In a decision handed down on 22 May 2024 (no. 23-83.180), the Criminal Division of the French Supreme Court, the Cour de cassation, ruled that the criminal liability of a company absorbed in a merger context, is transferred to the absorbing company, regardless of its corporate forme.

This decision follows a 25 November 2020 decision of the Cour de cassation, which held for the first time that the criminal risk of the absorbed company could be passed on to the absorbing company if the latter was a joint-stock company (société anonyme) or a simplified joint-stock company (société par actions simplifiées) (I).

In this case, a limited liability company, i.e. société à responsabilité limitée or SARL, was held liable of numerous criminal offences under urban planning law in 2021. In 2022, this company was absorbed by another SARL. In 2023, the Court of Appeal confirmed the lower court’s decision and held the absorbing company liable for offences committed by the absorbed company prior to the merger by absorption.

The absorbing company referred the matter to the Cour de cassation, claiming, based on the criteria laid down by the Criminal Division in its decision of 25 November 2020, that the absorbing company could not be held liable, given that the latter, incorporated as a SARL, did not fall within the scope of Council Directive 78/855/EEC of 9 October 1978 on mergers of joint-stock companies, as last codified by Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 (“Directive 78/855/EEC”).

The Cour de cassation dismissed the appeal, abandoning the criteria regarding the form of the absorbing company. It decided that the absorbing company was liable for the offences committed by the absorbed company, although the companies were both incorporated as SARLs (II).

I.      Until 2024, the transfer of criminal liability following a merger was limited to certain types of companies based on their corporate forms

Until the 25 November 2020, the Criminal Division of the Cour de cassation held that the French principle of individuality of offences and penalties prevented the transfer of criminal liability from the absorbed company to the absorbing company following a merger by absorption. Judges based their decisions on a strict interpretation of article 121-1 of the French criminal code, according to which no-one is responsible for anything other than their own actions.[1]

However, this strict interpretation was conflicting with former decisions handed down by the Commercial Division of the Cour de cassation or the Conseil d’État, as well as by supranational courts.[2] The Court of Justice of the European Union considered that the liability of the absorbed company should be transferred to the absorbing company[3] and the European Court of Human Rights deemed that a civil fine could be imposed on the absorbing company for acts committed by the absorbed company prior to a merger by absorption, without infringing the principle of individuality of offences and penalties, on the basis of the economic and functional continuity between the absorbed company and the absorbing company.[4]

In the 25 November 2020, the Criminal Division of the Cour de cassation reversed its prior position to align its case law with that of these courts. It admitted, on the basis of the economic and functional continuity laid down by the European Court of Human Rights, that when a merger by absorption occurs, the criminal liability of the absorbed company is transferred to the absorbing company when the operation falls within the scope of Directive 78/855/EEC.[5] In this case, only a fine or confiscation may be imposed on the absorbing company, which enjoys the same rights as the absorbed company and may rely on any defenses that the latter may have raised.[6] The Cour de Cassation also specified that this position would only apply to mergers by absorption concluded after 25 November 2020, for reasons of legal predictability arising from article 7 of the European Convention on Human Rights.

Although this decision allowed criminal liability to be transferred following a merger by absorption, it was limited to companies falling within the scope of Directive 78/855/EEC, i.e. joint-stock companies (sociétés anonymes) and simplified joint-stock companies (sociétés par actions simplifiées).

The Cour de cassation provided for only one exception to this principle, if the merger operation, regardless of its date or the corporate form of the companies involved, was intended to shield the absorbed company from criminal liability. In such a case, the transaction is fraudulent in this respect which entails the de facto criminal liability of the absorbing company and any penalty incurred may be imposed.[7] In this regard, a decision of 13 April 2022 clarified that criminal courts are required to investigate whether mergers by absorption between sociétés anonymes and sociétés par actions simplifiées carried out before 25 November 2020 were legitimate or fraudulent, to assess whether criminal liability should pass on the absorbing company.[8]

II.   The 22 May 2024 decision handed down by the Criminal Division of the Cour de cassation broadens the scope of the transfer of criminal liability from the absorbed company to the absorbing company to all companies regardless of their corporate form.

The 22 May 2024 decision handed down by the Criminal Division of the Cour de cassation broadens the scope of the transfer of criminal liability in the event of a merger by absorption.

In this case, a merger by absorption had been concluded between two SARLs after 25 November 2020 and was unrelated to any fraudulent situation.

To establish the criminal liability of the absorbing company, the Court of Appeal had considered, in accordance with the criteria set out in the decision of 25 November 2020, that the absorbing company fell within the scope of Directive 78/855/EEC.

The defendant company challenged this analysis, arguing that, in light of the criteria set out in the 25 November 2020 decision, in the event of a merger by absorption, only the two aforementioned hypotheses allowed the absorbing company to be held liable for acts committed by the absorbed company prior to the merger, which could only concern joint-stock and simplified joint-stock companies.[9]

Although the Cour de cassation censured the Court of Appeal for holding that the SARL fell within the scope of Directive 78/855/EEC, it did not overturn the decision and finally rejected the criterion related to the corporate form of the company. On the basis of the economic and functional continuity of the legal person, the Court now considers that the transfer of criminal liability applies irrespective of the corporate form of the company involved in the merger by absorption.[10]

Although criminal liability is now transferred regardless of the corporate form of the company involved in a merger by absorption operation, the other criteria set out in the 25 November 2020 decision remain applicable.

As a result, except in the case of fraud, the criminal liability transfer only applies to mergers closed after 25 November 2020. Besides, the only penalties applicable are fines or confiscation, and the absorbing company may rely on any defenses that the absorbed company may have raised.[11] Similarly, in the event of a fraudulent transaction, the absorbing company may be held liable for offences committed by the absorbed company prior to the merger by absorption operation, regardless of the date on which the transaction was concluded.