Judgment of the Federal Supreme Court of 5 November 2024
Case Reference : 4A_379/2024

Facts

Albert (the “Plaintiff”) founded C. AG (the “Employer”), which employed Benoît (the “Defendant”). In 2018, the Plaintiff, the Defendant as well as Ernest, Fabienne and Gaston (the “Other Shareholders”) incorporated D. AG (the “Company”). Upon incorporation, the shareholders entered into a shareholders’ agreement (the “SHA”).

The SHA contained, among others, the following provisions:

• Right of first refusal (Section 3.2 of the SHA): if a shareholder intends to transfer its shares in the Company to another shareholder or a third party, the transferring shareholder must first offer them for sale to the other shareholders in writing. The non-transferring shareholders may exercise their right of first refusal within 50 days of receiving written notice, but only with respect to all the shares intended for transfer.
• Obligation to sell (Section 3.4.3 lit. d of the SHA): if the Employer terminates the employment of a shareholder of the Company, the terminated shareholder is obliged to sell their shares in the Company, with Section 3.2 of the SHA applying mutatis mutandis, granting the other shareholders a right of first refusal.
• Liquidated damages (Section 6 of the SHA): In case of breach of the SHA by a party, the other parties may claim liquidated damages in the amount of CHF 50,000.

On September 3, 2019, the Plaintiff and Gaston, acting on behalf of the Employer, terminated the Defendant’s employment contract. On September 26, 2019, Gaston informed the Defendant that the Other Shareholders wished to acquire all of his shares in the Company for CHF 55,000. The following day, Gaston reiterated this by email, copying the Plaintiff. However, no sale was concluded at that time. On January 26, 2021, the Other Shareholders once again requested that the Defendant sell his shares. The transaction was completed on February 4, 2021 for a total of CHF 52,250.

On March 21, 2021, the Plaintiff accused the Defendant of breaching his notification obligation under Section 3.2 of the SHA and demanded payment of the contractual penalty of CHF 50,000 stipulated under Section 6 of the SHA. The Defendant refused to pay.

On May 17, 2021, the Plaintiff filed a claim before the First Instance Court of Zurich, requesting that the Defendant be ordered to pay him CHF 50,000 under Section 6 of the SHA. The First Instance Court dismissed the claim. The Plaintiff appealed to the Zurich Cantonal Court, which also rejected his claim.

He subsequently appealed to the Federal Supreme Court.

Issue

The Federal Supreme Court was asked to determine whether the Defendant was obliged to formally offer his shares for purchase to the Plaintiff following the termination of his employment contract.

Decision

The Federal Supreme Court upheld the Cantonal court’s judgment and rejected the Plaintiff’s appeal.

First, the Federal Supreme Court made a distinction between a right of first refusal and a pre-emption right. A pre-emption right grants its beneficiary the right to acquire ownership of an asset through a unilateral and unconditional declaration, provided the person bound by the pre-emption right sells the asset to a third party. A purchase agreement is entered into when the beneficiary exercises its right. Conversely a right of first refusal only creates an obligation to offer the shares to the beneficiaries of such a right before selling it elsewhere.

The Federal Supreme Court then elaborated on how a right of first refusal is generally applied. The right of first refusal typically arises when the offeror decides to sell its shares. Since the intention to sell is a private, mental act, the offeror must notify the beneficiaries of its intention to sell. If such notification is omitted and the beneficiaries are unaware of the event triggering a right of first refusal, the offeror may be held liable for breaching its notification obligation.

However, the parties to a share purchase agreement do not have to link the event triggering the right of first refusal exclusively to the intention to sell. On the contrary, they can determine that the right of first refusal will be triggered by other events, such as external factors. The occurrence of the right of first refusal, which only triggers the obligation of the offeror to notify the beneficiaries, must be distinguished from the actual sale of the shares, which typically occurs when the beneficiary accepts the offer.

In the case at hand, the Federal Supreme Court acknowledged that the SHA contained a right of first refusal under Section 3.2, as well as an obligation to sell under Section 3.4.3 lit. d. The obligation to sell was triggered by the termination of the Defendant’s employment contract, which in turn triggered the purchase right of the other shareholders. The Federal Supreme Court found that the reference contained in Section 3.4.3 lit. d of the SHA to Section 3.2 of the SHA related solely to the modalities for exercising the right of first refusal, and not the intention to sell.

