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On 25 November 2020, the criminal division of the French Supreme Court (Cour de Cassation) formally overturned its case law relating to the transfer of criminal liability between legal entities in the event of a merger.1 

From now on, the absorbing company may be held criminally liable and subject to a fine or confiscation in the event that the absorbed company committed any act constituting an offence prior to the merger.2

Prior to this decision, the criminal division refused to allow an absorbing company to be prosecuted for acts committed by the absorbed company, based on the principle of the individual nature of the penalties.

This unprecedented, albeit not unexpected, resolution will only apply to certain merger activities closed after 25 November 2020, unless the merger by absorption is intended to relieve the absorbed company of its criminal liability.

1. The new principle of transferring criminal liability from the absorbed company to the absorbing company

Under article 121-1 of the French Criminal Code, “no one is criminally liable other than on his own account”. The criminal division interpreted this provision as prohibiting the initiation of criminal proceedings against an absorbing company for acts that were committed by the absorbed company before it lost its legal status by way of merger.3

By contrast, in its decision of 5 March 2015, the Court of Justice of the European Union (CJEU) reached the opposite conclusion, on the basis of Third Council Directive 78/855/EEC of 9 October 1978 on mergers of public limited liability companies (sociétés anonymes) and the principle of the automatic transfer of the assets and liabilities (transmission universelle de patrimoine) of the absorbed company. 

This new interpretation of article 121-1 of the French Criminal Code was made possible by a decision of the European Court of Human Rights (ECHR) on 24 October 2019, which affirmed that, on the basis of the principle of companies’ financial and functional continuity, the French courts had not violated the principle of the individual nature of penalties by ruling that a civil fine could be imposed on the absorbing company for acts attributable to the absorbed company.5

European case law gave rise to the change in the position adopted by the criminal division of the Cour de Cassation, which considers that the absorbing company may be criminally liable to a fine or confiscation for acts constituting an offence committed by the absorbed company prior to the transaction.6

According to the court, “a merger by absorption that leads to the dissolution of the absorbed company does not result in its liquidation” and “the assets of the absorbed company are transferred in full to the absorbing company [...]. As a result, any economic activities carried out by the absorbed company, in the fulfilment of its corporate purpose, continue under the company that benefited from these activities.”

Moreover, since the activities carried out by the legal entity being absorbed are continued by the absorbing company, the latter benefits from the same rights as the absorbed company, and can thus avail itself of any defence that the latter could have invoked during the course of the proceeding.