The latest judgment of the Court of Appeal of Frankfurt am Main: an analysis
By Dr. Dirk Stiller

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Judgments dealing with German SPAs (sale and purchase agreements) are very rare because the parties usually resolve disputes amicably or by (nonpublic) arbitration. That makes a recent judgment (26 U 35/12) of the German Court of Appeal (Oberlandesgericht) of Frankfurt am Main (“Court”) even more important. The judgment deals with two topics that are relevant in almost every SPA negotiation: balance sheet guarantees and the consequences of purchaser’s knowledge of a breach. This article explains the decision and the consequences it has for the practice of M&A law.

Underlying facts

The judgment pertains to an independent performance guarantee without fault (the German equivalent of a representation and warranty) according to which the company’s annual statement (for the most recent financial year) was prepared with the due care of a prudent businessperson in compliance with statutory provisions and presents a true and fair view of the financial position and performance of the company. The purchaser proved that the balance sheet erroneously showed a profit instead of a loss and that certain provisions were either not made or not made in the correct amount.

Balance sheet guarantees and their legal consequences under German law

The grounds for the judgement partially align with the prevailing opinion expressed by German legal authors and courts. In other parts of the judgment, they are surprising. In particular, the Court held that the independent performance guarantee was to be considered a “hard” balance sheet guarantee.

A hard balance sheet guarantee is usually defined as a guarantee statement according to which the annual financial statement comprehensively and correctly discloses any and all liabilities and obligations, known or unknown. In contrast, a “soft” balance sheet guarantee is a statement indicating the annual financial statements comply with the principles of orderly accounting and with statutory provisions.

Considering this, it is surprising the Court held that the agreed wording qualifies as a “hard” balance sheet guarantee. It appears to be a semantic debate, but the interpretation of the Court has the consequence that the seller can be held liable for all actual and contingent liabilities irrespective of potential knowledge or fault at the time of preparing the balance sheet. The Court thereby extends the adjusting events period (Wertaufhellungszeitraum) through the end of the last oral hearing of the post-M&A litigation.

The judgments on the calculation of the compensation

There are two possible ways of calculating compensation for a breach of a balance sheet guarantee under German law. One is the concept of balance sheet replenishment (Bilanzauffüllungsmethode) according to which the annual financial statements would have to be replenished due to misrepresentation; alternately, the compensation could equal the amount of a hypothetical difference in the purchase price. The Court followed the prevailing opinion among legal authors and refers to the hypothetical impact on the purchase price. The seller will have to put the purchaser in the equivalent position as if he or she had been able to agree on a lower purchase price by knowing the real situation.

This concept is dangerous for both parties. The seller bears the risk that he or she has to indemnify the purchaser for the misrepresentation with a multiple if the purchaser can prove that he or she had calculated the purchase price using the discounted cash-flow method or the multiplier method and, thus, the amount has to be multiplied. The purchaser, however, will often be negatively impacted by a lack of evidence (as in the case at hand). Further, the ground for this judgment leaves the question open as to whether the seller could argue he or she would have in no way accepted a lower purchase price because of competing bids in the M&A process.

Purchaser’s knowledge

In almost every SPA negotiation, the parties discuss the questions of whether and how the purchaser’s knowledge of a potential breach would release the seller from his or her liability. The parties usually exclude the statutory rule of Section 442 of the German Civil Code and replace it with a tailored solution. In the case at hand the parties did not expressly exclude Section 442 of the German Civil Code. The Court stated very briefly that the SPA was to be construed in a sense that Section 442 of the German Civil Code was (implicitly) fully waived. A purchaser should, however, not rely on this rather purchaser-friendly construction but rather insist on an explicit waiver.


The judgment here proves the theory wrong that representations and warranties today are not as important as the purchase price mechanism in an SPA. Instead, it shows that both aspects work together, and the sections “representations and warranties” and “remedies” require a high level of economic know-how from the parties and/or the lawyers. Both sides benefit from a clear and precise wording of the balance sheet guarantee. While joint documentation by the purchaser and the seller as to how the purchase price was determined does not appear very practical, the purchaser should maintain appropriate documentation. Sellers should expressly exclude any risk that they would have to indemnify the purchaser for a misrepresentation with the use of a multiple.

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