Corporate Compliance @ Tech Deals in Germany – The Compliance Guarantee


Even if the law on sanctions against associations (Verbandssanktionengesetz) will no longer be adopted in this legislature, compliance issues clearly remain relevant. Supply chain law and the implementation of the EU Whistleblower Directive play an important role alongside the “classics” in the areas of corruption and money laundering. In addition, compliance is also becoming increasingly important in the practice of mergers and acquisitions. Based on the results of compliance due diligence, the compliance guarantee is at the center of M&A negotiations.

Particularly due to increased legal requirements, in particular the FCPA and the UK Bribery Act, the compliance guarantees in SPAs are increasingly broad and differentiated. The buyer thus hopes to be able to exonerate or exonerate the target company in the event of discovery of a continuing violation of compliance, which had already started in the target company before the transaction, or to have a right of recourse against the seller .

Is this possible with a guarantee of conformity? The basic answer is yes. However, it is recommended that this be a specific compliance guarantee which states that the company always complies and has complied with the law.

Such a guarantee of conformity could, for example, read briefly as follows:

“The target company conducts and has conducted its business in accordance with all domestic or foreign laws and regulations to the extent applicable to the target company or its business partners; in particular, there has not been and there have been no compliance issues in the past three years to date, except those listed in the annex, no the seller has not knowledge of official investigations for any compliance matter, except those listed in the Schedule.

Compliance issues include an objective violation or, to the knowledge of the seller, a suspicion of a violation by employees, self-employed persons or officers of the target company on behalf of and on behalf of the target company, whether in as offenders or accomplices, Sec. 299 StGB [German Criminal Code] (accepting and giving bribes in commercial practice),… ”

The catalog of prohibitions to be included in the definition is then generally very extensive and must separately list all the special laws relevant to the company.

Such a clause leads at least to the fact that in the event of a breach of conformity which was committed before the takeover of the company, there may be a right of recourse against the seller if there is damage to the buyer. Whether the claim then really exists and its amount depends on how the buyer negotiated the clause.

In contract negotiations, the seller will regularly seek to offer the guarantee only to the best of his knowledge and to limit it to what is substantial. The buyer, in turn, will seek to exempt the compliance guarantee from a de minimis rule and maximum liability limit and agree to a longer limitation period. Whether and in what way reputational damage should be compensable as collateral damage may also be the subject of several rounds of negotiations, to the chagrin of lay people involved. However, it can often be worthwhile for the buyer if compliance violations are discovered after the transaction.

For another reason, the buyer should always be interested in including a specific guarantee of conformity in the SPA. If a blanket and meaningless assurance of compliance is used, it can be assumed that the buyer did not place particular emphasis on compliance issues in the context of the transaction. If the buyer is also not unable to prove that he has exercised due diligence in compliance, he will have no arguments in favor of a mitigation of liability if he himself or the target company is held accountable for past compliance violations. The buyer will have to accept the charge that they haven’t even tried to uncover compliance violations in the past and remedy them if they continue. However, if he has performed compliance due diligence and this is also reflected in the compliance assurance, he can at least make a case that he has made a serious attempt to uncover breaches of compliance. This may then have the effect of reducing liability.

However, it will often be difficult to uncover actual compliance violations during compliance due diligence, as these often remain hidden. Instead, compliance due diligence will serve to give the buyer an idea of ​​the active practice of compliance in the target business and the existence of compliance structures. Of course, it’s also possible for the seller to unknowingly or knowingly cover up compliance issues – especially if they’re not even asked about them because no compliance due diligence is being performed.

Then the dispute is usually pre-scheduled, especially if the damage exceeds the purchase price and a limitation of liability to the amount of the purchase price (or less) has been agreed for the guarantee of conformity. In order to undermine the liability regime negotiated in the purchase contract, the buyer will regularly invoke fraudulent statements and claim damages for the full amount. In order to avoid litigation, the seller and the buyer have a common interest in resolving relevant compliance issues during the due diligence process.

However, what if compliance issues are identified during due diligence?

In this case, the seller will try to exonerate himself by recording the facts in an appendix to the guarantee of conformity. By describing the facts as precisely as possible, the buyer is then clear about the risks he is taking and thus has various options for action. If the buyer decides to buy the target anyway, he can cover any financial liability with indemnity from the seller, under which the seller has unlimited liability for any claims arising out of the facts. Another option is to assess currency risks as part of determining the purchase price. Alternatively, the seller may decide to bear the risk of non-compliance entirely without discounting the purchase price in the hope that the risk will not be fully realized. In any case, the buyer must cease the violations for the future.

Lessons Learned: During due diligence and contract negotiations in the M&A process, special attention should also be paid to violations of the law in the target company, as any violation of compliance can become an existential risk. , in particular due to the risk of liability under foreign regulations.

About Leah Albert

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