BGH ruling in Germany: Corporate buyers in luck - sellers under pressure.
- the haptic investor
- 2. Aug. 2024
- 4 Min. Lesezeit
What corporate sellers must now pay special attention to.
The Situation
In a recent case (BGH, Urteil v. 15.09.2023 , V ZR 77/22), the German Federal Supreme Court (BGH) ruled on how a seller must fulfill its duty of disclosure in an M&A transaction and when it must explicitly draw the buyer's attention to certain documents.
In the case at hand, the buyer - a company - acquired commercial units in a large building complex for €1.5 million. After the transaction, he was confronted with substantial maintenance costs of which he learned too late. The seller had made minutes of an owners' meeting available in the virtual data room, but without explicit notice and shortly before the contract was signed. The buyer felt that he had not been sufficiently informed and that he had been fraudulently deceived.
The Higher Regional Court Celle (OLG Celle) placed the main responsibility for obtaining information with the purchaser and dismissed the action. The BGH reversed this ruling and referred the case for a new hearing.
The BGH emphasized that the seller must inform the buyer, without being asked, about cost-relevant information of significant importance that is provided in the data room. This concerns "circumstances subject to disclosure." The seller's duty to disclose is only fulfilled if he can reasonably assume that the buyer will find the relevant information in the data room. The simple provision of documents shortly before the conclusion of the contract without a corresponding notice is insufficient.
The BGH emphasizes that these principles apply to all types of corporate transactions and are also relevant for virtual data rooms. What matters is the structure and organization of the data room, agreements reached, the significance of the information and its discoverability.
In practice, sellers must be more careful when using virtual data rooms and systematically provide documents in the data room. The buyer side should be made aware of newly uploaded documents, and a "cut-off date" for new documents should be included in the purchase agreement. This ensures that the buyer can review all relevant information.
It remains to be seen whether every seller must conduct a "vendor due diligence" in advance in order to assess for themselves what information is "in need of disclosure" to the buyer side. The ruling emphasizes that no separate disclosure by the vendor is required if the expectation is justified that the buyer will perceive certain information in the data room and include it in his purchase decision.
The ruling sharpens the distinction between "fair disclosure" in a due diligence and the "fraudulent underreporting" of information. Vendor due diligence may not be mandatory, but careful preparation and structuring of documents and their timely provision are essential. The ruling applies to all types of corporate transactions and emphasizes the importance of thorough information provision in the M&A process.
Germany - A Market To Watch?
Germany is moving further into focus as an M&A market because, as an industrialized nation, it is feeling the currency pressure of the Euro, a high tax burden, bureaucracy, electricity costs and infrastructural weaknesses. and is also struggling with succession problems, especially in the SME sector. Under the right circumstances, this pressure can result in low selling prices and therefore favorable purchase prices for buyers.
My Two Cents
Legal and Financial Due Diligence have always been an important (if not THE most important) factor in transactions. As a lawyer and someone who has been working in finance for roughly a decade, I have been involved in LDD and FDD processes plenty of times. Deals are becoming more and more extensive, as is the amount of documentation and review work that needs to be done. There is a fine line between the selling party wanting to sell their business as polished as possible and at the highest possible price and the buyer wanting to acquire a business at fair market value, or ideally a touch below. In the process, every inch is fought for. This decision moves the favor a touch on the side of the buyer.
The winners? Private equity investors, companies with an affinity for expansion and capital providers, who can now hope for even clearer and earlier indications in the purchase process. Nevertheless, it should be noted that the documentation and information requirements already existed before. There is no outright reorganization.
In my opinion, this makes it all the more important to involve experts in the transaction at an early stage. Certainly, consulting fees cause costs, but these are insignificant compared to the costs of a deal gone bust.
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