On 25 November 2020, the Criminal Chamber of the Cour de Cassation (French judicial Supreme Court) issued a major reversal of its case law, ruling that in the event of a merger by acquisition [1], the criminal liability of the acquiring company could be incurred for acts committed by the acquired company before the merger.
In the present case, a company was summoned as a defendant in front of the Criminal Court for unintentional burning of property belonging to another, consequence of a breach of the legal duty of safety or caution required by law.
However, it appeared that the company had been acquired by merger by acquisition prior to the trial which therefore cannot proceed as the acquired company dissolved.
According to the long-standing case law of the Cour de cassation based on article 121-1 of the French Penal Code, an acquiring company cannot be prosecuted and convicted for offenses committed prior to the merger by the acquired company.
However, in its decision of 25 November 2020, the Criminal Chamber of the Cour de Cassation reversed its case law, ruling that the acquired company transfers its liabilities to the acquiring company in the event that the merger transaction falls under the scope of the European Directive 78/855/EC related to mergers of public limited liability companies.
This ruling is a result of the decision rendered by the European Court of Human Rights on 24 October 2019 ruling the existence of the economic and operational continuity between the acquired company and the acquiring company which excludes a distinction between their criminal liabilities.
However, the transfer remains limited. The acquiring company can only be condemned to a financial sanction such as a fine or confiscation.
Furthermore, the Criminal Chamber of the Cour de cassation establishes a specific regime for cases where the merger by acquisition is solely designed to avoid criminal liability of the acquired company. This regime applies to all companies, whether or not they fall under the scope of the European Directive.
In such cases, financial sanctions may be combined with additional sanctions, such as the dissolution of the company, debarment from public procurement, etc.
It therefore appears that it is henceforth essential to strengthen due diligence verifications regarding the situation of the acquired company, prior to any merger by acquisition, in order to establish the risk incurred by the acquiring company with certainty.
In the event of a criminal risk relating to the acquired company, a thorough analysis of the facts and the context of the merger by acquisition shall become good practice. Especially since the interpretation of this landmark decision and the concept of fraud by French courts remains uncertain.
- Specific caution must be observed regarding the risk of criminal liability of public limited liability companies
- Especially in cases where the merger by acquisition could be deemed designed to avoid criminal liability