In this case, the right of first refusal was triggered by an external event – namely, the termination of the Defendant’s employment contract – with the Plaintiff himself (together with Gaston) having signed the termination letter. The Plaintiff thus personally triggered the obligation to sell, and consequently the right of first refusal of the remaining shareholders, and cannot claim to have been unaware of the resulting obligation for the Defendant to offer his shares. The Defendant would only have been liable for failing to notify if the beneficiary had otherwise been unaware of the event triggering the right. The Plaintiff, however, was unable to demonstrate any advantage he would have gained from being formally notified of a fact already known to him.

In light of these considerations, the Federal Supreme Court upheld the Cantonal court’s judgment and confirmed that the Defendant was not liable for breach of the notification obligation under Section 3.2 of the SHA.

Key takeaways

In the case at hand, the Federal Supreme Court substantially considered that a shareholder was not liable for liquidated damages despite failing to satisfy his duty to inform the other shareholders of the occurrence of a purchase option. This is due to the fact that the claimant shareholder was unable to demonstrate that he would have gained any advantage from having received such notification.

Comments

The solution reached by the Federal Supreme Court in this decision is convincing: the right of first refusal is not exercised in a vacuum but must be understood within the context of a particular case. While it is generally true that, as a rule, a shareholder’s decision to sell its shares may not be obvious to the other shareholders, this is different when the other shareholders have expressly provided for specific events that entail an obligation to sell. In such cases, since the share sale is tied to a predetermined event, the other shareholders are able to exercise their right of first refusal without the need for a formal notification from the selling shareholder.

The pragmatic approach adopted by the Federal Supreme Court in the case at hand prevents the claimant from demanding payment of liquidated damages solely on the basis of a formal breach, without showing any actual disadvantage. Ultimately, this decision reflects the principle of good faith: a shareholder who deliberately refrains from exercising their right of first refusal, while already aware of the triggering event, cannot later claim they were prevented from exercising said right due to purely formal reasons.

This case highlights the risks associated with internal cross-references in contractual clauses. Although the solution reached by the courts could have also been reached by the parties through straightforward contractual interpretation, it is advisable to draft such cross-references with maximum clarity and precision in order to avoid disputes of this kind. , to avoid any potential disputes it would be preferable to draft such cross-references as carefully and precisely as possible.

Other sources presenting the case

Schmidlin Adrian, Vorhand- und Vorkaufsrecht in einem Aktionärsbindungsvertrag, in legalis brief 2024 Gesellschaftsrecht 16.12.2024.

Judgment of the Federal Supreme Court of 10 June 2022

Case reference : 4A_58/2022

Facts

On November 5, 2012, A (the “Seller”) and B (the “Buyer”) entered into a sale agreement (the “Agreement”), under which the Seller had sold its “online marketing” activities to the Buyer (asset deal). Under Article 2 of the Agreement, the purchase price consisted of a short-term cash payment and of subsequent payments in the form of sharing of revenues. The short-term cash payment amounted to CHF 25,000, payable by March 31, 2013. The subsequent revenue share payments would be based on the net operating income relating to the sold activities. The amount due to the Seller depended on the amount generated within the first semester of a year, the second semester of a year or the full year. The Agreement did not provide for the duration during which the Buyer would have to pay a share of its revenues to the Seller, but stipulated that the maximum purchase price would be CHF 100,000, after which the revenue share expired.

On March 29, 2019, the Seller filed a claim against the Buyer before the Commercial Court of the Canton of Zurich (the “Commercial Court”), requesting the payment of an amount of CHF 52,059.88 with interests, or, alternatively, that the Buyer be compelled to provide the Seller, inter alia, with information on the turnover generated by some clients relating to sold “online marketing” activities since January 1, 2013, so as to allow the Seller to calculate its claim towards the Buyer. The amount claimed corresponded to the difference between CHF 100,000 and the amount that had actually been paid to the Seller.

By partial judgment of December 21, 2021, the Commercial Court held that the purchase price under the Agreement was composed of a fixed portion, in the amount of CHF 25,000, and of a variable portion, which depended on the turnover generated by the sold activities (the “Earn-Out”), knowing that the Parties had not contractually defined the term of the obligation of payment of this variable portion of the purchase price. The Commercial Court consequently held that there was a gap in the Agreement. It filled it by holding that the period during which the obligation of the Buyer to share its revenue was two years after the consummation of the transaction, namely from January 1, 2013 to December 31, 2014 (the “Earn-Out Period”). The Commercial Court thus compelled the Buyer to provide the Seller with information and documents on the turnover generated by the Buyer with the relevant business during the Earn-Out Period only in relation to certain clients.

