Compensation and warranty in a Share Deal – Is there liability for defects in the business?

1. What is this about?

It has already been clear that if all, or at least a majority, of the shares in a company are acquired, the warranty rules apply. However, when a smaller shareholding is acquired, difficulties may arise in distinguishing between the acquired shares, on the one hand, and the associated company, on the other. In particular, the question arises as to whether the obligations to perform relate solely to the acquired shares (= the subject of the purchase), or whether the assets embodied therein (= the company) are also covered.

In its judgment 6Ob25/26h, the Supreme Court had to address this issue: a commercial property was transferred as part of a share deal. The property had significant defects resulting from a previous water ingress incident. The seller of the shares, who subsequently became the defendant, was aware of these defects, as an expert report on the matter had already been drawn up in 2016 and the defects had been provisionally rectified in 2020. 

Despite a contractual obligation to disclose relevant circumstances, the claimant who had purchased the share was not informed of the condition of the building or the associated survey report prior to the conclusion of the contract. The contract contained a warranty exclusion clause. 

The purchaser of the shares asserted, amongst other things, claims for damages and under the warranty.

2. Are defects in the company relevant when purchasing a shareholding?

The Supreme Court clarified the following:

Defects in a company may also be relevant when acquiring a minority shareholding. In this regard, the interpretation of the specific contract is decisive. It must be assessed whether the acquisition of the shares constitutes a risky transaction and whether the quality of the shares was made the subject of the transaction, either expressly or by implication. 

The existence and scope of a duty to disclose are determined on a case-by-case basis. As the disclosure of the relevant information was guaranteed in the contract, the seller of the shares was required to disclose the defects in the business assets. 

The agreed exclusion of warranty did not apply, as liability was based on a breach of the duty to disclose.

3. What lessons should be taken from this decision?

• Depending on the terms and interpretation of the contract, the associated company must also be taken into account.

• Defects in a company may be relevant not only when acquiring a majority stake, but also when acquiring a minority stake.

• An agreed exclusion of warranty does not protect against claims arising from breaches of contract.

About the author:
Ms Mag. Sylvia Unger has been a solicitor for over 25 years and founded her own law firm, ‘Unger Rechtsanwälte’, in 2011.

Her areas of specialism include employment law, company law, contract law and payment transactions law. She is the (co-)author of several specialist books, gives lectures on employment law, company law and payment transactions law, and advises companies across a wide range of sectors.