In M&A purchase agreements, a balance sheet guarantee is found as standard, because of which protracted negotiations often ensue. The question arises as to whether a subjective-soft or objective-hard balance sheet guarantee should be issued. Particularly in so-called locked box purchase agreements, the buyer will press for an objective-hard balance sheet guarantee, since the purchase price in these cases was ultimately calculated mainly on the basis of the last balance sheet and no purchase price adjustment is made at closing by so-called closing accounts. The interpretation and, above all, the legal consequences of breaching balance sheet guarantees have been controversial for years. This is problematic against the background of the tendency to increasingly attempt to use balance sheet guarantees as a fall-back guarantee. A recent decision of the Frankfurt Higher Regional Court (judgment of May 7, 2015, 26 U 35/12, GmbHR 2016, p. 116) had to deal with precisely these issues. This invites to highlight considerations of this problem relevant for practice, which have to be taken into account already when drafting M&A purchase agreements.

Facts of the balance sheet guarantee

Frequently, the formulation is found that the balance sheet (i) was prepared with the care of a prudent businessman and in compliance with the statutory provisions and (ii) give a true and fair view of the net assets, financial position and results of operations of the Company. The reference under (ii) is understood as a hard balance sheet guarantee, which means that a breach of guarantee also exists if, for example, debts and unprovided contingent liabilities already existed at the time of preparation, but were not apparent even when the preparation care required by accounting law was taken into account. Such facts, which only become apparent at a later date, are also referred to as facts that clarify the balance sheet. If proper accounting principles were applied, they did not have to be recognized in the balance sheet at all. Ultimately, therefore, such a "hard balance sheet guarantee" is based on the fiction of an omniscient balance sheet preparer.

Thus, if the seller wants to avert a "hard balance guarantee," the seller must insist on a subjective element. This can basically be done in two ways:

Knowledge Qualifier

The seller may accept a wording that limits the warranty to his knowledge. The wording then reads "(ii) to the best of the seller's knowledge, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the company." Of course, how strong this restriction is then depends on the definition of the seller's knowledge.