Dispute after company purchase in Germany
Post M&A disputes, breach of warranty, earn-outs and fraud in german practice
The sale of an entire company or parts of a company is a wonderful moment for entrepreneurs and shareholders in Germany - if the sale does not take place in distress. Ideally, years of building up the company are highly remunerated. However, the seller, whether shares in a GbR, GmbH & Co KG, GmbH or stocks, should not let high purchase prices cloud his view. The company buyer will be anxious to have his profit expectations for the business contractually secured. To this end, extensive guarantee and indemnity declarations are required from the seller and are also regularly issued in german practice.
If in Germany a dispute arises after the transfer of the company, so-called post M&A dispute, the matter is often settled amicably and without the involvement of a court, as the costs of conflict are generally high on both sides. However, in german practice, hard-fought post M&A disputes occur time and again. Whether you are on the seller's or buyer's side, it is good to be prepared.
Our legal expertise in german M&A disputes
Our english-speaking german transactional attorneys offer experience from countless advisory and litigation engagements. We combine years of M&A experience from major law firms and internationally active companies.
From our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne, we serve clients nationwide before, during and after the sale of a company. Our range of services includes in particular:
- Liability prevention before the company purchase / deal
- Strategic advice and representation of the seller in the event of breaches of the company purchase agreement (breach of warranties and non-competition clauses, fraud, etc.)
- and expert opinions on earn-out claims and breaches of warranties
- Strategic advice and litigation representation of the company purchaser in the event of breaches of warranty and rescission of the company purchase agreement as well as earn-out disputes in cooperation with auditors and criminal lawyers
- Management of shareholder disputes in the GmbH, partnership or shareholder lawsuits in the AG after entry into the company
Company purchase agreement in Germany - regular limitation of liability
Regardless of whether the company is sold by way of a share deal or an asset deal - the basis for liability can always only be found in the company purchase agreement. Recourse to the law (i.e. the purchase law of the German Civil Code) is almost always expressly excluded. The seller and buyer must therefore deal with the contractually agreed liability regime. This is usually based on extensive warranty catalogs. However, the contractually regulated narrow liability framework of the company purchase agreement does not apply in the case of fraud if the seller has intentionally deceived the buyer.
Which issues often lead to M&A disputes in german practice?
In Germany, disputes often arise when the seller of a company remains with the company as an executive or managing director after the transaction has been completed. It is often very unfamiliar for the seller to be integrated into foreign structures and no longer be the master of his own house. His company is integrated into a foreign company. The reporting channels change: reports have to be submitted to the new owners or new bosses, he has to coordinate with co-managing directors and submit certain transactions to the new owners for approval in advance.
Against this background, it is not surprising that disputes often ignite over the employment contract/managing director contract of the company purchaser. It then becomes dynamic relatively quickly and often leads to dismissals, terminations and even house bans.
In german practice, typical areas of conflict are so-called purchase price adjustment clauses and contractual guarantees. Post M&A disputes in connection with downstream purchase price payments (so-called "earn-outs") are also virtually classic.
M&A disputes and purchase price adjustment clauses in german law
Frequently, especially in larger transactions, the parties agree on purchase price adjustment clauses. Their function in german practice is to take into account any changes in the company relevant to the purchase price until the closing. Here, disputes can arise regarding the accounting principles to be applied and their concrete application.
Warranty, warranty catalog and breaches of warranty in Germany
Corporate buyers obtain various guarantees from the seller. A breach of warranty does not require fault on the part of the guarantor in Germany. He simply vouches for the presence or absence of certain circumstances.
A distinction is then made between objective and subjective guarantees in german practice. In the case of a subjective warranty, the seller's liability is again limited (for example: "to the best of his knowledge, the seller warrants").
Indemnification clauses as a safeguard under german law
Indemnity clauses provide the buyer in Germany with protection against risks that are already known. For example, the buyer may claim personal liability of the seller for warranty claims of customers against the target company that are already emerging. Other common indemnification cases include environmental liabilities, tax liabilities and any german public law fines.
The indemnification clause gives the buyer in Germany the right to demand that the seller fulfill the claims defined in more detail in the clause. In the case of an indemnification, the buyer is in the good position of not having to prove the occurrence of a loss.
Risk minimization through earn-out clauses in german practice
The so-called earn-out clauses are widely used. They allow the buyer to pass on part of his economic risk as the new owner of the company to the seller, since at least part of the purchase price does not have to be paid until a later date.
