I. Purpose of due diligence reviews

The purposes of due diligence reviews are manifold. On the one hand, they are intended to reduce any information asymmetries, particularly in favor of the purchaser, and to give the purchaser the opportunity to thoroughly examine the object of purchase – for example, a company – and in particular to enable him to determine where he would like to and should demand guarantees or indemnities from the seller. At the same time, the knowledge gained by the purchaser during the due diligence process regularly has an impact on the purchase price to be agreed.
For the seller, the due diligence review and in particular the setting up and preparation of a (virtual) data room is an attempt to “reduce his liability”, since guarantees are generally not valid for circumstances that are known to the purchaser – the seller is therefore ultimately attempting to fulfill his obligation of disclosure by filling the data room. The ruling outlined below attempts to specify the requirements to be met.

II. Facts of the decision of the BGH of 15 September 2012, case no.: V ZR 77/22

The seller sold the purchaser several commercial units in a building complex for around EUR 1.5 million and assured the purchaser that there would be no future special allocations – with one exception. The seller was also unaware of any other costs. The minutes of the owners’ meeting were handed over to the purchaser, who was subsequently entered in the land register. The seller provided the purchaser with a virtual data room for the provision of documents and information as part of the purchase process. On Friday before the notary appointment, further documents were made available in the data room; the purchase agreement was signed on the following Monday.
The documents uploaded at short notice included the collection of resolutions containing the minutes of the 2016 owners’ meeting. In this meeting, the owners had decided to obligate the majority owners to make extensive structural changes to the building complex amounting to EUR 50 million on the basis of a resolution passed in 2006. Following a lawsuit by an owner, it was decided in a settlement that the owners of the commercial units would have to make a special contribution of EUR 750,000 and, if necessary, up to EUR 50 million for maintenance and repair measures, which would also be claimed from the purchaser. The purchaser defended itself against this by contesting the purchase agreement, or alternatively by withdrawing from the purchase agreement.
The court of origin and the court of appeal had rejected the purchaser’s claim for indemnification, or alternatively for payment of EUR 1.5 million plus approximately EUR 185,000. The purchaser appealed to the BGH.

III. Reasons for the decision of the BGH

The appeal was fully justified. In the opinion of the BGH, a claim for damages by the purchaser pursuant to sec. 280 para. 1, 311 para. 2 no. 1, 241 para. 2 German Civil Code (BGB) due to a pre-contractual breach of obligations – specifically the breach of an obligation of disclosure – is possible.
The BGH first states that not every piece of information available to the seller is a circumstance that must be disclosed to the purchaser. However, if statements are made by the seller, these statements must be correct and complete. In this case, the seller stated that no extraordinary costs were imminent, although the documents uploaded at short notice showed that there was an increased risk of claims being made against the purchaser.
Moreover, in the opinion of the BGH, a circumstance is always subject to disclosure if it could frustrate the purpose of the contract for the other party and is of considerable importance for its decision. In principle, the provision of documents in a virtual data room may be sufficient to fulfill the obligation of disclosure. However, this depends largely on the circumstances of the individual case, in particular whether a due diligence review was or should have been carried out by the purchaser, how the data room and access to it is organized and structured, what type of documents or information are involved and whether and how many competent persons are on the purchaser’s side. In the present case, the information was known to the seller, was easy to communicate and was clearly of particular importance to the purchaser. It should also be noted that the documents were made available to the purchaser without notice on the Friday before the notary appointment on Monday and that it was difficult to find the specific information within the documents during this period. Irrespective of the due diligence review carried out, the seller has not fulfilled its obligation of disclosure by providing the documents in this case. This is because he could not reasonably expect that the purchaser would become aware of the circumstance requiring disclosure. On the contrary, in the present case – according to the BGH – a specific indication by the seller was absolutely necessary.

IV. Consequences for the practice

Whether the decision is fully transferable to M&A transactions remains to be seen. However, it can be assumed that the guidelines of the judgment and thus the existing obligations of disclosure must also be taken into account in the corporate context, at least in the preparation of a due diligence review, especially since the BGH itself makes a connection to corporate transactions (see para. 30 et seq. of the judgment).
In particular, the BGH makes it clear in this ruling that the question of whether the seller has fulfilled its obligation of disclosure by providing documents in a data room is and will remain first and foremost a case-by-case decision.
The BGH lists the following criteria that can be used for or against the fulfillment of the obligation of disclosure:

• Business experience of the contractual partner – i.e. the purchaser in this case;
• expertise of the consultants engaged by the purchaser;
• actual performance of a due diligence review by the purchaser;
• structure of the data room;
• (automatic) notification when uploading new documents; and
• period between the posting of new documents and the notarization of the purchase contract.

In M&A transactions, it should be noted that “imbalances” in the business experience of the parties are not the rule, at least above a certain level. Here, a data room is set up precisely for the purpose of carrying out a due diligence review, as this corresponds to the market standard – as already mentioned above – so that the question of whether a due diligence review is actually carried out appears less relevant. The same is likely to apply with regard to the expertise of the advisors involved, as the parties regularly have correspondingly specialized advisors who accompany the transaction. Nevertheless, there may also be cases of imbalance here and, in particular, unsolicited obligations of disclosure may be affected if the critical information is not recognizable from the due diligence documents. Here in particular, the short-term nature of providing key information before the transaction is signed can also be critical.
As far as the structuring of the data room is concerned, certain practices have also developed here, which are reflected in particular in the fact that clauses are regularly found in company purchase agreements which stipulate that documents posted in the data room are only deemed to be known – and thus exclude liability on the part of the seller – if they have been fairly disclosed, i.e. have been filed where an advisor familiar with M&A transactions would expect them to be. Modern digital data rooms from professional data room providers are also generally equipped with automatic notification functions that inform everyone who has access to the data room when new documents have been posted.
In (M&A) practice, the parties regularly agree on a date before the conclusion of the contract for the period between uploading the documents and the conclusion of the contract by which documents may be uploaded to the data room. If further documents are subsequently provided, an agreement between the seller and purchaser is the rule, usually combined with an additional inspection period.
Overall, it should be noted that most of the criteria set out by the BGH are met anyway in a properly structured M&A sales process with a professionally set up data room.
Nonetheless, there remains an uncertainty due to the individual case, which can be reduced in particular by providing as many documents as possible in the data room in good time and, if necessary, explicit explanations of circumstances that are particularly relevant for the purchaser.