U-turn: France aligns with US criminal successor liability

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Alexandre Bisch
Debevoise & Plimpton, Paris
abisch@debevoise.com

Aymeric Dumoulin
Debevoise & Plimpton, New York
addumoulin@debevoise.com

On 25 November 2020, France’s highest judicial court, the Court of Cassation, issued a landmark decision[1] whereby public limited liability companies may now be held criminally liable for previous criminal conduct of companies they acquire through ‘mergers by acquisition’.[2] This decision is a reversal of existing case law and results in the alignment of French jurisprudence on the Anglo-Saxon doctrine of criminal successor liability.

Importantly, such a reversal is likely to create an increased post-merger criminal liability risk for acquiring companies and a corresponding incentive to enhance pre-merger due diligence efforts.

The US perspective

For decades, United States courts have applied criminal successor liability in connection with mergers, where the acquired company is dissolved and consolidated within the acquiring company – the equivalent of France’s ‘merger by acquisition’. Successor liability has become an integral component of corporate law and, inter alia, it prevents companies from avoiding liability by reorganising.

Historically however, criminal liability was attached to the corporate form. If the corporate form was dissolved, then it amounted to the equivalent of the death of natural people, and criminal liability could no longer apply.[3] Although there is still no federal common law of successor liability in the US, state practice and state courts have applied criminal successor liability since the late 1950s.[4] It is now settled in the US – in the context of consolidations – that criminal liability survives a merger or consolidation and attaches to the resulting corporate successor.

In their reasoning, the judges of the French Court of Cassation followed that same pattern, 60 years later.

The context in France

In the context of ‘mergers by acquisition’, France’s highest courts had already ordered acquiring companies to pay civil or regulatory fines for pre-merger breaches of competition, capital markets or tax regulations committed by an acquired company. But in the specific context of criminal matters, the Court of Cassation had always decided that an acquiring company cannot be prosecuted for the criminal conduct of a company it had acquired by merger. The Court was applying the principle that a company can only be held criminally liable for its own actions; and it was ruling that the acquiring company was to be viewed as a different legal entity than the acquired company.

In recent years, however, the Court of Justice of the European Union (CJEU) and the European Court of Human Right (ECHR) rendered two important decisions. Both cases influenced the Court of Cassation’s long-standing reasoning.

On 5 March 2015, the CJEU ruled that the Directive (EU) 2017/1132 relating to certain aspects of corporate law must be interpreted as meaning that a merger by acquisition results in the transfer to the acquiring company of the obligation to pay a fine imposed by a final decision issued post-merger for infringements of employment law committed pre-merger by the acquired company.[5]

On 24 October 2019, the ECHR held that a company merged by acquisition was not truly ‘another’ entity in relation to the surviving company. The ECHR concluded that in ordering the acquiring company to pay a fine for pre-merger acts committed by the acquired company, French courts had not breached the rule that a sanction should be imposed on the offender only and not to third parties.[6]

France’s new approach

Drawing on these two decisions, the Court of Cassation reconsidered its longstanding case law. The Court acknowledged the existence of an ‘economic and operational continuity’ between merged companies. It decided that an acquiring company should therefore not be deemed different from an acquired company. Consequently, an acquiring company may be held criminally liable for an acquired company’s pre-merger criminal conduct.

The Court also noted that the absence of prosecution of the acquiring company would contradict the nature of merger by acquisition. According to the Court, such a merger consists of the transfer of the acquired company’s entire assets and liabilities to the acquiring company. The Court also noted that if the transfer of such liability were excluded, a merger would constitute a means for a company to avoid criminal liability by reorganising.

The main consequences of this key decision are:

  • The ruling covers merger by acquisitions closed after 25 November 2020 of public limited liability companies falling within the scope of Directive (EU) 2017/1132. In France, the very commonly used sociétés anonymes and sociétés par actions simplifiées are covered.
  • The acquiring company may raise any defence that would have been available to the acquired company.
  • The ‘only’ criminal sanctions that can be imposed on the acquiring company are fines and forfeiture, to the exclusion of the various other criminal sanctions available under French law, including the disbarment from public procurement.
  • Where the purpose of a merger was to escape criminal liability, courts may always impose all available criminal sanctions on the acquiring company, irrespective of the date of the merger and the corporate form of the companies.

