What is dead may never die: transfer of criminal liability from absorbed company to absorbing company following a merger
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Emmanuel Moyne
Bougartchev Moyne Associés AARPI, Paris
emoyne@bougartchev-moyne.com
Nima Haeri
Bougartchev Moyne Associés AARPI, Paris
nhaeri@bougartchev-moyne.com
Hubert Pouradier-Duteil
Bougartchev Moyne Associés AARPI, Paris
hpouradier@bougartchev-moyne.com
The facts
The disputed facts were the following: a company, charged with involuntary destruction by fire, had been absorbed by another company as part of a merger consolidation. The absorbing company criticised the Court of Appeal’s decision for having ordered additional information (supplément d’information) in order to assess whether the merger absorption had been entered into with fraudulent intent to exempt the absorbed company from its criminal liability.
The legal issues
The Cour de cassation identifies three legal issues respectively relating to: (1) the principle of transfer of criminal liability; (2) its application over time, and (3) the merger entered into with fraudulent intent. The issue at stake is whether, in the event of a merger absorption, the absorbing company might be convicted for offences committed by the absorbed company, prior to the merger.
The Court’s decision
The Cour de cassation ruled that in the event of a merger absorption falling within the scope of the Council Directive 78/855/EEC of 9 October 1978 concerning mergers of public limited liability companies (sociétés anonymes), now part of the codified Directive 2017/1132 of the European Parliament and of the Council of 14 June 2017, the absorbing company might be subject to a criminal penalty of a fine or forfeiture for offences committed by the absorbed company prior to merger.[1]
In its detailed ruling, the Cour de cassation reviewed its previous case law and explained the reasons for this reversal. In addition to its decision, the Court issued a press release,[2] an explanatory note,[3] and the report[4] of the Avocate General (avocat général) in an attempt to gain acceptance of what is turning out to be a serious threat to companies considering acquiring other companies by merger absorption.
Despite the Cour de cassation’s explanation of its reversal, the application of the ruling remains both legally questionable and economically concerning.
The reasons for the reversal of case law put forward by the Cour de cassation
An established case law initially opposed to the transfer of criminal liability
Prior to the decision of 25 November 2020, the Cour de cassation interpreted the principle of personal criminal liability as that set out in Article 121-1 of the French Penal Code. According to the Code, ‘no one is criminally liable except for his own conduct’, which is given a constitutional value under French law. This prohibits the transfer of criminal liability in the event of a merger absorption.[5]
This interpretation of Article 121-1 was explained by the fact that the Cour de cassation equated the dissolution of a legal entity with the death of a natural person. For natural persons, Article 6 of the French Code of Criminal Procedure provides that: ‘Public prosecution for the imposition of a penalty is extinguished by the death of the defendant.’ Consequently, according to the Criminal Chamber, the absorbing company, which is a separate legal entity, could not be prosecuted for the acts committed by the absorbed company.[6] This solution seemed logical and in compliance with the French fundamental rule of personal criminal liability.
Furthermore, the interpretation of the Cour de cassation was supported by the case law of the European Court of Human Rights (ECHR) which, based on Article 6, section 2 of the European Convention on Human Rights (ECHR), had affirmed that: ‘It is a fundamental rule of criminal law that criminal liability does not survive the person who has committed the criminal act.’[7]
The influence of the European courts
Consequently, the Cour de cassation considers that the comparison between the dissolution of the absorbed company and the death of a natural person is ‘unrelated to the economic reality’.[8] On the contrary, the Criminal Chamber emphasises ‘the specificity of the legal person, which can change legal form without being liquidated’.[9] This significant shift is due to the case law of the Court of Justice of the European Union (CJEU) and the ECHR.
The influence of the CJEU
On the one hand, in a decision of 5 March 2015,[10] the CJEU interpreted the Directive on the merger of public limited liability companies as meaning that a merger absorption results in the transfer to the absorbing company of the obligation to pay a fine imposed after this merger for offences committed by the absorbed company prior to the merger.
However, as stated by the Cour de cassation, this case law alone could not trigger an evolution in national law. Indeed, the interpretation of national law in conformity with EU law must not lead Member States to make the provisions of a directive produce a direct effect against an individual.
The influence of the ECHR
On the other hand, in a recent decision, the ECHR ruled that ‘the absorbed company is not really “third party” in relation to the absorbing company’,[11] therefore basing its reasoning on the economic continuity of the absorbed company after the merger.
In this case,[12] the ECHR ruled that imposing a civil fine to an absorbing company for acts committed by the absorbed company does not infringe the principle that the penalties must be specific to the offender.
