I. Usual exclusion of liability for facts disclosed in the data room

In corporate acquisitions, the following market standard has become established for limiting the seller’s liability: A seller’s liability for a breach of a contractual warranty is excluded if the facts were disclosed to the buyer in advance, usually during due diligence. Disclosed” is regularly deemed to be at least the content of an electronic data room in which the seller posts documents and information about the object of purchase and thus makes them available to the prospective buyer for review. For evidentiary purposes, the contents of the data room are saved on a data carrier and frequently handed over to a notary for safekeeping.

Electronic data rooms typically contain a wealth of documents and information from different stages of a transaction and from different areas of due diligence (financial, commercial, legal, tax, etc.). The content of the data room usually consists of documents pre-selected by the seller and supplementary documents requested by the buyer during the due diligence process. Data rooms are structured and organized in different ways. In the course of contract negotiations, the question is regularly discussed as to whether further requirements should be placed on the manner of disclosure in the data room before such disclosure exposes the seller to liability. In practice, various standards have developed under the heading “Fairly Disclosed” which are intended to specify the seller’s disclosure obligations and ensure that documents and information are made available by the seller in such a way that a buyer can also become aware of them. In this respect, increased requirements are regularly placed on the (folder) structure, the correct classification of documents within the structure and the content of the documents.

II. Judgment of the Federal Court of Justice 

In a Federal Court of Justice judgment dated September 15 (V ZR 77/22), the 5th Civil Senate com-mented on a real estate seller’s disclosure obligations when setting up a data room. In this case, three days before the notarization of the purchase agreement, the seller posted in the data room minutes of an owners’ meeting that had taken place more than two years ago. The minutes indi-cated a risk of a possible loss that could exceed the purchase price many times over. The seller had not separately drawn the buyer’s attention to the provision of this document and had not expressly excluded this risk from the agreed catalog of warranties in the purchase agreement signed shortly thereafter.

In accordance with the principle of “fair disclosure”, which is widespread in practice, the Court con-siders the disclosure obligations of a seller to be fulfilled only “if and to the extent that he can have the legitimate expectation on the basis of the circumstances that the buyer will become aware of the fact subject to disclosure by inspecting the data room”. The manner of disclosure must be such that “the purchaser will specifically review the records not merely for the purpose of general in-formation, but from a particular point of view”. In the opinion of the Court, a simple record of an owners’ meeting without further reference is not sufficient to adequately inform a purchaser of a possible risk that may significantly exceed the purchase price. For sufficient disclosure of such facts, the Court considers expert opinions or documents of similar quality to be necessary instead. The Court also lets it be known that the timing of the disclosure—shortly before the notarization date—also places an increased duty of disclosure on the seller.

However, the Court cited another aspect in its ruling that will be equally important. This is not a question of how disclosure is to be made, but rather which specific facts are to be disclosed. It is almost impossible for a buyer looking at the target company from the outside to conclusively identi-fy the relevant risks and request any missing documents from the seller. Here, a buyer is regularly dependent on the careful and dutiful cooperation of the seller. In the contract negotiations, the parties consistently struggle to obtain a guarantee from the seller that the buyer has been provided with “all information relevant to the transaction”. In the present case, due to the importance of the facts to be disclosed, the Court recognized that the seller also had to inform the buyer about the relevant facts “without being asked”. The Court was not even concerned with a corresponding guarantee in the purchase contract.

III. Outlook

Moving forward, sellers, M&A advisors and others involved in the organization of a data room on the seller’s side will have to observe heightened duties of care when selecting, setting up and sup-porting the data room.

In particular, the parties should observe the following points in the future:

• Selection of professional data rooms: The parties should select a professional data room provided by an appropriate service provider. Professional data rooms offer necessary func-tions for an appropriate structure and organization. Authorized persons are automatically notified of the upload of new documents by email.

• Disclosure shortly before the transaction is completed: More stringent requirements may be placed on disclosures shortly before the transaction is completed. In practice, this will play a role in disclosures after the completion of due diligence and shortly before the sign-ing of the contract. Here, an automatically generated notification from the data room pro-vider about new documents in the data room might not be sufficient, especially if it relates to relevant facts and the seller have given a credible assurance in advance that such facts are not applicable to the target company.

• Selection of documents to be disclosed: In particular, facts that represent a material poten-tial risk for the target company should be disclosed “unsolicited” by the seller.

• Type and manner of disclosure (concretization of “fair disclosure”): When selecting docu-ments, care must be taken to ensure that material risks are not disclosed as “hidden” but “present”.

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