Germany: Management Liability Based On Inadequate Due Diligence In Corporate AcQuisitions

In the context of corporate acquisitions, the managing directors of the acquiring company are regularly faced with the question of the scope of the "due diligence," the review of the target company. Sometimes no due diligence at all is performed, such as in the context of a share purchase via the stock market. However, if the managing director makes the wrong decision regarding due diligence, it may lead to significant liability. The comments in this article relate to the managing directors of German limited liability companies but also apply to the boards of directors of stock corporations and generally to the management of limited partnerships that have limited liability companies as general partners. In the event the buyer uncovers risks that were unknown prior to the acquisition, or the business of the target company does not do as well as expected, the managing director may be reproached for potentially violating his duties of care in connection with the acquisition. Liability of the managing director is especially relevant when the purchasing entity does not have remedies available to it, as when the statute of limitations has run, there is a lack of solvency, or damage claims cannot be asserted against the seller (as is often the case when expectations regarding earning power are not met). In case of violations of the duty of care, the managing director is liable to the acquiring company for damages. Approval of the acquisition by shareholders (not the supervisory board, if any) or instructions issued by the shareholders in connection with the acquisition can exempt the managing director from liability only if the shareholders were adequately informed of any potential risks beforehand.

Duty to Perform Due Diligence?

The law contains only vague guidelines regarding the conduct of the buyer's managing director in a corporate acquisition. These guidelines provide that "the care of a prudent businessman is to be applied." The managing director is benefited by the fact that he has broad discretionary leeway. This includes knowingly assuming certain business risks, with the corresponding risk of making the wrong decision. In this context, the managing director is obligated to be thoroughly informed with the due care customary in the business regarding the basis for the corporate decision and the assumption of risks. Generally, in an acquisition setting, this means the company must have its own qualified employees perform due diligence as well as involve external advisors.

The managing director has the burden of proof that he did not violate his duty of care. If damages arise, he has to prove that he complied with his duty of care, that he could not comply with his duty of care through no fault of his own, or that the damages would have been incurred even if he had complied with his duty of care.

Scope of Due Diligence

In performing due diligence, questions arise as to its form and scope. There is no generally accepted standard in this regard. Today, it is customary to review the target company from a tax, economic, and legal perspective. However, further areas may also come under consideration, such as the review of potential environmental liabilities. The extent to which the information provided by the seller will be independently verified must also be decided. The Higher Regional Court of Oldenburg, for example, ordered a managing director to pay damages because he based a corporate acquisition on the profitability calculations prepared by the target company's management even though irregularities were evident, instead of conducting his own review of the calculations.

Regarding the managing director's discretionary decision as to the form and scope of the due diligence, circumstances may at times be taken into consideration that speak in favor of limiting the due diligence and possibly knowingly accepting risks:

  • Time constraints. Time constraints may justify limiting the scope of due diligence. In an auction context, complying with the time frame set by the seller is often a decisive factor for continued participation in the auction process and therefore for achieving the entrepreneurial goal of completing the acquisition. On the other hand, timelines set by the company itself or its supervisory board are not as imperative as they may sometimes appear.

  • Effort and expense. The costs and human-resources expenditures have to be commensurate with the economic value of the intended corporate acquisition for the buyer.

  • Safeguarding against risks. In properly safeguarding against risks, it is appropriate to assume risks in cases in which a failed acquisition threatens the buyer's very existence. Safeguarding against risks can, for example, be served by creating a new limited liability company to act as the buyer and borrower simultaneously under the related acquisition finance facility. For financial investors, accepting high risk is practically part of the business model, and the risk of individual bad investments is reduced by diversification across an entire investment portfolio.

  • Warranty claims. Due diligence, however, should not be limited due to reliance on potential warranty claims against the seller. When the decision regarding due diligence is made, the details of the seller's warranties are still uncertain. In the seller's market that has prevailed over the last several years, buyers were often prepared to accept far-reaching limits on warranties, such as short limitation periods on claims or low ceilings on damages. In addition, asserting warranty claims may take many years and may ultimately fail due to the seller's lack of solvency. On the other hand, comprehensive due diligence is to be performed if no adequate warranties may be expected, such as in the context of a purchase from a bankruptcy trustee or if the enforceability of any future warranty claims is doubtful.

  • Increase in shareholdings. Often the position is taken that due diligence does not need to be performed in the context of the purchase of shares in a company in which the buyer is already a shareholder. This holds true, according to the principles set forth above, only if the buyer has access to adequate and reliable information regarding the company based on his prior shareholdings.


In corporate acquisitions, the managing director is advised to reach an informed decision regarding form and scope of due diligence by taking all material circumstances into account and carefully documenting the basis for the decision. This is especially true in exceptional cases in which the managing director decides against performing any due diligence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions