I. BGH judgment of 26 September 2018

1. Fact of the case

The decision of the BGH was based on the following facts: The claimant and the legal predecessor of the defendant had held equal participations in a company in the legal form of a limited liability company [Gesellschaft mit beschränkter Haftung – GmbH] within the framework of a joint venture since 2011. Due to differences in opinion between the shareholders the joint venture was supposed to be terminated by means of a sale of the shares in the target company held by the defendant to the claimant. Following an expert opinion by an auditing company which was commissioned by the claimant the total value of the target company amounted to EUR 8 million on 31 December 2010. Against this background, the claimant acquired the shares of the defendant at a purchase price of around EUR 4 million with effect as of 1 October 2011. The purchase contract contained several guarantee declarations of the defendant, in particular concerning the legally effective existence of the sold shares, the lack of encumbrances with third-party rights, the defendant’s legal title position regarding the shares as well as the capital contributions on the shares made in half. Statutory guarantee claims of the claimant were excluded “to the extent permitted by law”. After the closing of the SPA, it turned out during the examination of the annual accounts of the target company for the business year 2011 that the annual financial statement for the business year 2009 which was relevant for determining the purchase price had shown revenues which were significantly too high as a result of a severe balance sheet delimitation error. If the parties had taken into account the correct business figures which they had not been aware of there would have been a significant adverse balance. Against this background, the defendant demanded the reimbursement of the paid purchase price and justified this demand with a claim to contract adjustment due to frustration of contract or alternatively a claim to warranty for defects.

2. Reasons for the decision

The previous instances had each dismissed the claim. The over-indebtedness and the vicinity of insolvency of the target company were, by respectively applying the provisions of warranty law for material defects (sections 434 et seq. German Civil Code [Bürgerliches Gesetzbuch – BGB]), a material defect of the sold shares under the SPA. However, a liability for material defects was expressly excluded in the purchase contract. Claims arising from section 313 BGB due to frustration of contract were also out of the question, because section 313 BGB is not applicable as a rule once the law for defects applies.
In a first step, the BGH confirmed the opinion of the court of appeal according to which section 313 BGB could not be used within the scope of application of the warranty for material defects and defects of title under classical sales law. The reason for this was that the risk allocation between seller and purchaser were specified in sections 434 et seq. BGB and that these sections could not be avoided by applying the provisions on a frustration of contract. This was supposed to apply as well if the requirements for a liability for defects in an individual case – e.g. due to a contractually agreed exclusion of liability – were not satisfied.
Contrary to the previous instances, the BGH did not consider the scope of application of the law for material defects in this concrete case to be opened. In the view of the BGH, a defect of the sold company – in this case its indebtedness and as result its vicinity of insolvency – did constitute neither a material defect nor a legal defect of the sold shares. In particular, the BGH expressed a clear rejection of tendencies in legal literature according to which defects of individual things, rights or other objects or the company assets during a share purchase should at the same time be considered as defects of the sold shares: Even after the Act to Modernize the Law of Obligations of 26 November 2001 (Modernization Act) came into force, the seller of a right is liable only for its existence (viability), but not for the quality of the object to which the right relates (status). This results due to an argumentum e contrario to section 453 para. 3 BGB. There was no need to extend the warranty liability to a purchase of rights. The parties could – as is usual in legal practice – make corresponding guarantee agreements. If the parties had neglected to do so, the purchaser was nonetheless not unprotected, as he was in principle entitled to claims from culpa in contrahendo (sections 280 para. 1, 311 para. 2, 241 para. 2 BGB) or from frustration of contract pursuant to section 313 BGB.
In the end, the over-indebtedness and the vicinity of insolvency of the target company were – contrary to the predominant claims in legal literature – not a legal defect of the sold shares themselves. The legal existence of the shares was not affected by the over-indebtedness or vicinity of insolvency, in particular voting rights and profit claims existed as before the occurrence of over-indebtedness.
In the meantime, the BGH made it clear that its consistent case-law endured beyond the coming into force of the Modernization Act according to which the warranty law for material defects may apply in the event of a share purchase under certain requirements in case of defects of the business operated by the company. The requirement of such a corresponding application of sections 434 et seq. BGB was that the purchase of shares, both in the opinion of the parties and objectively, constitutes a purchase of the company itself and thus, from an economic point of view, operates like a “purchase in kind”. Such a purchase of a company or purchase in kind was the case if the purchaser buys all or almost all shares from the seller and accordingly was thus unrestrictedly able to dispose of the company, without being affected by the authority of the co-shareholders. The BGH held that this prerequisite in the case of the purchase of only 50 percent of the shares – irrespective of the circumstance that the claimant had already held 50 percent of the shares at the time of the purchase and had thus acquired all of the shares in the company as a result of the additional acquisition – was not fulfilled: The fact that the claimant had already held business shares of the target company at the time of the share purchase, could not be taken into account for the assessment of the presence of a purchase of company. Because the relevant connecting factor concerning the law for material defects was exclusively each purchase object. And in this specific case, only 50 % of the shares were purchased and thus not all or almost all of the shares.
Accordingly, due to a lack of applicability of sections 434 et seq. BGB there was room for applying the provisions on a frustration of contract pursuant to section 313 BGB. In this respect, the BGH could, however, not make a decision, but had to refer the case back to the court of appeal due to a lack of relevant findings. Indeed, the court of appeal had already found that both parties assumed a positive equity and the ability to continue the business of the target company. However, there were no findings as to whether and to what extent these substantial expectations of the parties actually turned out to be wrong and whether, taking into account all the circumstances of the individual case, it was unreasonable to expect the claimant to adhere to the unchanged contract.
In the end, the BGH expressly pointed out that the applicability of section 313 BGB was not excluded, because the parties of the purchase contract agreed on an exclusion of statutory guarantee claims and instead stipulated certain guarantees concerning the shares to be transferred. Section 313 BGB was not applicable if a risk was materialized by a frustration of contract which would fall under the risk area of one party. The purchase contract in dispute, however, did not contain further details on the economic situation of the company and did thus not make a statement as to who would bear the risk for the frustration of the intended equivalent interest between performance and consideration.

II. Consequences for the practice

The BGH’s comments on the corresponding application of the warranty law for material defects will hardly have any practical relevance in themselves, as liability for defects in share purchase agreements is largely excluded by mutual agreement. The decision, however, as far as it concerns claims of a purchaser of shares according to section 313 BGB, once again clearly demonstrates that the seller of shares is not sufficiently protected by the exclusion of liability for defects alone. If the court of appeal in the case on which the decision of the Federal Court of Justice is based should consider the conditions of the facts of section 313 BGB to be fulfilled, the seller would be obliged to repay the purchase price to the purchaser. However, the seller certainly wanted to avoid this result by issuing guarantees relating only to the sold shares (title guarantees) and by excluding statutory warranty claims. The seller would therefore have been well advised to completely exclude his legal liability within the scope of what is legally permissible, in particular including any claims arising from section 313 BGB and from “culpa in contrahendo”.