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Liability Risks for the Seller
Business purchase agreements typically contain a list of warranties provided by the seller, which may be more or less extensive. In most cases, liability for breaches of warranty is capped (maximum liability amount) or limited (minimum amounts, deductibles), so that the seller assumes only a (supposedly) limited risk of having to refund part of the purchase price. However, caution is warranted here: If the seller has been negligent, the limitations are invalid and the seller is liable without limitation. This applies first and foremost to warranties that were intentionally misrepresented. The problem here pertains less to cases where the seller is aware of this. According to the case law of the Federal Court of Justice (BGH), intent is already present when a statement is made “at random”—that is, when the seller does not even know whether the warranty has been breached or not. In such cases, unlimited liability may arise. It is therefore highly advisable to carefully verify the accuracy of the warranties provided. If a thorough verification is difficult, the warranty should be provided only to the best of one’s knowledge.
Another liability risk lies in the seller’s pre-contractual disclosure obligations. If the seller was aware of material risks facing the business and failed to disclose them to the buyer, the seller may be liable for damages arising from a breach of pre-contractual disclosure obligations even if such liability is excluded in the business purchase agreement.
The manner and timing of disclosure are also relevant here. If the seller “hides” any information regarding the risks in locations where it is not expected to be found (e.g., in folders within a so-called electronic data room), this may, in the worst-case scenario, not constitute sufficient disclosure. The same applies if disclosure occurs so close to the conclusion of the contract that the buyer is no longer able to assess the information.
The seller is therefore advised to inform themselves about potential risk areas well in advance of selling their company in order to better assess their own liability risk. In case of doubt, an advisor with transaction experience should always be consulted to work with the seller to develop a strategy and determine which warranties must be provided and to what extent, as well as what information must be made available to the buyer (even if not requested).
Liability Risks for the Buyer
The complex world of corporate acquisitions, however, also harbors several risks for the buyer that should not be underestimated.
This applies, for one thing, to transactions in which the buyer acquires not the shares of the company being sold, but rather its material assets. Such an asset deal is often chosen to avoid assuming known or suspected liability risks of the company. However, this does not always succeed. Pursuant to Section 75 of the German Fiscal Code (AO), the buyer of a company is liable for certain taxes owed by the seller, but only for up to one year following the acquisition. If the buyer continues to operate the acquired business under the same name, the buyer is generally liable under Section 25 of the German Commercial Code (HGB) for all of the seller’s liabilities, even if the buyer did not actually acquire them. While the latter liability can be avoided by making an entry in the commercial register, this is not possible for liability under Section 75 of the AO. It is therefore important, even in an asset deal, to identify any tax risks in order to assess the risk more accurately.
Knowledge of warranty breaches can also pose a risk to the buyer. The buyer will typically conduct due diligence to identify any risks and, if necessary, secure protection against them through warranties. However, if the buyer was aware of specific warranty breaches at the time the business purchase agreement was concluded, the buyer has no claims for damages arising from those breaches. Pursuant to Section 442 of the German Civil Code (BGB), a buyer cannot assert warranty claims if the buyer was aware of the defect or failed to recognize it due to gross negligence. While it is disputed whether this provision applies to standard warranty structures, the risk to the buyer remains high in the absence of a clear provision addressing this in the business purchase agreement. In practice, therefore, it is usually agreed that while Section 442 of the German Civil Code (BGB) does not apply, all information reasonably disclosed during due diligence is deemed to be known to the buyer, and no claim for breach of warranty exists if such a breach is apparent from that information. Therefore, in the case of known risks, the buyer should not rely on a warranty but should, for example, reflect the risk in the purchase price or demand an indemnification clause that establishes the seller’s liability regardless of the buyer’s knowledge.
Overall, while the acquisition of a company is not a minefield, there are some significant risks that the parties should be aware of in order to find appropriate solutions. Specialized advisors can provide valuable assistance in this regard.