Consequently, the Cour de cassation had the possibility of giving a new interpretation to Article 121-1 of the Penal Code, in a way that respects the provisions of Article 6.2 of the ECHR newly interpreted by the ECHR. Therefore, the Cour de cassation could definitively adopt the interpretation of the CJEU in its decision of 5 March 2015: the Directive on the merger of public limited liability companies may be interpreted as meaning that a merger absorption results in the transfer to the absorbing company of the criminal liability of the absorbed company.
A reversal, subject to conditions, that entails significant consequences and risks
The conditions of application of the transfer of criminal liability
The conditions relating to the form of the companies and the nature of the penalty
In its decision, the Cour de cassation restricts the effects of the reversal to mergers falling within the scope of Council Directive 78/855/EEC of 9 October 1978 concerning mergers of public limited liability companies. Nonetheless, simplified joint-stock companies (sociétés par action simplifiées) are affected by the transfer of liability because they are largely subject to the provisions laid down for public limited liability companies.[13]
Other companies should also be very cautious as such case law might end to be extended to all corporate forms.
However, the Cour de cassation suggests that the absorbing company may only incur penalties of a patrimonial nature (fine or forfeiture). On the one hand, the decision only refers to such penalty. On the other, the explicative notice delivered concurrently – which does not have any normative value – specifies that the transfer of liability shall only apply to fines and forfeitures, excluding per sethe various penalties that legal entities are subject to, including exclusion from public procurement. Despite this limitation, companies should remain cautious. The commented decision is a first of its kind, and its extension to all sorts of penalties is a question that will most certainly arise in forthcoming cases.
Finally, the decision specifies that the absorbing companies that might be convicted have the same rights as the absorbed company and can therefore raise the means of defence that the absorbing company could have raised. This is the least a respectable defence lawyer would have expected.
The conditions relating to the application over time
In accordance with the principles of legal certainty and predictability,[14] the Cour de cassation restricts the effects of this new interpretation of Article 121-1 of the Penal Code to merger closed after 25 November 2020. In other words, a company that has absorbed, before the date of the decision, another company having committed offences, cannot be held responsible for the acts of the absorbing company.
Exception
There is, however, an exception to this principle. For the first time, the Court ruled that when a merger transaction has been entered into in order to exempt the absorbed company from its criminal liability, it constitutes a fraudulent evasion of the law (fraude à la loi) and the judge may pronounce a criminal penalty against the absorbing company. As this principle was not unpredictable, it applies immediately.
As a result, regardless of the form of the company (public limited liability company or simplified joint stock company) or the date of the merger, if the merger constitutes a fraudulent evasion of the law, the absorbing company will not escape the transfer of the criminal liability of the absorbed company.
The legal and economic concerns
A decision legally dubious
First, it seems absurd that a person should be required to explain themselves on acts that they did not commit. The Cour de cassation, in the light of the case law of the ECHR,[15] indicates that the economic and functional continuity of the absorbed legal entity ‘leads to not considering the absorbing company as being distinct from the absorbed company’.[16] By using this negative turn of phrase, the Cour de cassation does not assert that the absorbing company is equivalent to the absorbed company, which would be a legal nonsense. Indeed, from a legal point of view, the merger absorption leads to the dissolution of the absorbed company, whose legal personality ceases to exist.[17]
Moreover, in our view, this solution goes against Article 121-2 of the French Penal Code which states: ‘Legal persons […] are criminally liable for offences committed on their behalf by their organs or representatives’. Yet, it turns out that the offence committed by the absorbed company, prior to the merger, is not committed on behalf of the absorbing company.
A decision economically detrimental
Second, from an economic point of view, the reversal of case law is likely to discourage ongoing mergers. In response to this legitimate concern, the Cour de cassation reiterates the CJEU’s arguments[18] and asserts that the shareholders of the absorbing company can be protected by liability guarantee clauses and due diligences over the target company. This is hardly enough to reassure companies. Indeed, no guarantee clause will be able to offset a criminal conviction with registration in the criminal record.
Furthermore, this new ruling is to be read in the light of limitation period under French law. Article 9-1 of the French Code of Criminal Procedure created by the 2017 reform states that the limitation period of ‘occult offences’ (infractions occultes)[19] and of concealed offences (infractions dissimulées)[20] – such as money laundering, fraud or bribery – runs from the day on which these offences could be discovered under circumstances enabling public prosecution. In such a case, the limitation period may not exceed 12 years from the day on which the major offence was committed. Therefore, if an imperceptible or concealed offence is discovered by the authorities 11 years after a merger absorption, the absorbing company may very well be prosecuted for an offence it did not commit.
In-depth due diligences
This decision will undoubtedly lead to the reinforcement of due diligence that will amount to an in-depth audit of the target company. Obligation of quasi-result might as well be required from law firms in charge of the due diligence, whose signature will be fraught with consequences. In this respect, it shall be crucial to work with criminal lawyers familiar with such an exercise.
