M&A: Claims for Damages after Business Acquisition

Business acquisition agreements always contain extensive catalogues of warranties. Disputes concerning warranty claims are seldom brought before ordinary courts. However, the Regional Court of Hamburg (Landgericht – “LG”) recently ruled in a much noted judgment on the stringent requirements that have to be met by parties wishing to bring claims for damages.

In the present case, it turned out after the conclusion of the transaction that the target company did not have all necessary licensing agreements for the use of certain patents. The claimant’s legal counsel initially based its claims for damages on a clause pursuant to which the target company warranted that it had obtained all the necessary approvals. The claimant furthermore invoked the accounts warranty that had been given, contending that the company should have established adequate provisions for the assertion of claims by the patent holder.

The LG Hamburg (judgment of 13 March 2015, case reference: 315 O 89/13) declined the existence of any claim to the permissions from the warranty as it clearly related only to public permissions. In addition, the LG had further reasons for its dismissal of the claim for damages: The purchaser had confirmed that it had inspected all the relevant documentation and received all the necessary information during the due diligence process. Given that it had been informed of the existence of a patent dispute, the claimant should have requested further details thereof. Moreover, the documentation in question included notes and statements which explained why the target company considered the assertion of any claims on grounds of patent infringements to be unlikely. In light of the foregoing, the court came to the (in our view plausible) conclusion that the target company was not under any obligation to establish provisions for this eventuality, the assertion of any such claims not being sufficiently likely as to make such a course of action necessary.

Comment

This judgment shows that public courts are also capable of duly resolving disputes relating to business acquisitions.  Matters with a cross-border element often include an arbitration clause as a means of possible enforcement. However, EU agreements should always be reviewed as to whether they may also be resolved by the generally less expensive public courts.

This judgment also clarifies the stop-gap function of accounts warranties, in which context it should be noted that the legal consequences thereof are uncertain (e.g. must the amount of any provisions established be reimbursed, even if these prove to be unnecessary in retrospect? What if the provisions were only necessary to some extent?). Internationally, an expert opinion from local accounts experts will always be required, as the requirements for the establishment of provisions in other jurisdictions may differ from those in Germany.

The consequences of this judgment for sellers are that the due diligence documents will have to be kept available for subsequent disputes and evidence that the documents were in fact inspected by the purchaser will also have to be provided to the court. This may entail the inclusion of affirmations to this effect in the purchase agreement, on the one hand, or require the archiving and use in the proceedings of the data room logs, on the other hand.