Mergers and transfer of criminal liability: reversal of the case law of the criminal division of the Court of Cassation for transactions carried out after 25 November 2020

Complex Litigation & Dispute Resolution Alert | December.17.2020

Version française : Fusions-absorptions et transmission de la responsabilité pénale : revirement de la jurisprudence de la chambre criminelle de la Cour de cassation pour les opérations réalisées à compter du 25 novembre 2020

Authors: Frédéric Lalance, Alain Pietrancosta

In a decision dated 25 November 2020, the Criminal Chamber of the French “Cour de Cassation” decided to reverse its case law on the transfer of criminal liability resulting from a merger by way of absorption. Moving forward, an acquiring company may be held criminally liable for offences committed by the absorbed company.

This is an important turnaround, both theoretically and practically. First of all, it reflects a desire to move away from an anthropomorphic approach to the “death” of legal persons, hitherto assimilated to that of natural persons, in order to take greater account of economic realities, which would justify the infringement on the fundamental principle that criminal liability and sanctions are personal by nature. If it had already been stated that the criminal liability of the acquiring companies could be sought in case of fraudulent transactions or by virtue of economic offences defined in contemplation of the economic activity rather than the legal entity, it is here the very principle of this transfer that is recognized by the highest French criminal court. This ruling ends the court’s resistance to the European Court of Justice, which is attempted in a decision of October 25, 2016. It also takes into account the green light given by the Strasbourg Court on October 24, 2019, in a “Carrefour” case.

Second, this solution will necessarily affect the conduct of M&A operations. In practice, it will require the implementation of additional due diligence, in particular through a reinforcement of the legal audits prior to the merger, in order to take into account the absence of the extinction of the criminal actions initiated or likely to be initiated against the absorbed company, and consequently to better detect all the risks, including the more subtle ones, which could lead to the subsequent criminal liability of companies.

The consequences of this new interpretation are such that the Court has decided to rule out any retroactivity. Thus, in order not to undermine the principle of legal foreseeability arising from Article 7 of the ECHR, this extension of liability to acquiring companies will only apply to merger transactions concluded after the date of this judgment. The solution will only differ if the merger had been carried out fraudulently in order to avoid the criminal liability of the absorbed company.

In view of its importance and the solemnity of its announcement, this turnaround raises questions about both its legal scope and its practical consequences.

If the solution pronounced is such that its meant to apprehend all types of criminal and quasi-criminal offences attributable to a legal person, questions may arise as to the nature of the applicable penalties, more or less related to the legal personality.

Generality also seems to prevail with regard to the level of visibility of the criminal risk in question: if the cases that the judges had to hear concerned merger transactions implemented, sometimes in extremis, after the criminal risk had been revealed, to the point that one could have considered sufficient the application of the general fraus legis theory, as was suggested and advocated by the Attorney general  to the Court, such a reservation was not adopted by the judgment of November 25.

Moreover, since the transfer of criminal liability to the acquiring party is based on the idea of the economic and functional continuity of the business under a different legal guise, there are likely to be many situations in which it will be difficult to disentangle the old from the new activities. The shift from a certain legal criterion - the dissolution of a company - to a more elusive economic criterion inevitably presents a disadvantage in terms of legal certainty. In particular, this will result in difficulties in determining the quantum of financial penalties based on the turnover of the convicted company.

Finally, but the list is not exhaustive, a doubt arises as to the scope of application of the new solution regarding the operations and companies concerned. The criminal chamber bases its new solution on the obligation of interpretation which is conform with European provisions relating to "mergers" of "public limited companies» and specifies twice that this reversal applies to "mergers-acquisitions" of companies "falling within the scope of the Directive". Nor does it say that the attribution of criminal liability was intended to apply in this case to the acquiring company, which is an SAS, and explains that the theory of fraud is intended to apply to all corporate forms. However, the extent of the Court's reasoning regarding the specific nature of legal persons and the effectiveness of criminal sanctions suggests that further developments may be forthcoming.

In anticipation of future clarifications, practitioners will have to question the impact of the new case law on the structuring of acquisition transactions, which could rekindle the interest in less fashionable forms; or on the documentation of "representations" of criminal risks by representatives of the target company; and, above all, on the implementation of guarantees obtained from the managers or shareholders of the target company, when this is conceivable, or even price adjustment mechanisms, which must nevertheless be respectful of the legal limits to the insurability of criminal offences.