Warranties for material defects at the purchase of shares

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Warranties for material defects at the purchase of shares

According to the case law of the German Federal Court (BGH), material defects warranty law applies to the acquisition of all shares in a GmbH. However, if only 50% of the shares are acquired, the provisions on defects of title shall apply, even if the acquirer subsequently holds 100% of the shares.

Facts

The plaintiff already held a 50% interest in a GmbH and then acquired the remaining 50% of the shares from the defendant for a purchase price based on a business valuation report. After a further business value report revealed that the GmbH had an adverse balance at the time of acquisition and that the purchase price should therefore have been zero at best, the plaintiff sued for repayment of the purchase price, inter alia with reference to the statutory material defect provisions.

In the share purchase agreement, the parties had limited the defendant's liability to typical title warranties. No guarantees regarding the financial and operational situation of the company were agreed; in other respects, any statutory warranty provisions were excluded.

Ruling

The plaintiff based its claim for repayment on material defects warranty law, which in its opinion was to be applied exceptionally and in accordance with the previous settled case-law of the BGH on company acquisitions, because the plaintiff had purchased the business operated by the company as a whole from the economic point of view to be taken as a basis.

The BGH did not share this view in its decision of September 26, 2018, case no. VIII ZR 187/17 with the following reasoning:

Admittedly, the plaintiff had attained the sole power of disposition over the GmbH by acquiring the remaining 50%. However, a purchase of only 50% of the shares in the GmbH was neither according to the views of the parties nor objectively to judge as a purchase of an 'entire' company. For the assessment as to whether the purchase of shares (= rights) was exceptionally subject to material defects warranty law, only the specifically agreed object of purchase has to be taken into account, not aspects outside the object of purchase, in particular economic aspects. Accordingly, the purchase of only 50 % of the shares did not meet the objective of a contract aimed at the acquisition of the company as a whole, i.e. the purchase of one thing.

For the sake of clarification, the BGH points out that the over-indebtedness or insolvency of the acquired company does not constitute a legal defect with regard to the acquired shares, since these circumstances do not impair the legal existence of the shares.

Since the plaintiff could neither rely on contractually agreed nor on statutory warranty provisions, in the opinion of the BGH the only basis of her claim for repayment of the purchase price was the appeal for the loss of the basis of the transaction. The BGH left open the question of whether the basis of the transaction had ceased to exist and referred the legal dispute back to the previous instance for a decision.

Practical consequences

The plaintiff had failed to insist on the provision of guarantees to the defendant with respect to the absence of over-indebtedness of the acquired company. In addition, she failed in her attempt to base her alleged claim for repayment of the purchase price on material defects warranty law.

The decision illustrates once again that a comprehensive and carefully tailored catalogue of representations and warranties to be incorporated in the share purchase agreement is still the best protection for the buyer against "nasty surprises". This is particularly important with regard to certain ideas of the buyer regarding the nature of the business operated by the company, since misconceptions of the buyer in this regard are not suitable in the opinion of the BGH to justify a legal defect of the purchased shares.

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