The Seller filed an appeal before the Federal Supreme Court requesting that the Buyer be compelled to provide information on the turnover generated by the relevant business since January 1, 2013, in relation to all clients. In addition, the Seller did not agree with the findings of the Commercial Court because it considered the purchase price of CHF 100,000.00 to not be variable and was thus due in any event. It further challenged the duration of the Earn-Out Period of two years (as determined by the Commercial Court).

Issue

The Federal Supreme Court had to answer three questions: first, did the Commercial Court correctly qualify the revenue share as a variable portion of the purchase price instead of a payment modality of a fixed purchase price; second, did the Commercial Court correctly hold that the Agreement contained a gap regarding the time limit for the obligation of the Buyer to share its revenue (earn-out) and that such gap had to be filled; third, did the Commercial Court correctly set the duration of the Earn-Out Period to two years?

Decision

The Federal Supreme Court first confirmed the qualification of the revenue sharing mechanism made by the Commercial Court as constituting a variable portion of the purchase price. The use of “revenue share”, in particular by opposition to “cash portion”, implies a variable component. Such interpretation is confirmed by the mention of a “maximum” purchase price, set at CHF 100,000. If the parties intended the revenue share to be a modality of payment of a fixed purchase price, they would have drafted the provision so as to provide that “the revenue share amounts to CHF 75,000 and will be paid as follows”. Finally, the complexity of the mechanism to calculate the amount due under the revenue share, together with the information rights relating to the calculation thereof, would be unlikely in a situation where the parties had simply agreed on a fixed purchase price of CHF 100,000 and where revenue sharing would only be a payment modality thereof.

The Federal Supreme Court then confirmed the ruling of the Commercial Court which qualified the absence of a time limit for the revenue share as a contractual gap that needed to be filled.

The Federal Supreme Court presented the legal principles applicable to the circumstances at hand. A contractual gap exists if the parties have not, or have not completely, regulated a legal question relating to the content of the contract. Whether such gap needs to be filled must be determined by a subjective (or empirical) interpretation and, if inconclusive, by an objective (or normative) interpretation (ATF 115 II 484, cons. 4a). If a gap must be filled, the court must determine, in the absence of applicable legal provision, what the parties would have agreed in good faith had they considered the unregulated point. In determining this hypothetical intent of the parties, the court must be guided by the thinking and actions of reasonable and honest contracting parties, as well as by the nature and purpose of the contract (ATF 133 III 421, cons. 4.1). The result of this normative activity is reviewed by the Federal Supreme Court freely, but with a certain restraint (ATF 127 III 300, cons. 6b), since filling a gap in a contract is generally within the discretion of the cantonal courts (ATF 129 III 380, cons. 2).

Applying these legal principles, the Federal Supreme Court held that a variable purchase price component presupposes a limitation in time of the Earn-Out Period. The Commercial Court correctly stated that the influence of the Seller on the success of the business would diminish over time and, conversely, the Buyer would not be inclined to share with the Seller earnings that are attributable to its own successful management of the business for an unlimited period of time.

On this basis, the Federal Supreme Court held that the Commercial Court rightfully limited the Earn-Out Period to a duration of two years. The Commercial Court defined the duration of two years for the Earn-Out Period by referencing various provisions of the Agreement: first, the non-compete undertaking binding the Seller had a duration of two years; second, the Buyer was authorized to use an identification name owned by the Seller for a duration of two years. The Federal Supreme Court then confirmed that the duration set by the Commercial Court was within the usual earn-out duration mentioned by Swiss legal scholars. Given that the Seller did not make any convincing arguments in order to justify that the Earn-Out Period should be longer than the two years duration set by the Commercial Court, the Federal Supreme Court confirmed the ruling of the lower court.

On this basis, the Federal Supreme Court rejected the appeal filed by the Seller.

Key takeaway

Why did the parties end up in front of the court? Because they had not specified the period during which the earn-out was to be calculated in the Agreement.

The key takeaway of this ruling is the importance for parties to set, in the transactional documentation, the key terms of the earn-out and, more specifically, the earn-out period. Agreeing upfront on the terms of the earn-out and reflecting them clearly in the contract is essential in M&A transactions where an earn-out mechanism is use, as this will allow the parties to reduce post-completion litigation risks and avoid uncertainties deriving from the perilous exercise of gap filling by the courts.

