Franco-German comparison: Liability of the transferor to the transferee in the event of a transfer of securities

In our “Special Report: Germany 2024”, we present the differences to bear in mind between German and French law when, following a transfer of corporate rights, the transferee wishes to hold the transferor liable for having failed in his duty to provide pre-contractual information.

Indeed, the grounds on which the assignee may bring a liability action are not the same under German and French law, as will be illustrated on the basis of a ruling by the Paris Court of Appeal dated September 14, 2023 (no. 21/22491).

In this ruling, the Court of Appeal held that a seller of corporate rights who fails to inform the purchaser of accounting changes that have an impact on Ebitda is in breach of his pre-contractual information obligation and is contractually liable, since he knows that this index is a determining factor in the purchaser’s consent, in that it serves as the basis for calculating the proposed sale price.

In this case, after acquiring the shares of a group of companies in October 2016, the purchaser complained that the seller had failed in its obligation to provide pre-contractual information within the meaning of article 1112-1 of the French Civil Code, by not informing the purchaser of the changes made in 2016 to the group’s accounting system, which affected the calculation of the Ebitda on the basis of which the purchaser had proposed the price at which it had finally acquired the shares.

The Paris Court of Appeal agreed, ruling that the purchaser had not only indicated in his letter of intent that the proposed price depended on the company’s Ebitda, but had also reiterated this in his firm and definitive offer to purchase, so that the seller was aware that accounting changes affecting Ebitda were decisive for the purchaser’s consent. By failing to inform the purchaser of these changes, the seller was contractually liable to the purchaser.

The seller of the shares was therefore ordered to compensate the buyer for the loss of opportunity corresponding to the difference between the price actually paid and the (lower) price he would have paid had he been aware of the unfavorable change in Ebitda calculation methods.

In this context, the Cour d’appel also recalls the rule laid down in article 1112-1 of the Civil Code since the 2016 reform, according to which in addition to the liability of the party who was bound by it, failure to comply with the duty to inform may also result in the annulment of the contract under the conditions laid down in articles 1130 et seq. of the Civil Code.

Article 1112-1 of the Civil Code is silent on the nature of the liability – contractual or extra-contractual – that may be incurred in the event of a breach of the pre-contractual duty to inform. Although the doctrine seems to agree that during the pre-contractual period, faults fall within the scope of delictual (extra-contractual) liability and not of contractual default, case law does not always adopt this position, as can be seen from the present ruling.

The application of the liability regime (contractual vs. extra-contractual) can have significant repercussions in practice, since, in the context of an action for contractual liability, the plaintiff is confronted with all the exceptions drawn from the assignment contract (e.g. liability exoneration/limitation clauses, franchise and ceiling clauses, etc.).

Under German law, a purchaser wishing to hold the seller of securities liable for breach of his pre-contractual duty to inform will act on the basis of culpa in contrahendo (c.i.c.). This action (c.i.c.) is one of the so-called “quasi-contractual” grounds for claiming damages in the event of a culpable breach by a party of obligations arising from a pre-contractual relationship of obligations.

In the context of takeovers, the case law of the German Federal Court of Justice (Bundesgerichtshof) attaches particular importance to the obligation to provide pre-contractual information, which is why – as in French law, where this obligation was enshrined in the Civil Code as part of the 2016 reform – it is important to be vigilant in this area.

Our Alister Avocats – German Desk team is at your disposal to provide you with cross-border assistance and expertise, so that you can take the necessary steps to comply with the new regulations under German law.