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Avoiding post-M&A disputes – identifying and mitigating risks in M&A transactions
Specialist article in corporate law
Why company acquisitions still harbor legal pitfalls even after closing.
Corporate transactions are among the most complex processes in business. Even if the purchase agreement and transfer proceed smoothly, M&A transactions are not necessarily complete at that point: Post-M&A disputes often arise where information was incomplete before the deal, due diligence had gaps, or contractual provisions regarding risk allocation were formulated too vaguely. It is therefore crucial for both buyers and sellers to be aware of the legal risks early on and to take proactive preventative measures.
What are post-M&A disputes?
Post-M&A disputes are legal conflicts that arise after the completion of a corporate transaction. They typically concern issues surrounding the purchase price, contractual warranties, or the seller's pre-contractual disclosure obligations. Such disputes can have significant financial consequences—in the worst case, the complete reversal of the deal.
The cause often lies in the structural information asymmetry between seller and buyer: The seller knows the target company in detail, while the buyer is dependent on the documents provided. If the presented picture does not correspond to reality, the potential for conflict is considerable.
Even when corporate transactions are overseen by experts, not all risks can be completely eliminated in advance. This makes thorough legal preparation on both sides all the more important – from setting up data rooms to structuring contracts.
Disclosure obligations of the seller in M&A transactions
A central aspect of M&A transactions is the seller's duty to disclose information. According to the case law of the German Federal Court of Justice (BGH), a duty to disclose exists when a circumstance is recognizably of crucial importance to the buyer and, based on the principles of good faith, the buyer can reasonably be expected to be informed of it. The specific circumstances of each individual case are always decisive in this regard.
The duty to disclose information is particularly relevant in circumstances that jeopardize the company's economic or legal viability. Typical examples include pending legal proceedings, threatened sanctions by authorities, unsecured liabilities, or serious compliance violations. If such circumstances arise or change during the ongoing sales process, the seller is still obligated to disclose them.
There is no obligation to disclose information regarding the mere value of the company or the valuation of individual components. The buyer generally bears the risk of misjudging the purchase price – unless a reduction in value is due to a specific, hidden defect, such as the invalidity of a key patent or the failure of a central production facility.
The method of information dissemination is also important: In a 2023 ruling, the German Federal Court of Justice (BGH) clarified that simply uploading documents to a virtual data room does not automatically fulfill the duty to disclose information. In cases of significant economic importance, an explicit and separate notification may be required.
Risk of contestation due to fraudulent misrepresentation pursuant to Section 123 of the German Civil Code (BGB).
If the seller intentionally breaches a duty to disclose information, the buyer risks contesting the company acquisition due to fraudulent misrepresentation under Section 123 of the German Civil Code (BGB). The legal consequence is the complete reversal of the transaction. In addition, the buyer can claim damages for breach of pre-contractual information obligations under Sections 280 and 311 Paragraph 2 of the German Civil Code (BGB) (culpa in contrahendo).
Of particular importance: Even a comprehensive disclaimer of liability in the purchase agreement cannot prevent such claims. According to § 444 of the German Civil Code (BGB), clauses that exclude the seller's liability for fraudulently concealed defects are invalid. A seller who has acted fraudulently cannot therefore rely on the protection of blanket disclaimers of liability.
The buyer's right to contest the purchase expires one year after discovery of the deception, according to § 124 of the German Civil Code (BGB). Since post-M&A disputes often only come to light months after closing, adhering to this deadline is of considerable practical importance for the buyer.
Due diligence as a protective measure for the buyer
For buyers, a thorough due diligence review of the target company is a crucial protective factor – both legally and economically. Those who neglect this review or conduct it only superficially not only jeopardize their investment but also significantly weaken their legal position in the event of later disputes.
Because: If the buyer knew of a defect before the purchase, or should have recognized it with due diligence, a challenge based on fraudulent misrepresentation is generally precluded. Furthermore, in a damages claim, the buyer can be accused of contributory negligence under Section 254 of the German Civil Code (BGB) if they failed to respond to clear indications in the data room.
The courts apply a strict standard in this regard: even if disclosed documents point to potential problems and the buyer fails to act on these signals, it can be assumed that the buyer should have been aware of them. Thorough due diligence therefore not only protects against financial surprises but also strengthens the legal position in the event of post-contractual disputes.
For complex transactions or increased risk potential, in-depth due diligence is recommended, which includes not only legal and financial but also tax, regulatory and operational aspects of the target company.
Contractual safeguards and risk distribution in M&A transactions
Proactive contract drafting is the most effective tool for avoiding post-M&A disputes. Blanket disclaimers of liability, as explained, offer no reliable protection and can be completely ineffective in cases of fraudulent misrepresentation.
Instead, it is advisable to agree on specific and objectively verifiable guarantees. Sensitive areas such as pending litigation, compliance risks, tax positions, or accounting uncertainties should be covered by targeted guarantee provisions. Precise wording is crucial: guarantees must be clearly defined and stipulate specific legal consequences in the event of a breach.
