Attribution of Knowledge for Corporate Acquisitions in Management Buy-Out Cases

In corporate acquisitions, the question as to whether and when the parties to the purchase agreement knew that a warranty provided in the agreement was inaccurate is frequently important, particularly with respect to the existence or non-existence of warranty claims. In many cases, the decisive question is not only whether the contracting party knew, but whether the knowledge of third parties can be attributed to the contracting party.

With regard to this problem, the Higher Regional Court of Dusseldorf recently found (Judgment of 16 June 2016, Case No. I-6 U 20/15) that, in certain cases, the knowledge of a managing director of the company being purchased can be attributed to the purchaser. That is the case, for example, if the managing director of the target company is involved in the corporate acquisition in a manner similar to that of a "management buy-out" (MBO; i.e. if the company is purchased by its current management). If, for example, the managing director in question holds shares in the purchasing company and will remain with the target company after the acquisition, it is assumed that he or she was loyal to the purchasing company even before the transaction, so that the managing director's knowledge is attributable to the purchasing company. The consequence of this attribution may be e.g. the exclusion of damage claims for breach of warranty which would otherwise exist.

Such an undesirable attribution of knowledge can be avoided by including an appropriate provision in the purchase agreement e.g. excluding the attribution of management's knowledge to a party or limiting this attribution to certain cases. As a practical matter, given the considerable repercussions of the possible consequences, it would therefore be advisable to include a contractual provision in each case concerning the attribution of management's knowledge with respect to the purchaser as well, and certainly in the comparable case of an MBO.