Under Dutch law, a seller of an enterprise must provide the purchaser with information relevant to such enterprise, whereas the purchaser has the obligation to perform an adequate investigation. How these two obligations relate to each other is determined by the principle of reasonableness and fairness which governs (pre-)contractual relationships under Dutch law. Thus, the parties should reasonably avoid the other party from assenting on the basis of false assumptions.

The extent of the mutual obligations depends on factual circumstances, such as the nature and complexity of the anticipated transaction and the information, the feasibility of a thorough investigation, and the existence or absence of specific knowledge and professionalism. In the case of advisors (experts, accountants, lawyers), this knowledge may be imputed, as was shown in a recent Supreme Court ruling.

That ruling deals with a case where (i) there was a substantial transaction value, (ii) full access to the books and accounts of the seller (selling its assets and liabilities) was permitted, (iii) the buyer instructed a professional team of advisors to conduct the due diligence investigation, whereas the seller was not advised by experts at all, and (iv) the seller had provided a substantial package of information for verification by the purchaser. This package, however, did not contain copies of two loan agreements, and although these loans were referred to in another document contained in the package, this was not further investigated.

The Supreme Court reasoned that under the circumstances of this specific case, the obligation of the purchaser to investigate outweighs the obligation of the seller to disclose. Therefore, even though the seller had warranted in the purchase agreement that it had disclosed all relevant information to the purchaser, the purchaser was denied a claim for damages in connection with the liability for the loans which surfaced after the completion of the transaction.

For the M&A practice in the Netherlands, this has as an important consequence that parties to a transaction need to consider in what manner they may contractually (for instance in a letter of intent) determine the scope of their mutual rights and obligations in connection with the due diligence exercise. Obviously, this has considerable implications for the "reliability" of the representations and warranties given as well.

This article is concluded per September 1996. For further information please contact Ewout J. Stumphius, Loeff Claeys Verbeke, Rotterdam (phone 31.10.4034644, fax 31.10.4149388). - or enter text search 'Loeff Claeys Verbeke' and 'Business Monitor'.

This article should not be considered a legal opinion or legal advice in any individual case; separate legal advice should be sought for that.