In addition, liability limits, so-called de minimis thresholds, and escrow solutions offer ways to make the economic risk for both parties calculable. With an escrow arrangement, a portion of the purchase price is held in trust for an agreed period and can serve as readily available security in the event of a dispute.
Documenting the entire transaction process is also crucial: All essential information should be stored in a structured manner in the data room, and economically relevant points should be explicitly highlighted. Q&A sessions, negotiation results, and critical comments should be recorded in writing to avoid later disputes about knowledge or constructive knowledge.
When is legal advice worthwhile in M&A transactions?
Legal representation pays off in M&A transactions on both sides of the deal – not only in the event of a dispute, but especially in the preparation phase.
As a seller, you benefit from an early legal analysis of your disclosure obligations. Targeted advice helps to systematically identify circumstances requiring disclosure, document them in a legally sound manner, and structure the data room in such a way that no grounds for later challenges arise.
As a buyer, legal counsel can assist with structuring and conducting due diligence, negotiating and drafting contractual warranties, and designing suitable purchase price mechanisms. Should disputes arise after closing, early legal advice is essential to avoid missing deadlines – particularly the deadline for contesting a contract under Section 124 of the German Civil Code (BGB).
TURGERLEGAL provides comprehensive advice to companies and business owners on M&A transactions – from due diligence and contract drafting to the enforcement of claims in the event of disputes. As a specialist lawyer for commercial and corporate law, Volkan Erdogan supports complex transactions with the experience and expertise required for legally sound deals. Get in touch and secure your transaction legally from the outset.
Conclusion on M&A transactions
Post-M&A disputes are often not unforeseen events, but rather the result of inadequate preparation, incomplete documentation, or flawed contract drafting. Sellers who consistently fulfill their disclosure obligations and buyers who conduct thorough due diligence significantly reduce the risk of post-contractual conflicts.
In addition, a carefully drafted contractual framework – through precise guarantees, clearly defined liability limits, and suitable escrow arrangements – provides the necessary planning security for both parties. M&A transactions can be structured in a legally sound manner if all parties involved take their due diligence obligations seriously and secure expert advice early on.
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FAQs – Frequently Asked Questions about Post-M&A Disputes
Post-M&A disputes are legal conflicts that arise after the completion of a corporate transaction. They often concern issues such as the seller's breach of disclosure obligations, the fulfillment of contractual warranties, or the appropriateness of the purchase price. In the worst-case scenario, the deal can be completely reversed.
The seller must inform the buyer of all circumstances that are recognizably crucial to the purchase and must be disclosed in accordance with the principles of good faith. This includes, in particular, circumstances that jeopardize the economic or legal viability of the company. However, there is generally no obligation to disclose the mere value of the company.
If the seller intentionally breaches a duty of disclosure, the buyer can contest the company acquisition due to fraudulent misrepresentation under Section 123 of the German Civil Code (BGB) and demand the reversal of the deal. In addition, claims for damages based on culpa in contrahendo (Sections 280, 311 BGB) may be considered. A contractual exclusion of liability is not applicable in this case according to Section 444 BGB.
No. According to § 444 of the German Civil Code (BGB), agreements that exclude the seller's liability for fraudulently concealed defects are invalid. Blanket exclusions of liability therefore offer no reliable protection. Only specifically formulated and clearly limited warranty clauses can guarantee an effective allocation of risk.
Due diligence not only protects the buyer from financial surprises but also strengthens their legal position. Anyone who knew of a defect or should have discovered it with careful inspection can generally no longer contest the purchase on the grounds of fraudulent misrepresentation. Furthermore, contributory negligence can be invoked in a damages claim under Section 254 of the German Civil Code (BGB).
Yes, under certain conditions. If the seller has fraudulently deceived the buyer, the contract can be rescinded under Section 123 of the German Civil Code (BGB). Contractual rights of withdrawal also apply in cases of serious breaches of warranty. The prerequisite is always that the buyer was unaware of the deception and, with due diligence, could not have been expected to be aware of it.
The right to contest a purchase agreement due to fraudulent misrepresentation expires under Section 124 of the German Civil Code (BGB) within one year of the buyer becoming aware of the misrepresentation. Regardless of this, the right expires at the latest ten years after the declaration of intent was made. Since post-M&A disputes often only become apparent months after closing, consulting a lawyer at an early stage is advisable.
In an escrow solution, a portion of the purchase price is held in trust by a third party for a defined period. This provides the buyer with readily available security in the event of warranty breaches or other claims arising after closing. Escrow solutions are particularly useful in situations with high risk potential or where warranty claims would be difficult to enforce.
The virtual data room is the central information medium for due diligence. The German Federal Court of Justice (BGH) has clarified that simply uploading a document to the data room does not automatically fulfill the duty of disclosure. For economically significant information, a separate notification may be required. A structured and transparent data room organization protects the seller and facilitates the buyer's review.
Ideally, this should happen as early as possible – on the seller's side, during the preparation of the sales process and the structuring of the data room, and on the buyer's side, at the latest before the start of due diligence. If a dispute arises after closing, legal advice is urgently required to meet deadlines and enforce claims in a legally sound manner.
