked about the negative result, the seller explained that the concerns could be allayed with the current positive sales and that "everything [...] is now going back into the black considerably".

After the transaction was completed, the seller asserted indemnification claims under the company purchase agreement against the buyers. The buyers then declared a rescission of the purchase agreement on the grounds of fraudulent misrepresentation and claimed damages for the breach of the pre-contractual obligations to provide information.

The Munich Higher Regional Court rejected the seller's claims and decided in favour of the buyers, the reasons being that the seller had fraudulently misled them about the economic situation of the target company. By suggesting a "very quick return on investment" and declaring that "everything is now going back into the black", the seller had falsely presented the economic situation of the company to the buyers. Furthermore, the seller had failed to inform the buyers that there were already significant indications for a poor economic situation of the target company at that time, which would obviously have been of considerable importance to the buyers. Consequently, the buyers were entitled to challenge the validity of the purchase agreement on the grounds of fraudulent misrepresentation; they were also entitled to the asserted claims for damages.

Significance of the decision in practice

The decision of the Munich Higher Regional Court makes it clear that parties should not underestimate in practice the risk of liability or rescission due to fraudulent misrepresentation, especially in the preliminary stages of the process of concluding company purchase agreements. The decision of the Munich Higher Regional Court also shows that strict requirements are placed on the seller's obligations to provide information on the financial situation of the target company and that the line where an action starts to be classified as intentional can be crossed quite easily in this context, which ultimately leads to nullifying any contractually agreed limitations of liability. In the decided case, intentional conduct could be evidenced in particular by the extensive and unambiguous correspondence between the parties, which in practice is rather not so easily possible in most cases, so in such cases other, more vague indications must be used.

The decision of the Munich Higher Regional Court is consistent with the prevailing opinion in the legal literature as well as the comparable court decisions already issued in cases concerning similar issues. Accordingly, a company seller may not make any inaccurate statements with regard to the target company. If the seller makes any statements about the target company, these must be correct and complete. Furthermore, a seller is always deemed to act intentionally if he makes inaccurate statements "out of the blue" without verifying them. Even if it is the buyer who is generally obliged to carry out a corresponding check of the target company, for example as part of due diligence, it is the seller who is subject to increased obligations to provide information. These include, among other things, the seller's duty to notify the buyer – even without being asked – of any circumstances which could frustrate the buyer's intended purpose of the contract and are of material importance to the buyer's decision to purchase the target. However, a possible contributory negligence on the part of the buyer must not be disregarded here. It is acknowledged that the buyer is partly to blame if he does not carefully verify documents provided to him relating to the target company and/or does not ask any questions with regard to particularly critical aspects.

This means that a potential buyer of a company must point out to the seller of the company already at the beginning of the transaction those aspects that are particularly important for the buyer. If a seller has a reason to believe that such circumstances do (or could) exist, he must inform the buyer of this fact also without being asked.

This also applies in cases where the seller or his advisors do not have knowledge of any such circumstances, but for example, an executive of the target company does, or if such circumstances are customarily documented in the company’s records. In such scenarios, the knowledge of the person with that knowledge and the knowledge typically recorded in the files is attributed to the seller. If the seller fails to inform the buyer about these circumstances in such a situation, his actions are intentional according to the case law of the Federal Court of Justice (BGH). In such a case, the seller is not released from liability by any contractual limitations of liability, as these do not apply due to the liability for intent. This would result in unlimited liability on the part of the seller. A further legal consequence could also be the rescission of the company purchase agreement, which can lead to considerable implementation problems in practice.

Conclusion

In summary, it should therefore be noted that the decision of the Munich Higher Regional Court is in line with the case law already handed down on these issues and once again makes it clear that misleading statements about the financial and economic situation of a company for sale can quickly be regarded as fraudulent conduct and thus as deception. Therefore, company sellers are advised to clarify   even without being asked   material aspects of the target company.