What is a data room?
In the course of a company acquisition, the commercial diligence of the prospective buyer requires an examination of the company to be acquired prior to the acquisition. This review process, known as "due diligence", involves setting up a transaction data room, which offers the potential buyer the opportunity to thoroughly review and evaluate the planned acquisition in detail using the documents posted there.
This data room describes a protected, physical or - as is almost exclusively the case nowadays - virtual room in which all documents for the due diligence are provided by the seller. Typically, the documents are divided into the areas of financial, tax and legal. The starting point for posting the documents is usually a list of requirements from the prospective buyer, with which he asks the seller for the documents relevant to him that he would like to look at as part of the due diligence. The prospective buyer can then use the data room to carefully view and evaluate the documents posted there.
The data room offers the seller the advantage of being able to upload all relevant documents to this virtual room in a secure (backed up by a so-called gatekeeper) and controlled manner. On the one hand, this ensures confidentiality within the company and, on the other hand, there are advantages for the buyer, such as the possibility of working with special search functions, access to the content for several users at the same time and simple and precise tracking of the information posted by the seller.
The mere provision of documents without reference is not always sufficient!
The Federal Court of Justice recently had to deal with the question of when and to what extent a seller must inform the other party to a transaction about important characteristics of the object of purchase and point out special features. If the buyer is granted access to a data room containing documents and information on the transaction object, the seller does not fulfil his duty to provide information if he merely makes the data available. Rather, the seller must be able to be certain that the buyer will gain knowledge of the circumstance requiring disclosure by inspecting the data room.
What had happened?
The buyer of a commercial unit, which he had purchased within a building complex for around €1.5 million, was surprised by cost-intensive maintenance measures after the transaction was completed. He then challenged the purchase contract on the grounds of fraudulent misrepresentation, arguing that he had learnt about the additional costs far too late and that the seller had not properly informed him about them prior to the conclusion of the contract. The mere uploading of the minutes of the owners' meeting (in which these maintenance measures were discussed) to the virtual transaction data room without explicit reference was not sufficient in any case. To make matters worse, the document in question had only been uploaded to the data room on the Friday before the notarisation meeting on the following Monday.
Federal Court of Justice sets strict requirements for the seller's duty of disclosure
The judges in Karlsruhe ruled in favour of the plaintiff, stating that the seller had significantly breached its duty of disclosure with regard to the scope of costs for the upcoming renovation measures (liability for culpa in contrahendo due to failure to disclose). The seller should have informed the buyer, without being asked, that structural measures on the purchased property with a considerable scope of costs were pending. The exact costs were undoubtedly of considerable importance to the plaintiff, so that the seller did not fulfil his duty of disclosure by merely posting the corresponding minutes of the owners' meeting, from which the costs resulted, in the data room. According to the case law of the Federal Court of Justice, it is not sufficient to exempt a seller from his fundamental duty of disclosure if the buyer only has the opportunity to obtain knowledge of the circumstances requiring disclosure himself. According to the judges, the mere fact that the seller sets up a data room and allows prospective buyers to access the data does not always allow the conclusion that the buyer will take note of the circumstances subject to disclosure. Whether a seller can expect this depends on how the data room and access to it are structured and organised, what agreements have been made in this regard, how important the information whose disclosure is at issue is and how easy it is to find in the data room. In the opinion of the Federal Court of Justice, the buyer had no reason to inspect the data room again in the time window between the posting on Friday and the notary appointment on the following Monday without a separate reference to the newly posted protocol.
Note for the practice
Even though the judgement concerned a real estate transaction, the principles set out by the Federal Court of Justice regarding the seller's duty of disclosure are important for all types of corporate transactions. It shows the absolute necessity of careful preparation, structuring and timely provision of documents in the data room. The following applies: better one reference to new documents too many than too few.