In the event of an asset deal, the employment contracts of the target business going concern are likely to transfer to the purchaser on the basis of article L.1224-1 of the French labour code.
According to this article, “in the event of a change in the employer’s legal situation, in particular as a result of inheritance, sale, merger, change of business or incorporation of the undertaking, all employment contracts in force on the date of this change in legal situation shall pass on to the new employer”.
The list of cases stated in the legal provisions of the French labour code is not limitative. The French Supreme Court has extended its scope of application to include the transfer of an “autonomous economic entity”, whose activity is maintained or taken over by the new owner while retaining its identity (Plenary Session of the French Supreme, March 16, 1990, no.86-40.686).
It appears from Article L.1224-1 that all employment agreements in force at the time of the sale of the transferred business and pertaining to that business will, by operation of French law, compulsorily be maintained and will automatically be transferred from the seller to the buyer.
The buyer cannot select which employees of the transferor transfer. Consequently, the buyer must assume all the former employer’s rights, powers, duties and liabilities under or in connection with the two employment contracts transferred on the basis of Article L.1224-1. The employee whose employment agreement is to be transferred as a result of the sale of the business to which he pertains is, inter alia, entitled to:
• his/her previous remuneration • his/her previous length of service • his/her previous individual benefits • the usages in force within the company of his/her former employer.
Moreover, the French labour code provides for an “information and consultation” procedure which must be completed before the terms of the transaction are agreed between the parties.
The seller’s works council must be provided with a comprehensive memorandum describing the proposed transaction, the buyer and the consequences of the transaction from an employment perspective. A discussion (an “exchange of views”) must take place, following which the works council must give an opinion (avis). It does not, however, have veto power, even when it opposes the transaction and issues a negative opinion.
This is a sensitive area for both the buyer and the seller: by law, the procedure with the works council needs to take place at a time where the proposed transaction is already sufficiently negotiated to be a concrete project, but has not yet reached the stage where no further substantive changes can be made. Indeed, the legislation involves the works council in the process so that it may be in a position to influence, to some extent, the outcome of the negotiations.
In practice, this means that no transaction contracts (including a detailed letter of intent) should be entered into before the works council is consulted .
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