Sweden: How the Swedish Sale of Goods Act Applies to Share Transfers

Last Updated: 18 April 2004
Article by Niclas Högström

Co-authored by Thomas Nygren and Sophia Westman Melén of Hamilton & Co

This article first appeared in the IFLR Mergers & Acquisition Yearbook 2004

Introduction

From an overall perspective the corporate acquisition process in Sweden has a striking resemblance to that which applies elsewhere in Europe. The chain of documents required is the same, and even the documents’ contents strongly resemble that which is applied in the UK and continental Europe. As in other similar jurisdictions the contract negotiations take place only after the buyer has conducted a thorough investigation of the target company. On a general level, accordingly, there is little that distinguishes the corporate acquisition process in Sweden from that applied elsewhere in Europe. The purpose of this article is to introduce and to describe certain particularities of Swedish law which will not effect the overall acquisition process, but which may have all the larger impact on the result of the process, namely the ensuing share transfer agreement and it’s application in practise.

A corporate acquisition involves numerous and considerable risks for the parties involved. The valuation of a target is complicated and a buyer will most often be dependent on information from the seller. The question of the seller’s responsibility for information provided and of the division of liabilities between the parties is therefore pivotal. The distribution of risk and liability is regularly stipulated in detailed share transfer agreements. However this allocation may in addition to what has been explicitly agreed by the parties also be affected by external factors, such as for instance information provided by the seller during the sales process or during a due diligence investigation. Even if the parties to a considerable extent endeavour to regulate their relationship in an agreement, it is not possible to create an agreement that is entirely dislocated from the law.

The application of the Sale of Goods Act

The Swedish Sale of Goods Act is considered applicable on share transfers, at least if majority holdings are transferred.

The circumstances that apply in share transfers, however, clearly differ in many ways from those that apply in relation to sales of other personal property. At the same time the rules in the Sale of Goods Act are primarily intended for sales of chattels, rather than immaterial assets. It is therefore of some interest to consider how the Sale of Goods Act shall be applied in relation to share transfers. The Sale of Goods Act is non-mandatory law and therefore only applies to the extent the parties have not agreed otherwise. Although the parties to a share transfer regularly describe their contractual arrangement in great detail in a share transfer agreement (and often agree that certain provisions and remedies of the Sale of Goods Act shall not apply) general Swedish contract law principles will have a supplemental role to play when it comes to interpreting the contractual relationship.

Our intention with this article is to look closer at the principles and provisions of the Sale of Goods Act that impact on the allocation of risk and liability amongst the parties in a share transfer. In this context we will consider the relevance of information provided to the buyer by the seller, the buyer’s obligation to investigate the target by means of conducting a due diligence investigation and the buyer’s ability to rely on warranties given by the seller.

The seller’s obligation to inform

Pursuant to Swedish law a seller has a far-reaching obligation to inform a buyer of negative characteristics of the sales object of which he is aware. It is interesting to note in this context how this principle contrasts to the caveat emptor principle that applies under common law and pursuant to which a seller appears to have a much more limited obligation to inform a buyer of circumstances that may affect a purchase, and according to which the buyer bears the risk of the acquired object being defective or deviating from what the parties have intended.

The obligation to inform is a manifestation of another legal principle of Swedish law which in essence is an obligation of loyalty. This loyalty obligation is a basic feature of Swedish contract law and is applicable to all contracting parties. As a result a seller is obliged to a certain degree to inform the buyer of negative characteristics of the sales object. The seller is not however obliged to inform the buyer of the size of the risk that the buyer assumes through the purchase. Nor is the seller obliged to inform the buyer of the fact that he would have considered accepting a lower price for the object. The loyalty principle applies both during negotiations leading up to a contract and thereafter and is aimed at preventing disloyal behaviour amongst the parties. The obligation of loyalty as between the contracting parties increases concurrently with the deepening of the contractual relationship. As the loyalty obligation is a basic feature of Swedish contract law it is not possible to agree that this principle shall not apply.

A seller’s obligation to inform also follows directly as well as indirectly from the rules in the Swedish Contracts Act and the Sale of Goods Act. According to section 30 of the Contracts Act a seller who has concealed information of importance for the buyer may be liable to deceit. A purchaser can also allege that a contractual arrangement is contrary to equity and that such relation may not be relied upon by reason of the seller having withheld information. Further, contractual terms can be modified or declared null and void by the court under section 36 of the Contracts Act, if they are deemed unreasonable taking into account the circumstances at the time of entering into the agreement. Withholding of information by the seller will be legally relevant and give rise to a duty to inform, only if the seller is informed of the relevant circumstance, is aware that such circumstance is of importance to the buyer, and further knows that the buyer lacks knowledge of the circumstance.

