The sale of companies is considered one of the most serious and important legal and commercial transactions, as it results in the transfer of assets, rights, and significant financial and legal obligations. Therefore, the law pays special attention to ensuring the validity of consent and protecting the parties from any form of fraud or deception. Fraud (tadlis) is regarded as one of the main reasons that may lead to the annulment or rescission of a company sale contract and the claim for compensation.
Fraud in the sale of companies is not limited to explicit lying; rather, it includes any fraudulent act intended to conceal the truth or present an unrealistic picture of the company’s situation in order to induce the other party to conclude the contract.
First: Fraud in the Sale of Companies
Fraud is the use of deceptive methods by one of the contracting parties or by a third party, with the intention of misleading the other party and inducing them to enter into the contract, such that without this deception, the contract would not have been concluded.
In the context of company sales, fraud is commonly realized through:
Concealing debts or substantial financial obligations.
Providing false or misleading financial statements.
Exaggerating the value of assets or profits.
Concealing existing or potential legal disputes.
Concealing tax or administrative violations.
Claiming that the company possesses licenses or privileges that do not exist or are threatened with cancellation.
Second: Elements of Fraud in the Sale of Companies
For fraud to be legally recognized, three essential elements must be present:
The Material Element (Fraudulent Means)
This consists of any positive act or omission that leads to misleading the buyer, whether through explicit falsehoods or deliberate concealment of material facts.
The Moral Element (Intent to Deceive)
This requires that the seller be aware of the falsity of the information provided, or aware of the facts being concealed, and that they intend to mislead the buyer.
The Causal Link
The fraud must be the main reason that induced the buyer to conclude the contract for the purchase of the company.
Third: Fraud under Egyptian Law
The Egyptian Civil Code regulates fraud as one of the defects of consent. It provides that:
“A contract may be annulled for fraud if the deceptive acts committed by one of the contracting parties or their representative are so serious that, without them, the other party would not have concluded the contract.”
From this, it follows that:
Fraud is a ground for relative nullity (voidability) of the contract.
The buyer has the right to request the annulment of the company sale contract.
It is permissible to combine a claim for annulment with a claim for compensation if damage has occurred.
In the context of company sales: If it is proven that the seller provided falsified financial data or concealed substantial debts, the buyer may:
Annul the sale contract.
Or request a reduction in the price.
Or claim compensation for damages.
The Egyptian Court of Cassation also holds that:
“The deliberate concealment of a material fact constitutes fraud if it is proven that the other party would not have concluded the contract had they known of it.”
This principle is of great importance in company sales, where financial and legal information forms the basis of the purchase decision.
Fourth: Fraud under Turkish Law
The Turkish Civil Code also treats fraud as a ground for invalidating consent, providing that:
“A person who has been induced to contract through deception has the right to annul the contract.”
In the context of company sales: If the seller provides incorrect information about the financial or legal status of the company, or conceals disputes, debts, or significant regulatory problems, the buyer has the right to:
Annul the sale contract.
Claim compensation for damages.
Require the seller to refund the price and compensate for any resulting losses.
Turkish courts attach particular importance to the principle of good faith in commercial transactions, and they consider misleading conduct or deliberate concealment as a clear form of fraud.
Fifth: Difference between Fraud and Mistake in Company Sales
It is essential to distinguish between:
Mistake:
Arises from the buyer’s own misunderstanding, without any interference from the seller.
Fraud:
Results from an intentional act by the seller or someone acting on their behalf.
The legal effect of fraud is more severe, as it involves bad faith and usually leads to:
Annulment of the contract.
Together with compensation.
Sixth: Common Forms of Fraud in Company Sales
In practice, the most common forms include:
Concealing bank debts or obligations toward suppliers.
Providing altered or unaudited financial statements.
Claiming the existence of fictitious profits.
Concealing labor or tax disputes.
Concealing the expiration or imminent expiration of operating licenses.
Transferring company assets before the sale without the buyer’s knowledge.
Claiming the existence of strategic contracts that do not actually exist.
Seventh: Legal Consequences of Fraud in Company Sales
If fraud is proven, the buyer has the right to:
Annul the Sale Contract
And restore the parties to the position they were in before the contract.
Claim Compensation
For:
Actual losses.
Lost profits.
Expenses incurred as a result of the contract.
Combine Annulment and Compensation
When damage is established.
In Certain Cases
Criminal liability may arise if the fraud amounts to criminal fraud or swindling.
Eighth: The Role of Due Diligence in Reducing the Risk of Fraud
Legal and financial due diligence prior to purchasing a company is the first line of defense against fraud, and includes:
Reviewing financial statements.
Examining debts and liabilities.
Reviewing contracts.
Checking legal disputes.
Verifying the validity of licenses.
Reviewing the tax position.
Nevertheless, fraud may still be established even after due diligence if it is proven that the seller concealed facts that could not reasonably be discovered by ordinary means.
Ninth: Contractual Clauses that Reduce the Impact of Fraud
Specialized lawyers always recommend including:
Representations and warranties by the seller.
An indemnity clause for any incorrect or misleading information.
A clause providing for automatic termination of the contract upon proof of fraud.
A clause allowing part of the purchase price to be retained as security.
Tenth: A Legal Message to Investors and Clients
Fraud in the sale of companies is not a simple contractual breach; it is a direct violation of the principle of trust in commercial transactions.
Both Egyptian and Turkish law adopt a strict stance against any conduct that misleads the other contracting party and grant the buyer strong legal tools to recover their rights.
Every investor or company buyer must know that:
Transparency is not an option; it is a legal obligation.
Deliberate concealment of material facts may destroy the contract from its very foundation.
Seeking the assistance of a specialized lawyer before concluding the contract is the real guarantee for a safe investment.
Conclusion
Fraud in the sale of companies represents one of the most serious legal risks threatening investors. Both Egyptian and Turkish law provide strict protection by allowing the annulment of contracts, granting compensation to the injured party, and deterring fraudulent conduct.
Therefore, legal awareness, thorough due diligence, and precise contractual drafting are the essential pillars for building a safe and fair transaction based on honesty and good faith, not deception and risk.