Could it be possible that the seller of a company, despite disclosing information in a data room, might face unlimited liability towards a buyer due to the fraudulent concealment of information disclosed to the buyer, regardless of purchase contract provisions, and that all limitations of liability are invalid? After a recent decision of the Federal Court of Justice (BGH), this could now happen.

Preliminary Remarks

Over the last few decades, share and asset purchase agreements have increasingly developed into standardized products. This process has been reinforced by the increased involvement of warranty & indemnity (W&I) insurers. As W&I insurers are involved in setting standards, negotiations of warranties and representations have been significantly reduced and the risk involved in acquisitions is often no longer distributed between the parties to a purchase agreement.

However, a seller may only rely on exclusions and limitations of liability, if and to the extent all relevant steps have been taken prior to the conclusion of an acquisition agreement. In addition to an appropriate warranty catalog, which will provide for partly objective and partly (seller) knowledge-based warranties, the purchase contract should contain exclusions of liability that apply, for example, if the buyer is aware of individual facts and circumstances. Moreover, the agreement should provide for a definition of buyer’s actual and deemed knowledge of facts and circumstances which could lead to a breach of warranties. In its ruling of 15 September 2023 (case reference: V ZR 77/22), the BGH recently commented on the effectiveness of limitations of liability and the knowledge of a buyer and extended the requirements for sellers.

Starting Position

The parties to an acquisition agreement usually exclude most provisions of the German Civil Code (BGB) and instead agree on a regime of liability and remedies. This includes a specific description of the target company through a set of warranty statements, limitations of liability and a definition of losses. Differences between the warranty statements and the actual state of the target company will trigger a buyer’s claim for losses. Against this background, due diligence reviews are regularly carried out by buyers in order to identify risks that could affect the purchase price or even lead to the transaction being abandoned. At the same time, due diligence serves to properly describe the target company, by agreeing appropriate guarantees.

Limitations of liability for duties of disclosure

The agreement of limitations of liability in general depends on the seller not deliberately concealing defects of the purchased item from the buyer. This element can lead to problems during due diligence based on applicable legal concepts.

On the one hand, case law has long assumed that a bona fide seller must always provide the buyer with comprehensive information about the target company, that the facts and circumstances relevant to the buyer and his acquisition decision are made known to the buyer and, therefore, the seller may assume that the buyer has taken these facts and circumstances into account in their acquisition decision.

Virtual data rooms that are now predominantly used regularly give a buyer almost complete access to all essential documents, allowing the buyer to evaluate all significant information. In the case decided by the BGH, however, relevant information was only uploaded to the data room shortly before the contract was concluded, so that the buyer had not actually been aware of this information (or possibly would not have had a chance to become aware of it). In this respect, the BGH ruled in favor of the buyer and assumed a breach of the seller's duty of disclosure. 
The decision of the BGH should generally be understood as meaning that an explicit note or comment of the seller would not be required only if the expectation is justified that a buyer will see and realize certain information disclosed in the data room including its relevance and include it in their purchase decision. In any case, it is not sufficient for a seller to set up a comprehensive data room and provide a buyer with access. Rather, the scope, structure and organization of a data room must be taken into account and the time of disclosure of the specific piece of information in the data room may also be significant. In addition, in the case of particularly significant information, it must be considered whether this information is clearly presented in the disclosed documents or whether it is merely indicative, not immediately apparent or requires further inquiry.

Disclosures that do not meet the new transparency requirements of the BGH run the risk of being interpreted as fraudulent concealment within the meaning of Section 444 BGB, despite the disclosure of the information in a data room. This means that although the seller has disclosed the information in principle, case law treats the seller as having fraudulently concealed this information from the buyer. In the case of fraudulent concealment, however, the limitations of liability otherwise agreed between the parties do not apply, so that the seller could then be liable in accordance with statutory regulations and thus without limitation. In addition, in such a case, the seller may be exposed to a possible recourse claim by a W&I insurer if such insurance has been taken out.

Recommended action

Sellers must now ensure to an even greater extent that data rooms are properly structured and organized, do not contain any duplicate documents, that the documents are comprehensible on their own and that they are uploaded to the data room sufficiently early. In individual cases, it may also be advisable to point out specific, particularly relevant risks separately and alert the buyer to any problems in this respect.