The Sale of Goods Act includes several rules regarding faults in the sales object from which a seller’s duty to inform can be gathered. It is generally considered that the seller’s obligation to inform only applies with regard to actual circumstances and not to hypothesis or prognoses. Section 17 of the Sale of Goods Act stipulates that faults in the purchase object exist if the object is not in accordance with what has been agreed between the parties. The seller’s responsibility for faults is strict and applies irrespective of whether the seller has knowledge of the deviation or not. The seller’s responsibility however is removed if the buyer is aware of the fault. In such instances there is no direct obligation on the seller to inform as he is responsible irrespective of knowledge about the fault. However, the seller may in order to avoid responsibility have to inform the buyer about faults that are known to the seller.

If the agreement does not provide any guidance, the sales object shall, according to the Sale of Goods Act, be suitable for it’s purpose. It is difficult to apply this provision to a corporate acquisition, but, it follows that the seller is obliged to inform the buyer of circumstances that result in that the target cannot be used for the intended purpose. In a share transfer the sales object consists of shares, which per se can only be used for voting purposes and to exercise other shareholder rights, and the question arises as to what precisely is covered by the duty to inform. In the case of a transfer of all shares in a company it is considered that not only circumstances such as redemption rights, limitations in voting rights and dividends fall within the duty to inform, but that also rights of disposition are included herein. If all shares have been acquired in a company that lacks the necessary permits to conduct its business, it is considered that the buyer cannot utilise the acquired company for the intended purpose.

Faults in the sales object also exist if it deviates in any other respect from what the buyer reasonably was entitled to expect. It is for obvious reasons difficult to pronounce on a general level what a buyer’s reasonable expectations are of a company. As a company and its business is unique it is hardly possible to compare one company with another even if they are in the same business. A common opinion is that the deviation must be placed in relation to the acquired company as a whole or it’s value and that the deviation must exceed a certain measure in order to be essential. For instance a limitation of the right of disposition is likely to be considered a deviation from what the buyer reasonably may expect and may therefore be considered a fault under the Sale of Goods Act.

A seller is deemed to have a duty to inform pursuant to Section 19 of the Sale of Goods Act in cases where the seller has limited his liability by selling on "as is" terms. The duty to inform encompasses such essential circumstances as a seller must reasonably have known of and which the buyer reasonably could be expected to be informed of. A circumstance is deemed essential if it influences a buyer’s evaluation of the sales object and the seller has realised that the buyer’s evaluation is affected by such circumstance.

As was indicated above, the duty to inform and the principle of loyalty appear not to be as extensive under common law as under Swedish law. Swedish contracts and sale of goods law would seem to differ in this respect as compared to what follows from the caveat emptor principle under corresponding legislation in common law jurisdictions. According to this principle, the buyer bears the risk of the sales object being defective or differing from what the parities have intended. If the buyer desires that this risk shall pass to the seller, the buyer must require a warranty or a representation. The seller would appear not to be under any obligation to inform of circumstances which may affect the transaction, in contrast to what follows from the principle of loyalty and duty to inform that applies under Swedish law. Even if the seller is aware of the fact that the buyer is entering into an agreement under incorrect assumptions the seller is not obliged to disillusion the buyer, provided always that the seller himself has not contributed to the buyers delusion.

Liability for information provided

Under Swedish law a seller is responsible for the correctness of the information he provides, irrespective of what is actually known to him. The strict liability of the seller is motivated by the fact that the buyer has relied on the information and evaluated the target on the basis of it. Information provided by the seller will, however, result in a liability on behalf of the seller only if the information in question has been of importance to the buyer and may reasonably have affected the buyer’s decision to consummate the transaction. This does not apply with respect to deviations from contract terms, as contract terms by nature are considered to have influenced the parties’ decisions. A deviation from what has been agreed therefore automatically results in responsibility for faults on behalf of the seller. Also information provided by others than the seller, for instance the seller’s lawyer, broker or accountant, may provide grounds for liability on behalf of the seller according to the Sale of Goods Act.

The buyer’s duty to investigate

The seller’s duty to inform has a counterpart in the buyer’s duty to investigate. The Sale of Goods Act does not charge the buyer with a general obligation to investigate, instead the assumption is that the buyer should be able to assume that the sales object is free from faults. But normally the buyer will conduct an investigation in his own interest in order to evaluate the sales object. If the buyer decides to perform an investigation, or if the seller encourages the buyer to do so, the buyer will be obliged to conduct a careful investigation. The buyer may not rely on faults which he ought reasonably to have discovered during his investigation, provided that the seller has not acted with deceit. The buyer may not either bring a claim on the grounds of a fault which has later (after signing) materialised from a risk that was apparent at the time of the investigation.

