Analysis
14 July 2022

Transfer of criminal liability following a merger or acquisition

In a ruling of April 13, 2022, the Court clarified the nature of the control that must be performed by judges on prosecutions against absorbing companies after its historic decision of November 25, 2020, regarding the transfer of the criminal liability of corporate entities.

 

I. The Court of Cassation departed from previous case law in the decision of November 25, 2020

In a decision rendered on November 25, 2020,[1] the Court of Cassation adopted a novel approach to the transfer of criminal liability of corporate entities in the context of merger transaction.

 

A. Previous case law

Under the previous case law, the Court of Cassation had consistently held that an acquiring company could not be prosecuted for acts committed by the acquired company before the merger transaction.[2]

The rule was based on article 121-1 of the penal code, which provides that a person is liable for his own wrongful acts,[3] as interpreted by the European Court of Human Rights (“ECHR”) in the light of Article 6 of the European Convention on Human Rights.[4]

Indeed, the Court of Cassation considered that the dissolution of the acquired company under the terms of the merger-takeover operation entailed the end of the existence of the absorbed company.[5]

Just like the extinction of the public action by the death of a natural person,[6] the dissolution of the legal personality of the absorbed company would very often lead to the termination of the prosecution.[7]

 

B. Grounds for the change in the Court of Cassation’s case law

National courts must interpret national law in a manner consistent with the directives of the European Union.[8]

The Court of Justice of the European Union (“CJEU”) held that the obligation to pay a fine resulting from acts committed and for which a final judgment has been issued, prior to a merger-absorption operation, could be transferred to the acquiring company as part of the assets and liabilities of the absorbed company.[9]

However, the Court of Cassation would not allow criminal proceedings to be brought against an acquiring company for acts committed by an absorbed company before the latter lost its legal existence.[10] As a result, there was a significant risk that companies would attempt to merge to avoid possible prosecution and criminal penalties.

Subsequently, the European Court of Human Rights (“ECHR”) has refined its appreciation of the rule according to which a person is only liable for his own wrongful acts when applied to companies,[11] allowing the French Court of Cassation to change its case law relating to the transfer of criminal liability of companies in the context of mergers operations.

Indeed, the ECHR has ruled that “the absorbed company is not really a third party with regard to the absorbing company” because of the economic continuity that exists between the companies during a merger-acquisition[12]. Thus, the ECHR considers that the conviction of the acquiring company to a civil fine, for antitrust offenses committed by the absorbed company, is compatible with the principle of the personality of penalties.[13]

 

C. Transfer of criminal liability of the absorbed company

The Court of Cassation, based on the same reasons as those raised the ECHR in the above-mentioned decision, changed its case law in a landmark decision in 2020.[14]

The Court ruled that in the event of a merger involving companies falling within the scope of European Council Directive 78/855/EEC of October 9, 1978, the acquiring company may be sentenced to a fine or confiscation penalty for offences committed by the absorbed company prior to the merger operation.[15]

Nevertheless, the transfer of criminal liability from the absorbed company to the acquiring company is only applicable to merger operations subsequent to the decision of November 25, 2020, in view of the principle of legal certainty,[16] as interpreted by the ECHR.[17] The scope of application of that new rule is restricted because it only applies to a certain type of limited companies (sociétés anonymes).[18]

Moreover, only fines and confiscation penalties may be imposed on the acquiring company, which may invoke the same rights and legal defenses as the absorbed company would have had against the accusation.[19]

Finally, the Court of Cassation pointed out that merger-absorption operations, regardless of the date and the nature of the companies involved, concluded solely for the purpose of exempting the absorbed company from its criminal liability, and to obstruct the prosecution of the company, constitute fraud. Consequently, where the merger operation has been conducted for this fraudulent purpose, a criminal court can declare an absorbing company guilty of the facts committed by the absorbed company.[20]

 

II. Clarifications of the Court of cassation in the ruling of April 13, 2022

The Court of Cassation clarified the scope of the new case law regarding the transfer of criminal liability of absorbed companies in a decision dated April 13, 2022.[21]

 

A. Practical application of the new case law

The case began in 2014 when a criminal complaint was filed for concealment of misuse of corporate assets committed by a company operating in the real estate market.[22]

However, several years before the complaint was filed, in 2005, the sole shareholder of the company had proceeded to the dissolution of the company and had transmitted all of its assets to another company over which he also had control.[23]

Since the merger-absorption occurred prior to November 25, 2020,[24] the judges had simply decided to dismiss the case. [25] This solution was consistent with the previous rule which prohibited imposing a sentence to the acquiring company for acts committed by the absorbed company.

Nevertheless, the Court of Cassation noted that, in any event, including for mergers carried out before November 25, 2020, acquiring companies may still be held criminally liable in the case where the merger-absorption operation is aimed at avoiding criminal liability.[26]

Therefore, the Court quashed the dismissal decision, considering that the Court of appeal had failed to assess whether the conditions for prosecuting the absorbing company, such as the existence of a fraudulent merger to escape criminal liability, had been met, prior to pronouncing a decision to dismiss the case.[27]

 

B. Judges’ duty to search for fraud in merger transactions completed before November 25, 2020

The Court of Cassation held that investigating magistrates are required to assess, before issuing an order of dismissal, whether the defendant company, having been the subject of a merger-absorption operation concluded before November 25, 2020, had carried out such operation to avoid criminal liability.[28]

The Court stated that the investigating magistrates, who will have to carry out the necessary investigations to ensure that a merger is based on legitimate grounds, rather than on the desire to avoid criminal prosecution, can carry out the verifications ex officio or at the request of a party.[29]

In order to determine whether there has been fraud, the investigating judge is entitled to request additional investigative acts.[30]

As for the victims of the offences committed by the absorbed company, they may directly request the magistrates to proceed with various investigative acts in order to discover the real motivations of the merger-absorption operation.[31]

 

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