The Federal Court of Justice (BGH) has issued an important decision on the effects that the performance of due diligence by the buyer has on the seller's duty of disclosure. In this decision, the BGH states: A seller does not fulfill its duty of disclosure to the buyer simply by somehow placing documents containing the information subject to disclosure in an (electronic) data room. This is not sufficient.
In the view of the BGH, a seller in such a case only fulfills its disclosure obligations towards the buyer if (i) the buyer had the opportunity to take note of the relevant documents/information in an (electronic) data room and (ii) the seller could at the same time have the legitimate expectation that the buyer would actually gain knowledge of the circumstances subject to disclosure by inspecting the data room. If the fact to be disclosed is a circumstance that is of very considerable economic importance for the buyer and if the fact to be disclosed is not readily apparent from the documents provided in the data room, the seller must also inform the buyer of this in the opinion of the BGH.
What was the issue?
The parties had a purchase agreement for several commercial units in a large building complex. As part of the purchase contract negotiations, the seller made various documents available in an electronic data room relating to the property. In the purchase agreement, the seller assured that he had no knowledge of any extraordinary costs for the current financial year or the future. He further assured that the community of owners had not decided on a special assessment. Finally, the purchase agreement confirmed that the seller had provided the buyer with all the minutes of the owners' meeting for the last three years. The parties agreed on a purchase agreement and agreed on a notarization date on a Monday. On the Friday before this notarization date, the seller uploaded further documents to the data room without informing the buyer. Among other things, the seller posted the minutes of an owners' meeting in the data room, in which the owners had decided to claim payment of EUR 50 million from the majority owner due to extensive renovation work in the building complex. At the owners' meeting, however, the owners had refused to levy a special assessment in the same amount from all owners.
As a result, one of the owners brought an action to enforce the special assessment. The lawsuit was ended by mutual agreement; in this context, the owners of the commercial unit agreed on a special assessment to be borne by all owners, initially in the amount of EUR 750,000.00, with the possibility of increasing this special assessment to up to EUR 50 million at the expense of all affected owners if necessary. The buyer, as the new owner, was then held liable for the special assessment on a pro rata basis. The buyer then challenged his purchase agreement with the seller on the grounds of fraudulent misrepresentation because he had not been properly informed of these circumstances before the purchase agreement was concluded.
What did the BGH decide?
Unlike the lower courts, the BGH essentially ruled in favor of the buyer, overturned most of the ruling and referred it back to the court of appeal for a new hearing.
In the opinion of the BGH, the fact that (re)construction measures were obviously required in the commercial property at a cost of around EUR 50 million, for which the owners may have to pay, constituted a fact about which the seller should have informed the buyer. Costs of this amount, even if they are only apportioned proportionately, are of significant importance for the buyer's decision to purchase and could even frustrate the purpose of the contract. A buyer could therefore expect a seller to inform them of such impending costs and the possibility of being required to make a pro rata special assessment.
In the case decided, the seller had provided the buyer with the relevant information by making documents available in the electronic data room immediately before the notarization date. However, the seller had neither drawn the buyer's attention to these documents, which were made available at extremely short notice, nor pointed out their economic significance.
In the view of the BGH, the seller did not fulfill his duty to provide information by merely posting documents in the data room. He had not fulfilled his obligations because he had posted the documents in the data room shortly after the conclusion of the contract negotiations and immediately before the notarization date. The seller could therefore not have assumed that the buyer would even take note of this document. The documents were therefore made available in such a way that it could not be expected that the buyer would take note of them from the outset. The BGH essentially transfers its case law on the physical handover of documents to the use of electronic data rooms and thus ties in with its established case law on duties of disclosure.
However, the BGH also clarified the following: The requirements that a seller must meet if it wishes to satisfy its duties to clarify and inform about circumstances subject to disclosure by posting documents in a data room generally depend on whether and to what extent the buyer carries out due diligence, how the data room is structured and organized and what agreements the negotiating parties have made in this regard. It also depends on the nature of the information to be disclosed and the specific documents in which it is contained. If necessary, the seller must expressly point out to the potential buyer that the documents have been placed in the data room and their content and significance.
In the present case, the decision of the BGH was clear: By simply providing documents immediately before the planned notarization date, the seller does not fulfill his duty of disclosure.
Impact on practice
The decision of the BGH was made on a real estate purchase agreement. However, due to the use of data rooms, it can be applied to all other types of purchase agreements, in particular also to M&A transactions and agreements in which data rooms are used in a variety of ways. The decision therefore has far-reaching significance and effects, especially in M&A practice.
In the opinion of the BGH, the mere posting of documents in a data room does not automatically mean that a seller has fulfilled any duty to disclose the circumstances presented in the documents. Only if the seller can have the legitimate expectation that the buyer will actually gain knowledge of a circumstance subject to disclosure by inspecting the data room will the seller provide the buyer with the necessary information as part of due diligence in such a way that it fulfills its duty of disclosure and can exempt itself from liability.
When can the seller, for example in an M&A transaction or other complex contracts for complex assets, have the legitimate expectation that the buyer will become aware of a circumstance that must be disclosed?
The data room and its structure, as well as the filling of the data room with the relevant or requested documents, must be carefully planned and managed. The structure of the sales process must also be taken into account. For the seller, this means first of all that he must be aware of all known or possible circumstances which, from the point of view of an objective third party, are of material importance to a buyer and may have a significant influence on the buyer's decision to purchase. Only if he has become aware of this can the seller compile and disclose information about these circumstances to the buyer in such a way that he can successfully exclude his liability for these circumstances when concluding a purchase agreement. The following points can serve as a guide for structuring the preparation of such transactions, especially in the area of M&A:
- In preparation for a pending sale, the seller must correctly identify and specifically record the relevant circumstances requiring disclosure.
- When disclosing these circumstances, for example in the context of due diligence, the information, for example in the (electronic) data room, must be clearly structured and allow the buyer easy access to the information.
- Therefore, the documents in the data room must be clearly sorted, systematically organized and named correctly and easily comprehensible.
- In his own interest, the seller should expressly point out to the buyer in writing, and in any case in a verifiable manner, any circumstances and the documents and information provided for this purpose that are or may be of considerable importance to the buyer. If necessary, this information should also be documented in the subsequent purchase agreement.
- The seller and buyer should expressly stipulate until when the buyer can expect to receive new documents and information in the data room. Such a regulation could include, for example, that documents may only be uploaded up to a certain date and/or that the seller informs the buyer of newly uploaded documents. In this way, the seller can document the proper/agreed fulfillment of any existing duties of disclosure.
If you have any questions about complex contract negotiations and structuring in M&A transactions or the provision of documents in a data room, or if you believe that you have not been properly informed by the seller in a contract / M&A transaction and have suffered damage as a result, please call us or send us an e-mail. We will be happy to assist you.