Seller’s disclosure obligations in the sale of a company – Higher Regional Court (OLG) Munich December 2, 2020 – 23 U 5742/19

When acquiring a company one is always confronted with the challenge of finding a balanced distribution of a number of (economic) risks between the seller and the buyer. This is particularly the case because the buyer regularly relies to a considerable extent on the seller's details and information about the object of purchase in the run-up to the transac-tion. In general, the buyer can only rarely and to a limited extent carry out his own investigations on potential legal and economic risks. In this context, in 2001 the Federal Court of Justice (BGH) already ruled that "in negotiations on the purchase of a company or of shares in a limited liability company, the seller has an increased duty to inform and exercise due diligence vis-à-vis the prospective buyer in view of the economic scope of the transaction and the regularly more difficult valuation of the object of purchase by the prospective buyer" (BGH, April 4, 2001 – VIII ZR 32/00).
These increased duties of disclosure and due diligence were confirmed by the OLG Mu-nich in a judgment of December 3, 2020 and substantiated in connection with the sale of a company in a continuing crisis (OLG Munich December 3, 2020 - 23 U 5742/19).

The decision of the OLG Munich

The case in question concerned the sale of a company which, among other things, operated a discotheque that has always been running at a loss. In his initial sale announcement, the seller predicted a very fast "return of investment" and later on dispelled the concerns about the profitability arising from the current management analysis (BWAs) in discussions with the subsequent buyers by stating that the whole thing was now "turning in the black". Against the background of the actual crisis of the company and the fact that the company had never achieved a positive result before the court considered this – irrespective of the possibility of the buyers to discuss the economic situation of the company more detailed with the tax advisor of the seller or of the company – to be a fraudulent misrepresentation by the seller, which entitled the buyers to contest and avoid the contract at a later stage.

The OLG Munich ruled that in the event of a company sale, the seller is generally obliged to inform the buyer, even without being asked, about specific events that are weighty indi-cations of a continuing crisis of the company, e.g. considerable payment arrears, multiple reminders and liquidity bottlenecks. Furthermore, the seller must, if necessary, provide clear and unambiguous information in the same way about the fact that and the extent up to which the company had only achieved negative results to date. In addition, a deception based on an untrue, misleading statement by the seller does not cease to exist merely be-cause business documents are handed over to the buyers which do not in turn provide a clear, complete picture of the economic situation of the company.

Implications for the (legal) practice

The significance of this ruling results in particular when seen in connection with another decision of the BGH from 2007 (BGH, January 17, 2007 – VIII ZR 37/06). In this decision, the BGH ruled that a contractually agreed exclusion of avoidance due to fraudulent misrepresentation agreed in advance is incompatible with the protection of free self-determination intended by Section 123 of the German Civil Code (BGB) and is therefore invalid if the misrepresentation is perpetrated by the business partner himself. In this re-spect – which was not the issue in the case decided – it probably would not have helped the seller would the sale and purchase agreement included a provision on the exclusion of all buyer rights with the exception of those regulated in the contract itself.

Considering this decision, in future transactions and company acquisitions sellers are advised to be cautious with any forecasts and predictions about the economic development of a company and to clearly indicate such information – if provided at all – as (uncertain) forecasts for which no warranty is assumed. As the decision once again makes clear, statements made even outside of due diligence examinations can also have considerable legal consequences.

At the same time, however, caution is called for from the perspective of potential buyers: "Blind" reliance on forecasts and information provided by the seller in the hope of being able to avoid a company purchase by way of contest in the event of non-occurrence of the predictions should also not be inferred from the decision. The statements and actions made by the seller in the decided case were too extreme for this.

If you intend to sell your business, acquire one in whole or parts, please feel free to con-tact us at any time. Our experts in our offices in Frankfurt am Main, Hamburg, Düsseldorf, Berlin and Stuttgart will be happy to assist you with any questions you may have.