Although, in future, some might imagine a loophole by excluding merger absorption and entering into mere acquisitions – the acquired legal person remaining in this case solely criminally liable for its previous acts – the issue of concealment or laundering that some authorities might wish to pursue in the person of the acquirer arises.[21]
The French lawmaker has significantly strengthened its mechanisms for fighting corruption, influence peddling and related offences, notably with the establishment of the public interest judicial convention (convention judiciaire d’intérêt public), as well as its international jurisdiction. With this reversed case law, enhanced due diligence is now required more than ever in an ever-increasing number of mergers, anticipation remaining the key to success.
Notes
[1] Cour de cassation, Crim Ch, 25 November 2020, No 18-86.955, available at: www.courdecassation.fr/jurisprudence_2/chambre_criminelle_578/2333_25_45981.html.
[2] Cour de cassation, Crim Ch, judgment No 2333 of 25 November 2020, available at: www.courdecassation.fr/jurisprudence_2/communiques_lies_activite_juridictionnelle_8004/penale_entre_9943/lire_communique_45982.html.
[3] Cour de cassation, Crim Ch, Explanatory note on the Judgment of 25 November 2020, No 18-86.955 (merger-absorption), available at: www.courdecassation.fr/jurisprudence_2/notes_explicatives_7002/relative_arret_45990.html.
[4] Cour de cassation, Opinion of Mr Renaud Salomon, General Advocate, Judgment No 2333 of 25 November 2020 – Appeal No P1886955, available at: www.courdecassation.fr/IMG///2020-11-25_arret_CR_avis_18-86.955.pdf.
[5] See, Cour de cassation, Crim Ch, 20 June 2000, No 99-86.742; Cour de cassation, Crim Ch, 15 October 2003, No 02-86.376, referred to in the decision.
[6] Cour de cassation, Crim Ch, 25 November 2020, No 18-86.955, section 19.
[7] ECHR, Case of E L, R L and J O-L v Switzerland, 29 August 1997, No 75/1996/694/886, section 53.
[8] Cour de cassation, Crim Ch, 25 November 2020, No 18-86.955, section 21.
[9] Ibid.
[10] CJEU, 5 March 2015, Modelo Continente Hipermercados SA v Autoridade para as Condições de Trabalho, C-343/13.
[11] ECHR, 24 October 2019, Carrefour France v France, No 37858/14, section 48.
[12] Ibid.
[13] Article L.227-1 of the French Commercial Code: ‘To the extent that they are compatible with the special provisions provided for in this chapter, the rules governing public limited liability companies, [...] are applicable to the simplified joint stock company.’
[14] Article 7 section 1 of the ECHR: ‘No one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence under national or international law at the time when it was committed. Nor shall a heavier penalty be imposed than the one that was applicable at the time the criminal offence was committed.’
[15] ECHR, 24 October 2019, Carrefour France v France, No 37858/14.
[16] Cour de cassation, Crim Ch, 25 November 2020, No 18-86.955, section 25: Ainsi, la continuité économique et fonctionnelle de la personne morale conduit à ne pas considérer la société absorbante comme étant distincte de la société absorbée […].
[17] Article L.236-3 of the French Commercial Code: ‘The merger or demerger leads to the dissolution without liquidation of the companies which disappear […]’.
[18] Cour de cassation, Crim Ch, 25 November 2020, No 18-86.955, section 33.
[19] Defined by Article 9-1 of the French Code of Criminal Procedure as ones ‘which, because of its constitutive elements, cannot be known either by the victim or by the judicial authority’. For instance, the French Court of cassation ruled that the offence of money laundering is an instantaneous but occult offence when it consists in facilitating the false justification of the origin of property or income or in assisting in an operation to conceal the proceeds of an offence. Consequently, the starting point of the limitation period should be postponed to the day on which the offence is revealed (French Court of Cassation, Crim Cha, 11 September 2019, No 18-81.040).
[20] Defined by Article 9-1 of the French Code of Criminal Procedure as ones ‘of which the perpetrator deliberately carries out any characterised means aiming to prevent its discovery’.
[21] See in this regard the Practice Guide entitled Les Vérifications anticorruption dans le cadre des fusions acquisitions, published by the AFA (the French Anti-corruption Agency), January 2020, p 7. Due to the reversal of case law, this guide will almost certainly shortly be updated.
[22] Cour de cassation, Crim Ch, 25 October 2016, No 16-80.366 that asserted that: ‘Article 121-1 of the Penal Code can only be interpreted as prohibiting the initiation of criminal proceedings against the absorbing company for acts committed by the absorbed company before the latter loses its legal existence’.