In Germany, the seller bears economic risk even though he is no longer a shareholder or only a minority shareholder. In addition, he is at the mercy of structural changes (for example, through a merger with another loss-making company). No matter how carefully the seller negotiates the german earn-out clause, there will always remain a substantial residual risk according to which the buyer can (dishonestly) get rid of his earn-out obligation. The seller will have to prove in an earn-out dispute that the buyer was in breach of duty in keeping the earn-out basis low.
M&A disputes over non-compete and customer protection clauses in Germany
The corporate buyer will usually insist that the seller signs a post-contractual non-compete agreement and a customer protection clause. The aim is to prevent the seller in Germany from simply continuing the sold business in a new form through targeted measures, for example by poaching the most important employees (non-solicitation clause) and setting up a competitor company.
An example could be a software company that is sold and where the founder subsequently poaches the most capable programmers in order to operate a competing company.
Deception and fraud in the purchase of a company in Germany
No contract can ever limit liability for fraudulent misrepresentation. An agreement that even limits liability for intentional conduct is invalid under german civil law. This means that the company purchaser's sharpest sword is always the accusation of fraudulent misrepresentation.
In principle, the seller is also obliged to provide unsolicited information about facts that indicate a continuing crisis in the company. According to the OLG Munich (judgment of 03.12.2020 - 23 U 5742/19), misleading statements can be challenged pursuant to Section 123 (1). The seller also deceives fraudulently if he fails to disclose facts that are essential for the buyer's decision for or against the purchase within the scope of an NDA (Non Disclosure Agreement) or later within the scope of due diligence. If, for example, a seller of a company in Germany does not disclose that one of the contracts most essential for production has just been terminated, this is likely to be regarded as fraudulent misrepresentation. The buyer can then rescind the entire contract and additionally claim damages.
In addition, and this makes the situation even more threatening, there is the accusation of criminal fraud ( Section 263 of the German Civil Code). The seller therefore also risks criminal prosecution.
Conflict avoidance through contract design in Germany
Since such disputes can be both financially and personally demanding, the seller should pay the utmost attention to avoiding liability. This is where experienced M&A lawyers are needed.
The usual measures include careful disclosure of liability-relevant facts ("disclosure") and the use of common contractual mechanisms to reduce liability ("de minimis", "basket", "threshold", "cap"; individually adapted limitation rules).
When disputes do arise in Germany: Post M&A disputes
Disputes arising from a german company purchase agreement usually follow certain patterns. In a first step, both sides articulate their respective claims and arguments. With the support of lawyers, both sides sound out whether and at what cost a peaceful settlement of the conflict without the involvement of a court makes sense.
If this does not succeed, both sides must prepare themselves for a long and costly legal dispute in Germany. In this case, however, the purchaser also risks having to deal with the public prosecutor's office.
Proof of causal damage under german law
Particularly in german M&A disputes, a distinction must be made between proof of a violation of rights and the resulting damage. In many cases, proving a violation of rights will be relatively easy.
However, it is much more challenging to present and prove the damage resulting from the breach of warranty in german practice. This applies in particular if it is argued that loss of earnings has occurred or that a lower purchase price would have been paid if the true condition had been known. The effort involved here, in particular also arising from the involvement of tax advisors and auditors in Germany, should not be underestimated.
Our expertise in german M&A disputes
Our german law firm has a large team of english-speaking corporate and transactional lawyers in Berlin, Frankfurt, Munich, Hamburg and Cologne, who are active in M&A matters both in an advisory capacity and in court. Our advisors are familiar with both scenarios: the joyfully concluded company purchase agreement and the bitterly fought dispute after the transaction has been completed. We advise and represent on an equal footing with major international law firms.
The ROSE & PARTNER M&A team in Hamburg, Berlin, Munich and Frankfurt
Contact persons for disputes arising from company purchase agreements are:
- Dr. Michael Demuth, LL.M. Attorney at law, Certified specialist for corporate law
- Dr. Boris Schiemzik, Attorney at law, Certified specialist for corporate law
- Dr. Ronny Jänig, LL.M., Attorney at law, Certified specialist for corporate law
- Dr. Jens Nyenhuis, LLM., Attorney at law, Certified specialist for corporate law
- Christian Westermann, Attorney at law, Certified specialist for corporate law
- Gregor Kübler, Attorney at law, Maître en Droit (Aix-Marseille III)
- Finn Dethleff, Attorney at law
- Christian Mattlage, LL.M., Attorney at law, Certified specialist for corporate law