Impact of German Court's Disclosure Obligations Ruling on Corporate and Financing Transactions

The German Federal Court of Justice (BGH) clarified in a ruling on September 15, 2023 (V ZR 77/22) that sellers may not rely only on the information they put in a data room when fulfilling their disclosure obligations towards a buyer or investor. While the case decided by the BGH involved a real estate transaction, the principles are viewed as likewise applicable to any corporate M&A, venture capital or any other financing transaction where a due diligence on the target business is involved. The disclosure processes as well as transaction documents have since been adapted to address the risks for sellers resulting from this ruling.

Key Takeaways from the Ruling

As a reminder, the ruling states that simply providing access to a virtual data room may not be sufficient to fulfill the legal disclosure obligations. According to the BGH’s ruling in order to ensure compliance with all legal disclosure obligations sellers must ensure that:

• Any information given to buyers which could influence their decision to purchase is accurate and complete;
• Questions posed by buyers are answered correctly and comprehensively;
• Facts that are essential to the buyer’s decision are disclosed to the extent that such disclosure can be reasonably expected based on good faith considerations;
• Any information that is significant and not readily apparent is proactively highlighted, especially if such information is added to the data room shortly before the deal closure; and
• The data room is structured in a manner that facilitates easy access and understanding of pertinent information.

Practical Implications

This ruling has significant implications for how sellers have to manage their disclosure process. To comply with these new standards and mitigate risks, parties should consider the following:

• Vendor Due Diligence: Sellers may need to conduct their own thorough due diligence to identify any circumstances that require disclosure.
• Professional Data Rooms: Use data rooms that offer sufficient features to meet the BGH criteria and consider tracking data usage for evidence.
• Data Room Organization: Ensure the data room is organized according to the BGH guidelines; avoid overwhelming buyers with irrelevant information.
• Clear Communication: Proactively communicate non-obvious, significant items and consider summarizing complex issues in memoranda.
• Documentation: Both buyers and sellers should comprehensively document the due diligence process in the purchase agreement.
  Transactional Documents: Reflect the necessary disclosure framework clearly in the purchase agreement. Reassess familiar clauses against the BGH decision's implications.
• Buyer Considerations: Buyers should document important issues, ensuring sellers exercise greater diligence in disclosing relevant matters.

In essence, both buyers and sellers must adjust their procedures to ensure a fair and clear disclosure process. Sellers cannot merely rely on a data room to escape liability; they must actively ensure that the buyer is likely to understand the significance of the information provided. Buyers should also take responsibility by conducting diligent reviews and seeking clarifications on critical issues.