In addition, this ruling gives some useful insight on how the Federal Supreme Court approaches contract interpretation and supplementation of contractual gaps. While another high court may have kept a certain distance with regards to the contract and remained on a high level of legal debate, the Federal Supreme Court took a pragmatic and “hands-on” approach to determine the hypothetical intent of the parties much like the Commercial Court. In particular, the Federal Supreme Court ruled out the qualification of the Earn-Out as a simple modality of payment of a fixed purchase price on the basis that the parties would have expressly provided for this in the Agreement had they desired such a purchase price structure. In this context, the Federal Supreme Court even suggested how such clause may have been drafted (“the participation to the turnover amounts to CHF 75,000 and shall be paid as follows:“).

Comments

On paper, earn-outs are pricing mechanisms that are generally beneficial to both parties: a portion of the purchase price is contingent on the future success of the target and the payment thereof thus deferred in time. For the buyer, an earn-out is a way to partially reduce the risk and uncertainty inherent to valuation exercises, and to partially finance the purchase price through future profits of the business. For the seller, an earn-out is a way to (potentially) obtain a higher price than what the buyer would (or simply could) have paid upfront (Rudolf Tschäni/Hans-Jakob Diem/Matthias Wolf, M&A-Transaktionen, Zurich (Schulthess) 2021, pp.172-173; see also Urs Schenker, Unternehmenskauf, Bern (Stämpfli) 2016, p. 250-251).

However, do these theoretical benefits pass the test of reality? The answer is (unsurprisingly) one a lawyer would have: it depends.

For example, when a transaction involves a drug development company, it is standard to tie the payment of a portion of the purchase price to the achievement of future regulatory or commercial events. In this context, milestone payments can typically be triggered by the start of a clinical trial, the obtaining of marketing approval from regulatory authorities (US Food and Drug Administration or the European Medicines Agency), and the first sale of a product in a given market. In the drug development industry, an earn-out is generally mutually beneficial as it enables the parties to reduce the negative impact on valuation deriving from the uncertainty inherent to the drug development process.

That being said, there is one principle that is generally acknowledged by practitioners: earn-outs tend to end up in court or arbitration proceedings (Tschäni/Diem/Wolf, p. 173; Schenker, p. 250). First, because the parties cannot foresee the future and anticipate all potential issues in the contract. When an unforeseen event happens after completion, two parties with interests that are not necessarily aligned will have different views. Second, because as from completion, the buyer is in charge of the target and may have a strategy that diverges from that of the seller’s. For example, whereas the seller may have had a conservative investment strategy, the buyer may wish to invest heavily in business growth, thus reducing the profit it generates. In other situations, the seller would have only considered the profitability of the target, while the buyer may decide to optimize the profit at group level, which may adversely affect the profitability of the target (Schenker, pp. 250-251). Third, because the parties, often having diverging interests after completion, may simply not agree on how the contractual provisions relating to the earn-out are to be interpreted. For example, in 4A_56/2017, the parties did not agree on the manner in which the earn-out was to be calculated, as well as which financial elements relating to the target were to be taken into account to determine the amount of the earn-out.

This empirical findings seem to be corroborated by the case at hand, although the litigation related to the existence of an earn-out (which is generally not debated) and its duration, rather than whether the buyer prevented the earn-out from becoming due (which is often disputed) or how the earn-out must be calculated (which was debated in 4A_56/2017).

There is one point to take away from this finding and the case at hand: if the parties to an M&A transaction decide, for whatever reason, that the purchase price will be variable and depend on future events, they must aim to draft a contractual provision that is as complete as possible and, if possible, include an example of how the earn-out will be calculated. This will reduce post-completion litigation risks and help avoid uncertainties deriving from the perilous exercise of gap filling by the courts. In the end, it’s better to be safe than sorry: anticipate, discuss and clearly express the agreement (even if it may be obvious). These elements are key to a successful transaction.

Judgment of the Federal Supreme Court of 14 October 2021

Case reference : 4A_92/2021

Facts

With a plan to relocate from Germany to Switzerland, A contacted B (the “Seller”), who is the sole manager and quotaholder of a Swiss limited liability company (LLC) offering tax services in Switzerland (the “Target”), to discuss the acquisition of the Target. On January 4, 2016, the Seller and a Swiss LLC, incorporated by A for the purpose of the transaction (the “Buyer”), entered into a share purchase agreement (the “SPA”), under which the Buyer acquired the Target’s entire quota capital for a price of EUR 480,000.00. The transaction was completed upon the execution of the SPA.

