Placing information in a virtual data room - BGH concretizes obliga-tions to disclose information for sellers in the context of a buyer's due diligence

In its judgment of September 15, 2023 (File No. V ZR 77/22), the Federal Court of Justice (FCJ) concretized the obligations to disclose information of a commercial real estate seller in connection with the provision of a virtual data room. A seller who grants the buyer access to a virtual data room with documents and information on the object of purchase only fulfils its obligation of disclosing information if and to the extent that it can have a legitimate expectation based on the circumstances that the buyer would gain knowledge of a circumstance subject to disclosure by inspecting the data room.

The decision is likely to have relevance beyond the individual case for the question of the extent to which documents which are placed in a virtual data room at short notice as part of an asset or share deal in M&A or other transactions are suitable for satisfying any disclosure obligations on the part of the seller.

Facts of the case

The plaintiff buyer withdrew from a purchase contract for several commercial real estate properties and demanded damages from the defendant seller because the latter had concealed certain facts in the course of the contract negotiations in disregard of its duty to inform the buyer. At the time the contract was concluded, the properties were subject to a considerable financial risk regarding impending special cost allocations. During the contract negotiations, the seller had granted the buyer access to a virtual data room in which it had placed documents relating to the purchase object. However, it was not until the last working day before the day of notarization that it posted a collection of further documents that allowed conclusions to be drawn as to the aforementioned risk.

The Regional Court had dismissed the action in the first instance. The appeal was unsuccessful. In response to the plaintiff's appeal, the Federal Court of Justice has now essentially reversed the judgment and referred the case back to the Court of Appeal for a new decision.

The Federal Court of Justice states in this regard, among other things:

According to the established case law of the FCJ, in contract negotiations each contracting party has the duty to inform the other party of circumstances that could frustrate the purpose of the contract and are therefore of material importance to the other party's decision, provided that the other party may reasonably expect the information in good faith, considering the prevailing public perception.

This also applies to the financial risks mentioned here, whereas the seller's duty to provide information had not been fulfilled or had ceased to apply despite the buyer's performance of due diligence by the fact that it had placed the aforementioned documents in the virtual data room shortly before the day of the notarisation without further reference.

The question as to whether a seller, by setting up a physical or virtual data room, satisfies its duty to give information to the subsequent buyer about a circumstance which is subject to disclosure and which is available as information in the data room cannot be answered in general terms and regardless of the circumstances of the individual case. The mere fact that the seller sets up a data room and allows the prospective buyer to access the data does not always allow the conclusion that the buyer will also take note of a circumstance that had to be disclosed, given the diversity of processes in practice. Only if the expectation was justified in the individual case that the buyer will perceive certain information provided by the seller in the data room and consider it in his purchase decision, separate disclosure by the seller was dispensable.

Whether the seller may have this expectation depends on the circumstances of the individual case, for example, on how the data room and access to it is structured and organized, as well as on the nature of the information to be disclosed and the document in which it is contained. If, for instance, a circumstance is involved which - recognisable to the seller - is of very considerable importance to the buyer, maybe because it could frustrate the purpose of the contract or cause very considerable economic damage to the buyer, and if the circumstance is not instantly recognisable from the data provided, but is known to the seller and can be easily disclosed, then the buyer can regularly expect a separate indication. In this case, the seller may not wait knowingly to see whether the buyer determines the information that is difficult to recognize from the data provided but must communicate this despite the Due Diligence. Whether the circumstance was instantly recognisable from the data provided or not could also depend on the type of document and in which position within the document the information was available. In addition, it is also relevant whether the seller may expect the buyer to look through the documents specifically for this information or rather with a view to general information.

In the specific case, the seller could not have had the legitimate expectation that the buyer would take note of the information contained in the most recently posted documents before the contract was concluded.

It can be gathered from the grounds of the judgment that the BGH bases this primarily on the fact that the documents were only posted so shortly before the date of notarization. Apart from that, the BGH also seems to consider how easy or difficult it was to find the critical information in the posted documents. However, it is not clear from the judgement whether these two aspects correlate, for instance, in the sense that early posting cures lack of clarity or clarity cures short-term posting, cannot be inferred from the judgment.

Sellers should thus ensure that information which is of particular relevance to the buyer's decision is sufficiently accessible and included in the data room in good time before the contract is concluded. In case of doubt, a separate explicit (and documented) reference is recommended.

Dr Christoph Schmitt