In a decision dated November 25, 2020, the Criminal Division of the Court de Cassation reversed a major case law regarding the transfer of criminal liability in connection with merger-absorption operations.
It was previously settled case law in France that the absorbing company could not be held criminally liable for acts committed by the absorbed company prior to the merger, except in cases of fraud.
This reasoning stemmed from a literal application of the provisions of articles 121-1 and 6 of the French Criminal Code, according to which “no one is liable other than for his own act” and which subordinate the exercise and pursuit of public prosecution to the fact that the defendant remains alive.
This approach makes perfect sense when applied to naturel persons, to whom the notions of life and death easily echo. However, it can be criticized when transposed to legal persons, because their disappearance can be organized and does not have the same economic consequences.
This position was adopted by the Court of Justice of the European Union in a decision dated March 5, 2015 (n°343/13), admitting, based on the European directive known as the “Domestic Mergers” directive of October 9, 1978, which aims at standardizing the regimes applicable to mergers of public limited liability companies, that an absorbing company may be required to pay a fine for acts committed by the absorbed company.
This stance, which had been rejected by the French courts until now, has finally been upheld by the Court de Cassation.
Indeed, the dissolution of a legal person is not similar to that of a natural person, especially when it occurs on the occasion of a merger operation.
As the Cour de Cassation reminds us, such an anthropomorphic approach does not stand up to a factual and, to say the least, logical examination of the differences between the death of a natural person and the dissolution of a legal person.
Furthermore, a merger by absorption leads to the transfer of the absorbed company assets to the absorbing company, so that the terminated company continues to have an economic existence, carried by the absorbing company.
This reversal of decision may therefore seem understandable in that it adopts an approach correlated with economic reality and puts an end to a doctrine based on an analogy between the death of a natural person and the dissolution of a legal person.
Nevertheless, the scope of this judgment deserves to be clarified in respect of the fact that it only applies to public limited liability companies, covered by the European directive, and to simplified joint stock companies (French société par actions simplifiée) whose regime is inspired on the former. The fact remains that the range of sanctions to which the acquiring company may be condemned is relatively limited, concerning only fines and confiscation.
Finally, in accordance with the principle of foreseeability of Article 7 of the European Convention on Human Rights, this case law will only be applicable to mergers occurring after November 25, 2020.
The Court points out that the transfer of criminal liability from an absorbed company to an acquiring company may also take place on the basis of fraud, independently of the application of the Domestic Mergers Directive.
Hence, whereas the said Directive only affects joint stock companies, other corporate forms could be subject to a transfer of criminal liability, when the merger by absorption operation had the purpose of exempting the absorbed company from its criminal liability.
Finally, the transfer of criminal liability analyzed under the prism of fraud is much more complete than the one resulting from the Domestic Merges Directive insofar as it deals with any sanction applicable to a legal person, without limitation only to sanctions of a patrimonial nature (fines and confiscation in particular).
Arst Avocats advises its clients in the following matters related to business law:
- Advice on the regulations applicable to the client. Dealing with a wide range of issues relating to Contract Law (contract law or special contract law and contractual or tortious liability) and intervenes at the various stages (negotiation, conclusion, execution and termination) of the contractual relationship between the company and its partners or clients;
- Intervention at all stages of disputes with which the company is confronted within the framework of its activity and represents it, if necessary, before the competent courts or within the framework of alternative dispute resolution procedures (mediation, arbitration, et seq.).
Company law, business creation and transfer of business
Arst Avocats advises its clients in the following matters:
- in the creation of companies;
- at all stages of a company’s life, from its incorporation to its dissolution, for the realization of the simplest to the most complex operations (split, merger, listing on a stock market, et seq.);
- in the context of the acquisition or disposal of a company, whatever its form (transfer of business or corporate rights assignment) as well as operations that precede or follow it;
- in the implementation of agreements organizing relations between the company’s shareholders (shareholders’ agreement, employee shareholding schemes).
Lawyer at the Paris Bar. Admitted to the Paris Bar since 1999. Holder of a Master’s degree (D.E.A.) in Contract Law from the Jean Monnet University of Law (Paris XI).
Lawyer at the Paris Bar.