The parties entered into the SPA on the basis that the 2014 financial statements of the Target were the basis for the transaction and on the common understanding that the business volume for 2015 would develop substantially in the same way as in 2014. However, shortly after the closing, the Buyer became aware that the Target registered a loss of CHF 40,000.00 in 2015 compared to a net profit of CHF 65,000.00 in 2014, and that the Target’s turnover had dropped by 26% in 2015 compared to 2014.

Given the significant discrepancy between the 2014 and 2015 financial results, the Buyer served a notice to the Seller on August 9, 2016, in order to rescind the SPA with retroactive effect (among other claims). On May 31, 2017, the Buyer filed a claim against the Seller, requesting, inter alia, the reimbursement of the purchase price, against the retransfer of the Target’s shares. The Court of First Instance granted the Buyer’s request. The Seller filed an appeal, which was dismissed. The Seller then brought the case before the Federal Supreme Court.

Issue

The Federal Supreme Court had to determine whether the Buyer had acted under a fundamental error within the meaning of Art. 23 et seq. of the Swiss Code of Obligations (SCO) when it entered the SPA and was thus entitled to retroactively rescind the SPA.

Decision

The Federal Supreme Court first reminded the general conditions allowing a party to retroactively rescind a contract if it entered into an agreement acting under a fundamental error within the meaning of Art. 23 et seq. SCO. A contract is not binding upon a party which entered into it acting under a fundamental error (Art. 23 SCO). An error is fundamental, for example, if it “relates to specific facts which the party acting in error considered in good faith to be a necessary basis for the contract” (Art. 24 para. 1 no. 4 SCO). The facts at the origin of the error should also objectively appear, in view of, or according to the requirements of fair commercial dealings, as a necessary basis for the contract. This is the case of a false perception of a fact, which was, for both parties, consciously or not, and objectively, an essential condition for the conclusion of the contract.

The Federal Supreme Court further reminded that a party may not raise a fundamental error in breach of good faith (Art. 25 para. 1 SCO). This is the case, in particular, when the rescission of the agreement would result in an obvious imbalance of the interests of the parties. To assess whether the rescission resulted in an obvious imbalance of the parties’ interests, the Federal Supreme Court compared the consequences of the rescission of the agreement for each party. If the rescission entails only a limited advantage to the party invoking the fundamental error, but results in particularly negative consequences for the other party, invoking the fundamental error will be considered to be made in breach of good faith and will thus not be possible (ATF 132 III 737, cons. 3.1). Further, a party’s negligence in causing the error does not generally prevent it from raising the fundamental error and in rescinding the agreement. However, in such a case, the party has to indemnify its counterparty for damages resulting therefrom (Art. 26 para. 1 SCO). Nevertheless, if a party fails to clarify specific and obvious questions arising in the negotiations, the other party may in good faith assume that the party does not consider these unclarified facts as a necessary basis for the conclusion of the agreement. In such case, the party is prevented from raising a fundamental error with respect to the unclarified facts, because doing so would be contrary to the principle of good faith.

Applying these legal principles to the facts, the Federal Supreme Court first noted that the parties entered into the SPA on the common understanding that the Target’s financial situation in 2015 would be substantially similar to that of 2014. When executing the SPA, the Buyer thought that the Target’s financial situation in 2015 would be similar to that of 2014 and had no reason to believe this would not be the case. However, after the closing when the Buyer ultimately got access to the Target’s 2015 financial statements, it became aware of the Target’s actual financial situation: i.e. a loss of CHF 40,000.00 in 2015 compared to a net profit of CHF 65,000.00 in 2014, and a decrease of its turnover by 26% in 2015 compared to 2014. The Buyer however did not act negligently given that it had requested up to date financials for 2015, but was assured by the Seller that these were not yet available.

The Federal Supreme Court then deemed the profitability of a target in the year prior to a transaction as being objectively a decisive element for a prospective buyer. An average person would not have left its home and professional activity in Germany for a loss-making company in Switzerland.

The Federal Supreme Court further found that the retroactive rescission of the SPA by the Buyer had not resulted in an obvious imbalance of the interests of the parties. The Buyer would be paid back the purchase price. However, it would have to rebuild its professional activity after having spent four years managing the Target. On the other hand, the Seller would be reinstated as owner of the Target against reimbursement of the purchase price. The possible lower value of the Target would not change this balance of interests given that the Target was already making losses in 2015, and that the Seller had refused a quick and amicable reversal of the transaction by the Buyer in 2016 to avoid a subsequent litigation and any potential negative consequences thereof on the parties and the value of the business.

