Austria: Post M&A Disputes – Rescission of Acquisition Agreements

→ Michael Walbert

In recent times of crisis, M&A transactions have given rise more frequently to legal disputes between the parties to the acquisition agreement. And parties to M&A transactions are seeking more often rescission of the agreement instead of mere compensation against the counterparty.

Legal basis for rescission of acquisition agreements

Poten­tial legal bases for con­tract rescis­sion include mis­take, lae­sio enormis (ie, short­fall of val­ue by more than half), inva­lid­i­ty (eg, due to cor­rup­tion or oth­er crim­i­nal offences, col­lu­sion or abuse of the right of rep­re­sen­ta­tion) and fraud­u­lent mis­rep­re­sen­ta­tion. While rescis­sion claims might also be based on breach of rep­re­sen­ta­tion and war­ranties and tort law, claims for rescis­sion on that basis are rarely seen in prac­tice as they are usu­al­ly exclud­ed in the acqui­si­tion agree­ment.

Exclusion of rescission claims in the acquisition agreement

From a seller’s per­spec­tive, it is gen­er­al­ly advis­able to seek the express exclu­sion of claims for rescis­sion of the acqui­si­tion agree­ment to the extent per­mis­si­ble under laws applic­a­ble to acqui­si­tion agree­ments. Under Aus­tri­an law, claims for rescis­sion of an acqui­si­tion agree­ment based on mis­take, breach of rep­re­sen­ta­tions and war­ranties, tort law and lae­sio enormis can gen­er­al­ly be exclud­ed between entre­pre­neurs to the extent per­mis­si­ble under pub­lic pol­i­cy prin­ci­ples.

The exclu­sion of claims clause in the acqui­si­tion agree­ment should specif­i­cal­ly refer to the legal pro­vi­sions gov­ern­ing the rescis­sion claims to be exclud­ed. Par­tic­u­lar care needs to be applied in con­nec­tion with exclu­sion of rescis­sion claims under acqui­si­tion agree­ments involv­ing nat­ur­al per­sons, in respect of which applic­a­ble law might lim­it the valid­i­ty of exclu­sion of rescis­sion claims based on con­sumer pro­tec­tion pol­i­cy con­sid­er­a­tions.

How­ev­er, rescis­sion claims based on inva­lid­i­ty due to crim­i­nal offences or due to vio­la­tion of oth­er core pro­vi­sions or prin­ci­ples of manda­to­ry statu­to­ry law, and rescis­sion claims based on fraud­u­lent mis­rep­re­sen­ta­tion, can­not be exclud­ed by agree­ment between the par­ties under Aus­tri­an law, and prob­a­bly not under the laws of many oth­er juris­dic­tions.

To disclose or not to disclose?

If the pur­chas­er dis­cov­ers defects of the acquired busi­ness or shares after the clos­ing of the trans­ac­tion, the ques­tion often aris­es of whether the sell­er has ade­quate­ly dis­closed rel­e­vant facts or cir­cum­stances giv­ing rise to the defect and, if not, whether the sell­er was oblig­ed to dis­close such facts or cir­cum­stances. Most com­mon­ly, fraud­u­lent mis­rep­re­sen­ta­tion is com­mit­ted by way of inten­tion­al non-dis­clo­sure or omis­sion of mate­r­i­al infor­ma­tion or doc­u­ments rather than by mis­rep­re­sen­ta­tion of false infor­ma­tion.

In a recent case¹, the Aus­tri­an Supreme Court con­firmed that fraud­u­lent mis­rep­re­sen­ta­tion can also be com­mit­ted by way of inten­tion­al omis­sion of facts and cir­cum­stances, if under gen­er­al­ly accept­ed views and stan­dards dis­clo­sure of the rel­e­vant facts and cir­cum­stances is required.

Unanswered questions

In the­o­ry, suc­cess­ful­ly rescind­ed agree­ments are unwound by each par­ty return­ing to the oth­er par­ty what it received in the trans­ac­tion. That, how­ev­er, is a major chal­lenge in case of trans­fer of a busi­ness that has been oper­at­ed by the buy­er fol­low­ing clos­ing and has changed over time. Rewind­ing of an M&A trans­ac­tion can be even more com­plex and chal­leng­ing if the acquired busi­ness or shares have been resold or merged into anoth­er com­pa­ny, in which case return of the acquired busi­ness or shares to the sell­er has become impos­si­ble. While it is gen­er­al­ly accept­ed among legal schol­ars that in such cas­es the buy­er must return the val­ue of the acquired assets or shares, or oth­er ade­quate com­pen­sa­tion, to unwind the acqui­si­tion agree­ment, there is lit­tle com­mon ground as to exact cal­cu­la­tion of the com­pen­sa­tion to be paid by the buy­er to the sell­er.

Conclusion and outlook

The Aus­tri­an Supreme Court has so far only con­firmed the rescis­sion of a busi­ness acqui­si­tion agree­ment in sin­gle cas­es in which the rul­ing was dri­ven by the par­tic­u­lar facts of the case. These cas­es pro­vide lit­tle guid­ance on dis­clo­sure oblig­a­tions of the par­ties in M&A trans­ac­tions.

As a rule, how­ev­er, the sell­er of a busi­ness should not be under a proac­tive or spe­cif­ic dis­clo­sure oblig­a­tion if the doc­u­ments and infor­ma­tion rel­e­vant to the tar­get are made avail­able to the pur­chas­er for review in the course of a due dili­gence. The sell­er is oblig­ed to spe­cif­ic dis­clo­sure only in rare cas­es; for exam­ple, where the pur­chas­er is unable to draw ade­quate con­clu­sions from the infor­ma­tion and doc­u­ments dis­closed in the course of the due dili­gence.

The Austrian Supreme Court has so far only confirmed the rescission of a business acquisition agreement in single cases in which the ruling was driven by the particular facts of the case. These cases provide little guidance on disclosure obligations of the parties in M&A transactions.

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OGH 22.10.2009, 3 Ob 111/09h