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Increased Duties of Disclosure in a Company Sale

The seller of a company is subject to increased pre-contractual duties of disclosure, in particular with regard to information about specific events and significant indications of a continuing crisis within the company. The seller has to disclose the relevant information without being asked. The Higher Regional Court of Munich had to deal with this issue (judgment of December 3, 2020 - 23 U 5742/19). It was in dispute whether the seller practiced a fraud on the buyers about the economic situation of the company and whether the seller has the duty to inform about specific events without being asked, provided that they represent important signs of a continuing crisis of the company.

The Higher Regional Court of Munich answered both questions in the affirmative. The sellers were sentenced to repay the purchase price and to compensate all damages incurred by the buyers as a result of the purchase of the company. The Higher Regional Court of Munich considered the pretense of an inaccurate economic situation and the failure to inform the purchasers about the already significant signs of a permanent crisis in the company to be malicious deception. The seller had previously advertised the sale online with, among other things, the advertisement "Very fast return of investment [...]". In the course of the contract negotiations, the seller also submitted balance and total accounts as well as business assessments, which showed a negative operating result. On further inquiry, however, the seller explained "As you see, and/or as announced by me, things are now moving back into the black considerably. We can discuss this in more detail with the tax consultant." One year after the share transfer,  the company's annual account was prepared. The annual account showed a substantial deficit. The negative numbers far exceeded the negative numbers reported in the business assessments.

Therefore, in the context of the sale of a company, the seller's increased duties of disclosure has to be observed. As a matter of principle, the seller is obliged to inform the purchaser, even without being asked, about specific incidents if these constitute weighty indications of a continuing crisis of the company. This applies, for example, to substantial payment arrears, multiple reminders or liquidity bottlenecks. Similarly, the seller has to provide clear and unambiguous information about the fact that the company has so far only achieved negative results and to what extent. The increased duty of disclosure includes all circumstances that have a negative impact on the company's ability to survive, such as an imminent or already existing insolvency or over-indebtedness. This is because the information that the company has never yet been economically self-supporting, let alone profitable, is essential to the contract.

It should also be noted that the seller's deceptions (untrue, misleading statements "fast return of investment", "things are now moving back into the black considerably") do not cease to exist by the fact that business documents were handed over to the buyer, which in turn do not paint a clear, complete picture of the company's economic situation. The deceptions are also not rectified by discussions with the tax consultant. Moreover, the tax consultant is also subject to duties of disclosure in the event of corresponding knowledge.

The seller's increased duty to provide information takes account in particular of the fact that the prospective buyer can form a reasonably accurate picture of the value-forming factors primarily only on the basis of the balance sheets, the current business analyses, other accounting documents and supplementary information from the seller. This also applies to the knowledgeable prospective buyer, since the latter, as an outsider, is particularly dependent on the correctness and completeness of the information provided to him on the sales and earnings situation of the company. In the case of a viable company, the duty to provide information extends to circumstances that seriously jeopardize the company's ability to survive, in particular an imminent or already existing insolvency or over-indebtedness. In this context, the seller must also provide comprehensive and truthful information, without being asked, about events which are weighty indications of a continuing crisis of the company. In the same way, in the course of the contract negotiations he must in principle also point out to the purchasers the losses of the past years which may jeopardize the purpose of the contract. This is because the purchaser is particularly worthy of protection due to the lack of any other means of obtaining information.

In the case of buying a company, it is therefore not only the drafting of the contract that is particularly important, but also the professional execution of the due diligence (company audit from a legal and tax perspective). A perfectly drafted purchase agreement does not in itself lead to a legally secure sale of the company if, as in this case, errors or even deceptions occur during the negotiations. In the course of the due diligence and the negotiations of the purchase agreement, great care should be taken to ensure that the seller provides the buyer with correct, accurate and sufficient information, insofar as he is asked appropriate questions in the course of the due diligence and his duties of disclosure are sufficient.

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