The Federal Supreme Court thus upheld the judgment handed down by the Court of First Instance, holding that the Buyer had the right to rescind the SPA on the grounds of a fundamental error within the meaning of Art. 23 et seq. SCO .

Key takeaway

This case constitutes an important reminder of how the principles of fundamental error under Art. 23 et seq. SCO can apply to M&A transactions with respect to an error about the financial health of the target company. As shown in this case, a buyer can rescind the SPA on the ground that the financial results of the target are below the legitimate expectations of the buyer.

Lessons learned: in order to avoid these types of disputes, the Buyer should have clarified more carefully and diligently the financial results achieved in 2015 and shouldn’t have relied on statements made by the Seller. The Buyer could have negotiated a system by which it would have adapted the purchase price depending on the actual financial results achieved in 2015.

In other circumstances, where the evolution of the target or its business activities in the (near) future is uncertain, the Buyer could negotiate a purchase price structured with a fixed component and a variable or conditional component. The fixed component is paid at the closing of the transaction and the variable or conditional component may be due at a later stage, depending on whether milestones specified in the SPA are met. This component can be fixed, meaning that a fixed amount is due if the milestone is met. It can also be flexible, meaning that the amount of the additional consideration will depend on the extent to which the milestone is met. The milestones can be set based on the financial performance of the target, or depend on the achievement of specific R&D, operational or commercial objectives (as this is common for transactions in the life sciences industry).

Comments

This ruling implicitly raises the question of whether the remedies provided for by the Swiss legal system offer satisfactory resolutions to M&A disputes. Here, the issue was whether a retroactive rescission of the SPA, half a decade after its execution, was a satisfactory outcome for the parties. In the case at hand, it might be satisfactory. That said, in most circumstances, it probably is not. On the one hand, a seller, by selling its company, shows its desire to get out of its former business activities. On the other hand, as long as the litigation is not finally resolved, the buyer has to manage the company, but certainly does not do it with its initial impulse because it ultimately desires to return it to the seller.

If the principles relating to fundamental errors generally apply to M&A transactions, the parties can contractually avoid its – sometimes undesired – effects: they may contract around it and waive in advance their right to retroactively rescind the contract on the basis of a fundamental error or because of a default in various way. These tools may be used individually but also cumulatively within a single transaction.

First, the parties may limit the legal remedies available to them in the transaction agreement. This can be achieved by including a “sole remedy” clause, which substantially provides that the legal remedies set forth in the agreement are the only remedies available to the parties (see Tschäni Rudolf/Wolf Matthias, Vertragliche Gewährleistung und Garantien – Typische Vertragsklauseln, in Mergers & Acquisitions VIII, Zurich (Schulthess) 2006, pp. 94 ff., pp. 119-120). The effect of such clause is to prevent the buyer from rescinding the SPA based on a fundamental error or terminating the agreement for a breach by the seller. The only remedy available to the buyer under the SPA will be a reduction of the purchase price, to the extent required to compensate the damage it suffered from the seller’s breach.

Second, the parties may specify that the representations and warranties (“R&Ws”) provided for in the acquisition agreement are the only R&Ws given by a party to the other, to the exclusion of any R&W non expressly set forth therein. If a fact is not covered by the R&Ws, a party implicitly acknowledges that such fact is not a necessary element to the party’s decision to enter into the agreement. Accordingly, that party may not raise a fundamental error with respect to facts that are not part of the R&Ws (see, for example, Tschäni/Wolf, p. 109 or Schenker Urs, Risikoallokation und Gewährleistung beim Unternehmenskauf, in Mergers & Acquisitions VII, Zurich (Schulthess) 2005, pp. 240 ff., pp. 263-264).

Third, the buyer may carry out a due diligence on the target or – especially in the context of auctions – the seller may make a vendor due diligence report available to the potential buyers. Given that a fundamental error presupposes the misrepresentation of a fact, the buyer will not be able to claim it would fall under a fundamental error as long as the information provided to the buyer is true, complete and not misleading (see Tschäni Rudolf/Frey Harold/Müller Dominique, Streitigkeiten aus M&A-Transaktionen, Zurich (Schulthess) 2013, pp. 16 and 120).