A letter of intent which contains an agreement to reimburse the costs of a due diligence in principle does not need to be notarised even if the letter of intent provides for the incorporation of a German Limited Liability Company (GmbH).

In a case heard by the Higher Regional Court of Munich, two companies had agreed to acquire jointly a business in Germany. For this purpose, the companies planned to establish a GmbH as an acquisition vehicle. In the letter of intent outlining the proposed transaction, one of the parties (the defendant) agreed to reimburse the other (the claimant) for all of its due diligence and legal costs in an amount of up to EUR 400,000 should the negotiations be terminated by one of the parties. The letter of intent also contained provisions on the proposed incorporation of the acquisition vehicle.

When the negotiations were later terminated by the claimant, the defendant refused to pay for the costs of the legal due diligence that had already been carried out. As part of its defence, the defendant argued that the reimbursement agreement was void due to a lack of form. The defendant argued that the letter of intent should have been notarised since it also provided for the establishment of a GmbH.

The court in its decision dated 19 September 2012 ruled that while statutory law provides for notarisation when a GmbH is established, this does not in principle apply to the letter of intent providing for such incorporation. According to the court, while the provisions of the letter of intent dealing with the incorporation were clearly non-binding, the parties had explicitly agreed that the part dealing with the reimbursement agreement should be of a binding nature. In addition, the court held that the (limited) reimbursement obligation did constitute a detriment of such nature that the defendant was de facto committed to finalise the proposed transaction. Therefore, the formal requirements for the establishment of a GmbH could not be applied to the letter of intent.

Higher Regional Court of Munich, decision dated 19 September 2012 (7 U 736/12)

Florian Puschmann