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.4
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.
2. The conditions for the transfer of criminal liability from the absorbed company to the absorbing company
If the judges of the criminal division of the Cour de Cassation hold that the criminal liability of the absorbed company may be transferred to the absorbing company, the latter subjects this transfer to strict and cumulative conditions.
- Both the absorbing and the absorbed companies must fall within the scope of Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017.
The court made reference to the case of a merger by absorption of a company by another company falling within the scope of Directive 78/855/EEC of 9 October 1978 on mergers of public limited liability companies (sociétés anonymes), as codified in article 105 of Directive (EU) 2017/1132 of 14 June 2017.
This Directive does not expressly state that simplified joint stock companies (sociétés par actions simplifiées) fall within its scope, but it is understood that the Directive applies since such companies share a number of features with public limited liability companies.7
Mergers that do not fall within the scope of this Directive therefore still appear to be subject to the above-mentioned ruling.
- The merger must have resulted in the dissolution of the absorbed company in question. As partial transfers of assets do not result in the dissolution of the transferring company, they should not be affected by the revised interpretation. Questions remain regarding corporate spin-offs – case law ruled out the transfer of criminal liability based on article 6 of the European Convention on Human Rights.8
- Only a penalty of a financial nature (fine or confiscation) may be imposed against the absorbing company insofar as the transfer of criminal liability is based on the principle of the automatic transfer of assets. Consequently, all other penalties, such as disqualification from practising, are excluded.
- The criminal division of the Cour de Cassation has specified that this revised interpretation of article 121-1 of the French Criminal Code will only apply to mergers that close after 25 November 2020, so as not to infringe the principle of legal predictability under article 7 of the European Convention on Human Rights, and on the basis that the ECHR had already ruled that the retroactive application of a reversal of case law disregards the principle of legality of criminal offences and penalties.9
3. Exception of the principle
The criminal division of the Cour de Cassation also stated for the first time that the criminal liability of the absorbing company may arise if the merger by absorption was aimed at exempting the absorbed company from its criminal liability and, in particular, from the consequences of the offences committed.
In such case, the criminal liability of the absorbing company may be upheld without it being necessary for the unlawful merger to fall within the scope of the Directive, and therefore, regardless of the form of the companies involved in the transfer.
In addition, any criminal sanction, even if not of a financial nature, may be applied in the case of an unlawful merger by absorption.
Finally, a special regime will be applicable to unlawful mergers carried out prior and subsequent to the date of the decision.
4. Conclusion
This important decision has the effect of harmonising the French and European position with regard to companies falling within the scope of Directive (EU) 2017/1132 of 14 June 2017. The revised interpretation is not without consequences, including significant consequences for future takeovers. Companies will need to be more vigilant in terms of risk prevention and bear in mind the new requirements when planning and performing merger activities.
- Cass. Crim. 25 November 2020, No. 18-86-955.
- Merger by absorption falling within the scope of Third Council Directive 78/855/CEE of 9 October 1978 on the merger of public limited liability companies, as last codified by Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017.
- Cass. Crim. 20 June 2000, No. 99-86.742 ; Cass. Crim. 14 October 2003, No. 02.86.376 ; Cass. Crim. 18 February 2014, No. 12-85.807.
- CJEU, 5 March 2015, Modelo Continente Hipermercados SA c/ Autoridade para as Condiçoes de Trabalho, C-242/13, concerning a fine imposed by a final decision after the merger arising from labour law violations committed by the acquired company prior to the merger.
- ECHR, 24 October 2019, Carrefour France c. France, No. 37858/14.
- Merger by absorption falling within the scope of Third Council Directive 78/855/CEE of 9 October 1978 on the merger of public limited liability companies, as last codified by Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017.
- Art. L. 227-1 al. 2 of the French Commercial Code.
- Court of Appeal of Paris, 14 May 1997, No. 96/85036.
- ECHR, 10 October 2006, Pessino c. France, No. 40403/02
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