On 25 November 2020, the Criminal Division of the French Supreme Court (Cour de cassation) issued a ruling that marked a major shift in its case law regarding the transfer of criminal liability during a merger-absorption. In this blog, we assess the impact of this decision.
The rulings of French courts, especially the Supreme Court, greatly influence the way French law is enforced. So although rulings are, strictly speaking, non-binding, lower courts tend to reach their decisions based on previous judgments. Therefore, this recent decision will certainly significantly influence future French case law on the matter.
Acquirer now liable for target's criminal acts
Until this ruling, in the absence of any legislation on the issue, the Supreme Court refused to allow an acquiring company to be subject to criminal proceedings for acts committed by the target. The dissolution of the target, at the time of the merger-absorption, results in a 'death' that would put an end to the public prosecution in accordance with the French Code of Criminal Procedure.
However, from now on, the acquirer may be liable for acts constituting a criminal offence committed by the target prior to the consolidation without any kind of corporate law mechanism being able to prevent this.
But liability is limited...
It is important to underline that the scope of the acquirer's criminal liability is strictly limited.
First of all, it only applies to public limited liability companies and to simplified joint stock companies carrying out a merger-absorption within the scope of the EU directive on the merger of public limited liability companies (Directive 78/855/EEC as last codified by Directive 2017/1132).
Therefore, transactions where stock is used as consideration do not seem to be subject to this revision of case law since both the directive and the ruling itself specify that the operation must result in the dissolution of the company in question.
However, the matter does arise in the case of mergers by the formation of a new company and, even if these operations do not fall within the scope of the above-mentioned directive, they involve the universal transfer of assets and liabilities under the French Civil Code.
Furthermore, the transfer of criminal liability only includes fines and confiscation penalties.
Finally, the acquirer benefits from all the means of defence that could have been invoked by the absorbed company.
... and time limited
In order to guarantee the essential principle of judicial reliability, the application of this precedent revision is applied over time. Therefore, only merger-absorption transactions concluded after 25 November 2020 are affected.
Audits of the target in particularly delicate areas such as compliance, environmental law or tax law will have to be reinforced accordingly.
No protection for mergers designed to escape criminal proceedings
Alongside this new transfer of criminal liability, the Supreme Court judgment deals with mergers and fraudulent evasion of the law.
The court found that, when the sole purpose of the merger is to enable the target to escape criminal proceedings, the criminal liability of the acquirer may be established regardless of the form of the companies involved and the penalties that may be delivered.
The understanding of this notion, rarely used in the area of mergers and acquisitions until now, will be closely monitored to ensure that the principle of judicial reliability mentioned above is not compromised at the expense of economic influences.
It would indeed be dangerous if this ruling opened the way to criminal proceedings targeting previous operations without a rigorous demonstration of the fraudulent evasion of the law, which, if necessary, could only be fought by the defence in the event of a debate on the merits of the case before the court of judgment.
The Supreme Court, having not yet pronounced on this matter, considers that its ruling does not constitute a precedent revision and therefore grants it immediate application, regardless of the date of the transaction.
The Supreme Court seems to be changing its position on various issues in the field of mergers and acquisitions (see, for example, another recent decision by the Third Division of the Supreme Court, 26 November 2020). We will be keeping a watchful eye of how things develop.