By Charles ANSABERE, Option Droit des affaires n°560
A "surprise" decision by the French Supreme Court in November 2020 has a direct impact on certain merger and acquisition transactions. It modifies the mapping of risks incurred by the buyer.. Above all, it adds an extra dose of compliance. Here's how it works.
Does anyone remember a time when all that was needed to structure a company buyout in France was a financial audit and a few legal investigations? The fact is, those days are long gone. With the rise of private equity funds and their Anglo-Saxon-inspired practices, transactions have gradually become structured around a panoply of due diligences. These are designed to reassure the buyer as to the condition of the target.
But, for once, this inflation of analyses prior to takeovers has not come from practitioners. At the end of 2020, the French legislature ruled on an issue that has implications for the way in which such transactions are prepared. In a ruling handed down on 25 November, the Criminal Division of the French Supreme Court (Cour de cassation) ruled that, from now on, any company could be held liable for acts attributable to a company that it had absorbed. This represents a genuine change in case law, decided in the light of the Iron Mountain case.
This group was held responsible for Intradis' safety failings. Intradis, like its parent company Recall France, was acquired through a merger. In January 2002, these failings led to a fire and the involuntary destruction of property belonging to others.
Limited scope of the decision
The Court of Cassation ruling changes the situation. It tends to align the transfer of criminal, civil and administrative liability. Gone is the principle of the personality of the penalty, by virtue of which any criminal sanction was extinguished at the same time as the absorbed entity disappeared. Since the date of publication of this ruling (in keeping with the principle of legal certainty), the old practice no longer applies. But how likely is it that this decision will affect merger and acquisition transactions? In any case, the French Anti-Corruption Agency (AFA) reacted immediately to the new case law. It updated its practical guide at the very beginning of the year to incorporate this compliance obligation.
" We were in the process of updating our recommendations when the Court of Cassation ruling came down. With a view to incorporating changes in market practices into our publications, we have not only mentioned this 'reversal' of case law, but also incorporated new recommendations and risk scenarios to make them easier to understand. The AFA is a major player in this field," explains Laurence Goutard-Chamoux, AFA's Deputy Director for Consultancy, Strategic Analysis and International Affairs. " This ruling reinforces the need for companies to be vigilant "she assures us. Because that's what it's all about. Compliance has taken on a new dimension with the abolition of what was, in the final analysis, a legal safeguard. For the time being, the Court of Cassation's decision targets mergers and acquisitions between limited companies or SASs.
But it would be wrong to think that any other form of business could be unaffected. " Although this position is limited in scope, for the time being, the court has been quick to point out that it is likely to apply to any company if there is fraud, for example if the purpose of the merger was to evade a criminal penalty. "says Blandine Cordier-Palasse, founder of BCP Partners, which specialises in governance, legal recruitment and compliance.
Basic trend
It has to be said that this ruling goes in the direction of history. Some deplore the inflation of constraints transposed from the Anglo-Saxon world. Compliance issues have become part of the landscape. They have found a resonance that goes beyond corruption issues alone. " France wanted to show that it was catching up "The European Court of Human Rights (ECHR) has recently changed its position. Nonetheless, the fact remains that it is better to take the criminal risk into account when making any acquisition. Whether or not you are a company that is already aware of these issues - as are those directly affected by Sapin 2, for example.
" This important decision was to be expected. Et's part of an underlying trend," says Stéphane Alaphilippe, head of the anti-corruption and anti-fraud division in Total Energies' legal department. In terms of mergers and acquisitions, there was another decision by the Cour de cassation at the end of November last year. It clarified that the absorbing company's civil liability insurance could not guarantee a debt of the absorbed company if the debt arose from events prior to the merger. Extra caution is therefore called for in such transactions. " " There is a huge movement towards transferring responsibility to companies," points out Blandine Cordier-Palasse. In the past, it was up to the judge to show that the company had failed to meet its obligations.. Aoday, the burden of proof is reversed. "In this context, it is understandable that pre-acquisition analyses are highly recommended - if not compulsory.
Directors' criminal liability
Moreover, this additional point of attention does not only affect international groups active in sectors that are " sensitive "As you might think at first. " There's a lot of talk about legal risks. But we need to take a more global view and look at transaction risks more broadly," says Caroline Leblanc, associate managing director at Kroll. The costs of integrating an acquisition target have just potentially increased as a result of this new case law. A risk-based approach is needed to assess an operation as a whole. "
And this may concern a Franco-French group wishing to reorganise its subsidiaries for organisational or tax purposes. Not to mention the fact that you can never totally rule out the possibility of fraud being discovered at a later date in the French entity that has been absorbed. And if you think you're miles away from this problem? Simply ask yourself whether your next acquisition target is fully compliant with the RGPD.
In this case, this is just one of the issues to be reviewed. The Court of Cassation ruling transfers responsibility for all compliance issues to the acquirer: compliance with antitrust laws (in France and internationally), anti-money laundering, fraud, compliance with embargoes, issues of cybersecurity and cybercrime, and so on. All of these factors now make managers criminally liable. So what can you do?
In its guide, the AFA advocates thorough prior analysis. " It is possible to carry out a compliance or anti-corruption due diligence, even over a short period of time," explains Chloé Auffret, Director at Deloitte. In the first 15 days, the main red flags can be identified. The acquirer can intervene in the latter post-acquisition by taking corrective action. By aligning best practice between entities in this way, the acquirer will be able to demonstrate its good faith if it is subsequently audited by the AFA. "
Caroline Leblanc confirms: " You have to be pragmatic. After carrying out reputational due diligence, to get to know the target in its environment and understand its ecosystem, we can go even further. You need to ask in the data room for information on the compliance programmes already in place. It's not that time-consuming or expensive! "That said, the presence of hidden elements cannot be ruled out. In this case, the buyer should take care to adjust the purchase contract. The latter will include a specific clause in the asset/liability guarantees or even a prejudice clause. This clause will limit the risk of penal exposure, without exonerating the buyer.
Reputational risk
" Companies that have already set up robust compliance programmes are used to using such clauses. They are even in a position to use them as a competitive argument, like Tarkett.. Tarkett developed its R&D after suffering a corruption problem in Russia, or Ipsen. Ipsen has changed its corporate culture to align processes with performance and production, under the leadership of its Chief Compliance Officer. "says Blandine Cordier-Palasse.
For those who are not accustomed to exploring such issues, however, the road may be a long one... Even if it needs to be travelled more quickly now that case law has pointed the finger at the risks involved. In the meantime, there should also be an obvious impact on valuations. Even if it is difficult to transfer this risk directly onto a company's value, without knowing what the penalty could be.
The only certainty is what it will cost to upgrade the compliance programme of the target company. All the experts agree: being involved in a compliance matter necessarily entails a reputational risk. It's an argument that seems to be making more and more people aware at the moment.