Swedish share purchase agreements regularly include a provision pursuant to which "the buyer has been provided an opportunity to investigate the company". Such a clause is likely under Swedish law to be construed as an invitation from the seller to investigate. The effect is accordingly that the buyer may not rely on faults which he ought reasonably to have discovered during an investigation.

A duty to investigate will most likely not arise solely on the basis of a suspicion on the part of the buyer of the existence of a fault. However such suspicion may affect the scope of an already existing obligation to investigate.

A duty to investigate may also follow from custom or trade practice. But it does not appear to be the case in Sweden however that custom or trade practice requires a buyer to perform a due diligence exercise without being encouraged to do so by the seller. If the seller however makes available information for review, then it is generally acknowledged that such act be considered an invitation to the buyer to conduct an investigation of the target.

The extent of the buyer’s duty to investigate is also affected by information supplied by the seller in connection with a sale and the seller’s behaviour may result in an extension (or a limitation) of the buyer’s duty to investigate. Information of a positive nature will normally have the effect of limiting the scope of the obligation to investigate, whereas information which is readily available and may easily be checked will not always have the same effect. A limitation of liability by a seller will normally cause the obligation to investigate to be extended, but also other circumstances that give rise to a concern on behalf of a buyer will result in an extension of this obligation. The scope of the investigation duty is also affected by the buyer’s expert knowledge. As corporate acquisitions are of a purely commercial nature, this may result in a more extensive duty to investigate on behalf of the buyer, irrespective of the fact that the Sale of Goods Act does not make any difference between commercial acquisitions and civil purchases, at least not as far as relates to the buyer’s duty to investigate. Also the time aspect may also be of relevance when determining the scope of the duty to investigate.

The seller’s limitation of liability

As is evident from the above the seller is deemed to have a relatively far-reaching responsibility for faults under the Sale of Goods Act. However, as this Act is not mandatory law, the parties may, by inserting limitation of liability clauses into their contract, restrict their liability. A limitation of liability may occur either by limiting the number and scope of the representations and warranties, or through a limitation of the remedies available for the buyer in case of a misrepresentation or breach of warranty. Under Swedish law, a seller may become responsible, despite having inserted a limitation of liability clause, pursuant to Section 19 of the Sale of Goods Act, if he issues incorrect statements, or omits to provide information regarding circumstances that he is aware of is of importance to the buyer. To avoid applicability of Section 19, the limitation of liability clause should be drafted in such way that the buyer confirms that he has not relied on any other information than that covered in the agreement. Information not included or referred to in the agreement will in such case not be considered as having affected the buyer’s decision to enter into the agreement, even though it may be considered essential, wherefore the buyer will not be able to rely on such information as constituting a fault.

Extensive or far-reaching limitation of liability clauses may further be adjusted under Section 36 of the Contracts Act. It is not the purpose of Section 36, however, to affect the balance of risk which the parties have agreed upon.

Warranties by the seller

By inserting a specific warranty in the agreement the seller undertakes a responsibility for the correctness of a certain fact or circumstance. By inserting representations and warranties the parties will try to establish a certain standard and thereby limit the buyer’s obligation to investigate. Viewed isolated from the facts a specific warranty will have the effect of an absolute guarantee with the result that the buyer will not be required to investigate the circumstances covered by the warranty. If the buyer, without regard to having received a particular warranty, carries out an investigation, then such investigation will not per se result in that the warranty is neutralized. But if the seller requires the buyer to investigate the circumstance for which the warranty has been given, then the scope of the warranty may well be affected. Such an invitation to investigate may be interpreted as the seller has provided a general guarantee, but that the buyer becomes obliged to investigate the precise circumstances that the seller has indicated through his invitation. Also in such cases where the buyer is actually aware of the circumstances surrounding the warranty, the scope of the warranty may be limited. In such cases the effect of the warranty may be neutralized by the fact that the buyer has no reason to rely on the warranty.

If on the other hand a buyer specifically requests a warranty after having investigated a particular circumstance or area of concern, then a warranty may be interpreted as being effective without reservation for what the buyer should have discovered by his investigation. In this way the parties may contractually determine that the liability is to be placed upon the seller, irrespective of the rules of the Sale of Goods Act that stipulate that the buyer may not formulate a claim on the basis on facts or circumstances that he ought to have discovered during his investigation.

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.

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