On 25 November 2020, France’s Cour de cassation announced the reversal of a long-standing line of cases limiting the criminal liability of the surviving company in a merger for acts or omissions committed by the absorbed company prior to the merger. The result of the case—Iron Mountain France SAS, Cass. crim., 25 Nov. 2020, no 18-86.955—is that companies with potential exposure to criminal liability in France will have to up their due diligence when contemplating a merger.

1.The facts of the Iron Mountain case

The Iron Mountain case arose out of a 2002 fire in a storage facility operated by Intradis, a wholly-owned subsidiary of the company Recall France. Customers whose property was damaged in the fire filed a criminal complaint, alleging that the company had violated Article 322-5 of France’s Criminal Code, which imposes criminal sanctions for the destruction, degradation or involuntary deterioration by fire of a good belonging to another caused by a breach by the defendant of a legal duty of safety or care.

Several months before the criminal complaint was filed, however, Intradis and its parent company merged with Iron Mountain, another storage solutions provider. The complainants therefore added Iron Mountain as a defendant in the case.

Subsequently, the magistrate overseeing the case ordered an investigation into the circumstances of the merger to determine the extent of Iron Mountain’s liability for the acts or omissions of Intradis.

Arguing that it could not be held criminally responsible for the acts of the entity that it had absorbed by merger, Iron Mountain filed an interlocutory appeal. The Court of Appeals of Amiens rejected Iron Mountain’s appeal. Iron Mountain then sought review by France’s high court, the Cour de cassation.

2. French precedent on post-merger criminal liability

In its appeal, Iron Mountain relied on French precedent limiting the liability of a surviving company post-merger based on two due basic tenets of due process. The first, enshrined in Article 121-1 of the French Penal Code and Article 6 of the European Convention on Human Rights, is that a person can only be criminally responsible for his own acts or omissions. The second, reflected in Article 6 of the French Penal Code, is that the death of a defendant puts an end to a criminal action against him. French courts had previously relied on these provisions to immunize the surviving corporation in a merger for criminal liability arising out of acts committed by an absorbed entity[1].

In the Iron Mountain case, however, the Cour de cassation reversed course.

3.The Court’s reasoning

It appears that the Cour de cassation saw this case as an opportunity to reconcile its case law involving the post-merger criminal liability of a company and its post-merger liability for civil or administrative sanctions. Indeed, French courts[2] and the European Court of Human Rights[3] had previously held that due process principles do not prohibit holding a surviving company liable for the payment of civil or administrative sanctions arising out of pre-merger activity by the absorbed entity. It was difficult for the Cour de cassation to maintain this distinction in the criminal sphere while disregarding it in the civil sphere.

Henceforth, companies can be expected to answer for the criminal, civil, and administrative liability of entities they have absorbed via merger.

4.The rules going forward

The Iron Mountain court explained, however, that the extent of the surviving corporation’s exposure to criminal sanctions depends on the purpose of the merger.

If the merger was undertaken for legitimate business purposes and not in order to avoid criminal liability on the part of the absorbed company, then the surviving company’s criminal liability is limited to fines or asset forfeiture. These sanctions are analogous to the kinds of civil and administrative penalties that surviving companies already faced. Moreover, to avoid creating an ex post facto law, the Cour de cassation held that its ruling will not have retroactive effect, such that criminal sanctions can only be imposed upon a surviving company when the merger took place on or after 25 November 2020, the date of issuance of the court’s judgment.

If, however, the merger was undertaken with the purpose of shielding the absorbed company from criminal liability, then there is no limitation to the kinds of criminal penalties the surviving company could potentially face. In such a case, the nature and extent of the penalties would be defined by the relevant criminal statute and could include fines, forfeiture, dissolution, temporary or permanent injunctions against exercising certain kinds of activities, the appointment of a monitor, prohibitions against engaging in public procurement, and prohibitions against the public offering of securities, among others. (These rules are set forth in greater detail at Article 131-7 through Article 131-39-2 of the French Penal Code.) Moreover, the court held that these penalties can be imposed on surviving companies for mergers predating 25 November 2020, under the rationale that these sanctions were foreseeable due to the fraudulent purpose of the merger.

To avoid potential liability for these types of criminal sanctions, companies should be careful to document their due diligence and negotiate appropriate disclosure and warranties clauses.

 

 

[1] Cass. crim., 20 June 2000, n° 99-86.742, Bull. crim. 2000, n° 237 ; Cass. crim., 14 Oct. 2003, n° 02-86.376, Bull. crim. 2003, n° 189.

[2] Cass. com., 21 janv. 2014, n° 12-29.166.

[3] Carrefour France v. France, n° 37858/14, ECHR, 24 Oct. 2019.

Johanna SCHWARTZ MIRALLES

Attorney (US)
Johanna is an American attorney and a graduate of Harvard Law School. Her legal practice spans a broad range of fields, including international commercial contracts, anti-corruption laws, compliance programs, whistleblower protections (Sapin II), business litigation and arbitration.

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Benoît LAFOURCADE

Co-Founder, Partner & Solicitor -
International Corporate Law & Litigation

Benoît, Delcade’s co-founder, is a Paris Bar lawyer and UK Solicitor (London).

Advisor for various embassies, working closely with the firm's team, Benoît offers his services to French and foreign companies requiring cross-cutting strategic and legal support in business law.

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Alberto CORDUAS

Associate - Litigation & Corporate
Alberto Corduas is a Lawyer working in the Litigation and Corporate department of DELCADE and practices both in the area of consulting and litigation before the civil and commercial courts.

He joined DELCADE in 2019 after having worked three years as a legal advisor for an international law firm in Paris and as a lecturer at the University Paris 1 Panthéon-Sorbonne.

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