Outlook

Corporations contemplating ‘merger by acquisition’ deals should now factor in this additional risk of criminal sanctions when performing their due diligence and negotiating disclosure and warranties clauses. This is particularly true in a context where French enforcement authorities are eager to prosecute companies for white-collar crimes – in particular corruption, tax fraud and money laundering – and where French criminal courts now impose blockbuster criminal fines.

In this new context, it is expected that the French Anti-corruption Agency will alter its guidelines of 17 January 2020 regarding due diligence for mergers and acquisitions, which unequivocally state that criminal successor liability does not apply to mergers or consolidations.[7] French practitioners are likely to welcome revised guidelines from French authorities on the use of the French-style deferred prosecution agreement, to include guidance on successor liability.[8] Both editions of the US Department of Justice’s and the Securities & Exchange Commission’s FCPA Resource Guide do in the anti-corruption context, and provide much needed comfort on the diligences required, hopefully to avoid prosecution, as a function of the type of corporate transaction.[9]

Future acquiring companies should also now go beyond that criminal liability risk and pay attention to the scope of their civil liability insurance policies. In another key decision of 26 November 2020, the Court of Cassation reminded that, in ‘merger by acquisition’ deals, the acquired company’s civil liabilities are automatically transferred to the acquiring company. Notably, the Court ruled that, unless otherwise provided in the policy, the acquiring company’s insurance contract covers the liability of that company only, and not of any acquired company.[10]

 


[1] Cass Crim, 25 November 2020, No 18-86.955.

[2] Article 89 of Directive (EU) 2017/1132 relating to certain aspects of company law defines such a ‘merger by acquisition’ as ‘the operation whereby one or more companies are wound up without going into liquidation and transfer to another all their assets and liabilities in exchange for the issue to the shareholders of the company or companies being acquired of shares in the acquiring company and a cash payment, if any, not exceeding 10% of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value.’

[3] Okla Nat Gas Co v Oklahoma, 273 US 257, 259 (1927) (‘It is well settled that at common law and in the federal jurisdiction a corporation which has been dissolved is as if it did not exist, and the result of the dissolution cannot be distinguished from the death of a natural person in its effect.’)

[4] See, eg, Melrose Distillers, Inc v United States, 359 US 271, 274 (1959) (affirming criminal successor liability for antitrust violations); United States v Alamo Bank of Texas, 880 F 2d 828, 830 (5th Cir 1989) (affirming criminal successor liability for Bank Secrecy Act violations and holding that a corporation ‘cannot escape punishment by merging with another [corporation]’); United States v Polizzi, 500 F 2d 856, 907 (9th Cir 1974) (affirming criminal successor liability in connection with a merger for conspiracy and Travel Act violations); United States v Shields Rubber Corp, 732 F Supp 569, 571-72 (W D Pa 1989) (permitting criminal successor liability for customs violations); see also United States v Mobile Materials, Inc, 776 F 2d 1476, 1477 (10th Cir 1985) (allowing criminal post-dissolution liability for antitrust, mail fraud, and false statement violations).

[5] Judgment of the Court (Fifth Chamber) of 5 March 2015 (request for a preliminary ruling from the Tribunal do Trabalho de Leiria – Portugal) – Modelo Continente Hipermercados SA v Autoridade para as Condições de Trabalho Centro Local do Lis (ACT), Case C-343/13.

[6] ECHR Carrefour France v France, case No 37858/14.

[7] Agence Française Anticorruption, Les Vérifications Anticorruption dans le Cadre des Fusions Acquisitions, at 7, see www.agence-francaise-anticorruption.gouv.fr/fr/guide-pratique-verifications-anticorruption-dans-cadre-des-fusions-acquisitions accessed 12 January 2021.

[8] Guidelines on the implementation of the convention judiciaire d’intérêt public, see www.agence-francaise-anticorruption.gouv.fr/files/files/EN_Lignes_directrices_CJIP_revAFA%20Final%20(002).pdfaccessed 12 January 2021.

[9] See Debevoise & Plimpton LLP’s ‘In Depth’, see www.debevoise.com/insights/publications/2020/07/us-enforcement-agencies-release-second-edition accessed 12 January 2021.

  [10] Cass Civ, 26 November 2020, No 19-17.824.

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