In light of several decisions by the Supreme Court*, we would like to draw attention to the potential liability of members of a managing body upon transfer of a business. This may arise from representations and warranties made due to negligence or ignorance, for example.
Upon transferring a business, a member of the managing body must comply with the duty of care arising from legislation; damage caused by violation of that duty must be compensated. In general, a member of a managing body is considered to have complied with the duty of care if they were careful in adopting and implementing the decision to sell, were sufficiently informed to adopt that a decision, and did not take any unreasonable risks.
Compliance with the duty of care may be reflected, for example, in collection of information, mapping of risks and determining the value of business. At the same time, liability of a member of a managing body does not depend on whether the member concerned is or is not an expert in some area – specialists in the relevant field must be consulted if necessary. Therefore, most such transactions involve legal and financial advisors, sometimes too, for example, construction and environmental specialists.
An audit by the seller is one way to prevent potential liability of a member of a managing body upon transfer of a business. Our partner office, Attorneys at Law Borenius, estimates that organising audits for that purpose is becoming increasingly popular in Finland. The audit lies in analysing the transferrable business by specialists in the given field according to the seller’s instructions. An audit enables the transferor to assess whether and how some aspects should be regulated in a contract to avoid a potential claim by the purchaser for price reduction or compensation for damage, which in turn may lead to liability of a managing body.
In addition, sellers may also wish to organise an audit for the reason that it contributes to a better selling process and gives a more solid negotiating position – in general, the purchaser makes a legal as well as financial audit of the company, one objective of which is to reduce the purchase price by referring to problematic issues identified. Organisation of an audit by the seller helps determine any potential bottlenecks and eliminate them in a timely manner, or express opinions.
Although organisation of an audit by the seller helps hedge the liability of a member of a managing body and is beneficial from several other aspects as well, an audit is not necessarily required for each sale transaction. We advise that attention be given mainly in the case of more complicated transactions and when a complete and detailed overview of the sale object is not available, which is generally necessary for the purchaser to make the necessary representations and warranties.
* See, for example, an overview of the dispute that reached the Supreme Court, published in the April 2010 issue of Deal with LMHB, where a shareholder claimed compensation from members of the supervisory board and management board for damage caused as a result of a merger.
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Liability of managing body members upon transfer of business
In light of several decisions by the Supreme Court*, we would like to draw attention to the potential liability of members of a managing body upon transfer of a business. This may arise from representations and warranties made due to negligence or ignorance, for example.
Upon transferring a business, a member of the managing body must comply with the duty of care arising from legislation; damage caused by violation of that duty must be compensated. In general, a member of a managing body is considered to have complied with the duty of care if they were careful in adopting and implementing the decision to sell, were sufficiently informed to adopt that a decision, and did not take any unreasonable risks.
Compliance with the duty of care may be reflected, for example, in collection of information, mapping of risks and determining the value of business. At the same time, liability of a member of a managing body does not depend on whether the member concerned is or is not an expert in some area – specialists in the relevant field must be consulted if necessary. Therefore, most such transactions involve legal and financial advisors, sometimes too, for example, construction and environmental specialists.
An audit by the seller is one way to prevent potential liability of a member of a managing body upon transfer of a business. Our partner office, Attorneys at Law Borenius, estimates that organising audits for that purpose is becoming increasingly popular in Finland. The audit lies in analysing the transferrable business by specialists in the given field according to the seller’s instructions. An audit enables the transferor to assess whether and how some aspects should be regulated in a contract to avoid a potential claim by the purchaser for price reduction or compensation for damage, which in turn may lead to liability of a managing body.
In addition, sellers may also wish to organise an audit for the reason that it contributes to a better selling process and gives a more solid negotiating position – in general, the purchaser makes a legal as well as financial audit of the company, one objective of which is to reduce the purchase price by referring to problematic issues identified. Organisation of an audit by the seller helps determine any potential bottlenecks and eliminate them in a timely manner, or express opinions.
Although organisation of an audit by the seller helps hedge the liability of a member of a managing body and is beneficial from several other aspects as well, an audit is not necessarily required for each sale transaction. We advise that attention be given mainly in the case of more complicated transactions and when a complete and detailed overview of the sale object is not available, which is generally necessary for the purchaser to make the necessary representations and warranties.
* See, for example, an overview of the dispute that reached the Supreme Court, published in the April 2010 issue of Deal with LMHB, where a shareholder claimed compensation from members of the supervisory board and management board for damage caused as a result of a merger.