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Corporate Parents, Beware in France: One Can Be Liable for Another’s Doing

March 11, 2021

France’s highest Court (Cour de Cassation) recently ruled that an acquiring entity, in this case Iron Mountain, could be found criminally liable for violations committed by the target, here Recall France, before the transaction. The November 25, 2020 decision, which reversed French case law, foreshadows serious concerns for future acquirers in M&A transactions.

Recall France, via its subsidiary Intradis, specialized in archive storage and was indicted for the destruction of property caused by a violation of its legal safety obligations after a fire damaged the archives kept in one of its warehouses. Before the trial began, however, Recall France was acquired by Iron Mountain which was then also summoned to appear in court to answer for Recall’s actions. Iron Mountain argued that, based on the court’s previous case law (Cour de Cassation Chambre Criminelle, June 20, 2000; Cour de Cassation Chambre Criminelle, October 14, 2003) and on article 121-1 of the Criminal Code (“No one is criminally liable except for his own doing”), it could not be held criminally liable for the target’s actions unless the transaction had occurred for the purpose of evading liability (legal fraud).[1] The court, perhaps surprisingly, responded that, the legal personality of the target does not disappear at the end of the acquisition; instead, it is continued (“absorbed”) by the acquiring entity which can thus be held liable for a fine or confiscation for the infringements of the acquired entity.

While it constitutes a significant reversal of French case law, this decision is in line with the European Union approach[2] with respect to mergers by public limited liability companies involving the absorption of the target pursuant to Directive 2017/1123[3] and removes France’s outlier status on this issue. Public limited liability companies, as defined under directive (EU) 2017/1132[4], intent on acquiring others will likely feel significant consequences as a result of this case.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Brussels
Christina Renner
Cecile Manong



[1] See Recapitulating Table.

[2] See for example Judgment of 5 March 2015, Modelo Continente Hipermercados SA c/ Autoridade para as Condições de Trabalho, C-343/13, EU:C:2015:146.

[3] Directive 78/855/CEE of the Council of October 9, 1978 concerning mergers of public limited liability companies, restated and codified by directive (UE) 2017/1132 of the European Parliament and the Council of June 14, 2017.

[4] The Cour de Cassation held that in France this applies to companies organised as SA and as SAS.