21 March 2025

Commercial Court of Zurich: Liability Risks in Case of a Breach of Representations and Warranties in an Investment Agreement

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  • Litigation / Arbitration
  • Transactions / M&A

The Commercial Court of Zurich ruled on August 21, 2024, on the liability consequences of false representations and warranties in an Investment Agreement – with important implications for investors and start-ups.

  • Luca Schärer

    Junior Legal Associate

  • Christoph Zellweger

    Senior Legal Associate

1. Introduction

In its ruling of August 21, 2024, the Commercial Court of Zurich decided on the legal consequences of breaching representations and warranties in an investment agreement.

2. Facts

In 2022, a Jersey-based investment company ("Plaintiff") participated in a financing round by investing in a Swiss stock corporation in the food industry ("Defendant"). In early November 2022, the parties signed an investment agreement granting the Plaintiff subscription rights for 26’411 preferred shares of the Defendant as part of a capital increase. In return, the Plaintiff undertook to pay the nominal value of CHF 26’411.- and to contribute EUR 14’973’282.22 to the Defendant’s reserves.

After the capital increase was completed, the Plaintiff discovered that it had been misled in several key aspects:

  • The 2020 and 2021 financial statements were falsified and had not, as assured, been approved by an audit firm..
  • The reported revenue and profit figures for 2022 were fabricated.
  • The Defendant was subject to tax enforcement proceedings despite assurances of tax compliance.

On September 29, 2023, the Plaintiff contested the investment agreement on the grounds of fraud under Article 28 of the Swiss Code of Obligations (CO) and demanded reimbursement of its investment exceeding the nominal share value, based on unjust enrichment (Art. 62 et seq. CO Alternatively, the Plaintiff sought monetary damages for breaches of contractual representations and warranties.

The Commercial Court of Zurich partially upheld the Plaintiff’s claim, ordering the Defendant to pay EUR 14’973’282.22 and CHF 281’219.25 (pre-litigation legal fees). Additionally, the Defendant was ordered to cover the Plaintiff’s legal costs (CHF 129’150.-) and court fees (CHF 107’600.-).

3. Considerations of the Commercial Court of Zurich

3.1 No Restitution of the Investment Agreement due to Defects in Consent (E. 3.2)

Referring to Federal Supreme Court jurisprudence, the Commercial Court of Zurich ruled that once a capital increase is registered in the commercial register, the subscriber of the issued shares can no longer claim a defect in consent, since by subscribing for the shares, the investor unconditionally undertakes to pay the relevant issue price.

Consequently, the Plaintiff had no right to a refund of the amount paid beyond the nominal value, and its primary claim was dismissed.

3.2 Compensatory Capital Increases Not Enforceable (E. 3.3.3)

It was undisputed that the Defendant had breached the representations and warranties under the investment agreement. The Plaintiff argued a violation of Art. 97 CO and sought monetary damages. However, the investment agreement stipulated that, in the event of a breach, damages were to be compensated exclusively through a compensatory capital increase.

The Commercial Court of Zurich concluded that this constituted a limitation of liability because it placed the Plaintiff at a disadvantage compared to statutory liability consequences. In startup investments, compensatory capital increases are not necessarily equivalent in value to monetary compensation. Pursuant to Article 100 para. 2 CO, liability limitations are void in cases of unlawful intent or gross negligence. Since the Defendant had intentionally misled the Plaintiff, the agreed compensatory capital increase was deemed invalid.

3.3 Monetary Damages for Breach of Representations and Warranties Limited in Scope (E. 3.3.1)

Following that the Commercial Court of Zurich held that monetary damages for breaches of representations and warranties under Art. 97 CO were in principle permissible. However, such claims are necessarily restricted by the prohibition of repayment of share capital under Art. 680 para. 2 CO, meaning damages must not affect the nominal capital or protected reserves of the Defendant.

3.4 Compensation for Negative Interest (E. 3.3.4.1)

While damages under Article 97 CO typically aim to restore the injured party as if the contract had been properly fulfilled (positive interest), The Commercial Court of Zurich ruled that, had the Plaintiff been properly informed, it would not have invested in the Defendant in the first place. Thus, compensation for negative interest was justified, placing the Plaintiff in the position it would have been in if the investment agreement had never been concluded.

Since the Defendant indisputably had sufficient free reserves, the Plaintiff was entitled to the requested monetary damages, succeeding with its alternative claim.

4. Key Takeaways

4.1 For Investors:

  • Once an investor has subscribed for shares and the capital increase has been registered in the commercial register, the investment agreement cannot be rescinded on the grounds of lack of consent.
  • The amount of enforceable damages is significantly limited by the company’s freely available reserves.
  • Thorough due diligence is therefore of critical importance.

4.2 For Startups /Founders:

  • Even if a compensatory capital increase is contractually agreed as the sole remedy for a breach of representations and warranties, it may be invalid in cases of gross negligence or unlawful intent.
  • Representations and warranties must be accurate and precisely drafted, as misleading or vague statements can expose the company to significant damage claims, even if a compensatory capital increase is stipulated.

You can find the full ruling here (German only).

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