Corporate criminal liability and merger deals: a major overturn

Traditionally, pursuant to the fundamental principle of personality of criminal liability, only the author of a criminal offence can be prosecuted and punished for it (Article 121-1 of the French Criminal Code). So far, this principle led to excluding criminal liability when a legal person ceases to exist. Thus, the criminal liability of an absorbing company could not be sought for acts committed by the absorbed company prior to the transaction. In both situations, the absorbed or merged companies that have legally disappeared could not be either prosecuted nor sentenced.

On Wednesday 25 November 2020 - in a case concerning a company involved in an accident nearly two decades ago, before it was absorbed - the Criminal division of the French Supreme Court ("Cour de Cassation") ruled that in the case of a merger by absorption the absorbing company can face criminal fines or confiscation for an offence committed by the target before the transaction (Cour de cassation, criminal division, 25 November 2020, 18-86.955).

The judges of the Criminal division of the Cour de cassation grounded their reversal position on a recent and significant ruling from the European Court of Justice (ECJ, 5 march 2015, aff. C-343/13) in which the ECJ was requested to interpret the Third Council Directive 78/855/EEC of 9 October 1978 (now Directive (EU) 2017/1132 of 14 June 2017) concerning mergers of public limited liability companies (Sociétés Anonymes). Under the Directive, a merger by absorption involves the transfer of all of the absorbed company's assets and liabilities to the absorbing company. The ECJ has considered that a fine fixed after the merger by absorption for offences committed prior to the merger by the absorbed company, enters in the passive assets of the absorbing company. Note that the Cour de cassation also based its position on a ruling from the European Court of Human Rights (ECHR, 24 October 2019, aff. 37858/14).

Nevertheless, it is worth mentioning that the Criminal division of the Cour de cassation has set some limits on the extent and impact of this transfer of criminal liability:

• Firstly, it is limited by the judges to mergers falling within the scope of the EU Directive on the merger of public limited liability companies (Sociétés Anonymes), since it is the aforementioned EU Directive, as interpreted by the ECJ, which grounds such a criminal liability transfer. In this respect, it should however be noted that the Directive on mergers of public limited companies (Sociétés Anonymes) also applies to simplified joint-stock companies (Sociétés par Actions Simplifiées);

• Secondly, only fines and confiscation penalties can be imposed on the absorbing company;

• Thirdly, defence rights are also transferred to the absorbing company meaning that it will be granted the same rights as the absorbed company.

Note that this new precedent will only apply to merger deals closed from 25 November 2020.

Furthermore, the Cour de cassation also gives a useful clarification regarding the impact of a fraud against the law committed in the course of a merger transaction. In this respect, the judges ruled that the existence of a fraud against the law allows the judge to pronounce any criminal sanction incurred against the absorbing company when the merger by absorption aimed at exempting the absorbed company from its criminal liability. The Cour de cassation specifies that this is not a reversal of case law and its position was not unforeseeable. Therefore, it applies immediately, including to previously closed mergers.

With regards to the criminal liability of natural persons, it is worth recalling that a merger by absorption has no effect on the conditions governing their criminal liability, including the management of the absorbed companies, who have taken part in an offence before the transaction. Consequently, if these natural persons have taken part in criminal offences before the absorption, their criminal liability may still be sought after the transaction, subject to the statute of limitations for public action.

It should be noted that this reversal in the case-law of the Criminal division of the Cour de cassation is part of a convergent movement in France as it joins the case-law of the Commercial division of the Cour de cassation, the administrative case law of the Conseil d'Etat and the case-law of the Conseil Constitutionnel (Cons. const., 18 May 2016, no. 2016-542).

Do not hesitate to contact us for more details.