A November 2020 ruling by France’s Supreme Court or Court of Cassation, reverses the country’s previously existing case law on corporate successor criminal liability in a merger by acquisition. Recent decisions made by the Court of Justice of the European Union and the European Court of Human Rights where considered by the French court in this case that ultimately influenced their decision. From the date of the ruling, responsibility for infringements committed pre-merger by the acquired company will transfer to the acquiring company after the merger is complete.
The case reverses a previous ruling in the country and the notion that there is no separation between a final merged entity and the pre-merger entities. Essentially a merger does not eliminate a company’s responsibilities or liabilities, and this new rule puts a firewall against any type of evasion.
The ruling has many implications on M&A activity in France – and possibly beyond – and could see organizations held accountable for the prior conduct and/or outstanding liabilities of the companies they acquire.
In this article we look at the implications of the ruling in France and the importance of conducting due diligence prior to any M&A transaction.
Implications of the ruling in France
Effective immediately, an acquiring company may be penalized by French authorities for offenses committed by the acquired company.
In its ruling, the Supreme Court also clarified that criminal liability will not be applied retroactively, meaning that the rule will only apply to cases closed after November 25, 2020. However, an exception may be created if a merger was carried out fraudulently to absolve the acquired company from criminal liability.
This ruling applies to public limited companies and private companies such as sociétés anonymes and sociétés par actions simplifies. Although it’s important to note that it only applies to mergers by acquisitions, not partnerships or joint ventures.
Penalties that may be imposed on acquiring companies include fines and forfeiture including disbarment from public procurement.
To avoid post-merger criminal liability for acquiring companies, due diligence will become more critical as firms seek to account for any criminal actions initiated or pending initiation against the absorbed company prior to the merger.
Due diligence is a critical task for international deals
Whether conducting M&A in France or in any country, it’s important to factor in the additional risk of criminal sanctions when performing due diligence and negotiating disclosure and warranties clauses. Acquiring companies should also consider the type of transaction taking place, and the different rules that apply to each. For example, what liabilities will I assume if purchasing an asset or shares versus fully acquiring the company and will that require the same level of due diligence? Will a new entity be formed versus a continuation of the target’s operations? Is the transaction between public or private companies? Does the M&A involve an acquisition by a foreign entity or by a locally established entity? There are many nuances to consider.
While each country applies successor liability in different ways, conducting a thorough due diligence can help protect against unforeseen risks.
To help determine if there are any future liabilities the acquiring company may face, legal teams must ensure to examine relevant documentation and understand how the transaction may be perceived by local regulators.
Keeping these complexities in mind, working with a trusted partner who understands the urgency of global deals, provides the necessary support to ensure due diligence is carried out efficiently and in a timely manner. CT provides local expertise and boots on the ground in over 150 countries – but with the convenience of a dedicated single point of contact who coordinates and manages your project from beginning to end.
Whether at the beginning stages of due diligence or the high-pressure stages of closing, CT delivers the merger and acquisition support you count on to finalize the deal.
Learn more about CT’s services, get in touch with a CT representative at (844) 322-6993 (toll-free U.S.).