In a March 30, 2016 judgment, the commercial division of the Cour de Cassation, France’s highest court, held that sellers of shares, who misrepresented the financial results of the company prior to the sale of their company shares, and who concealed to the buyer information related to the foreseeable collapse of the turnover derived by such company from at least two of its main clients, vitiated the buyer’s free consent to enter into the sale contract.
Those elements were considered key factors to be disclosed as any buyer apprised of the company’s exact financial condition would not have accepted the acquisition terms had he been informed thereof. As a consequence, the fraudulent concealment attributed to the sellers warranted the annulment of the sale contract.
This ruling of the Cour de Cassation echoes the French Civil code legislature’s reform, initiated by Order n°2016-131 dated February 10, 2016, which will come into force on October 1, 2016.
Indeed, such reform confirmed that acts of fraudulent concealment may be ground for the annulment of a sale agreement when they have a determining effect on the parties’ consent, in particular when information is willfully concealed.
Therefore, the Cour de Cassation sought to compensate the parties’ informational asymmetry by reinforcing sellers’ duty to inform , increasing thereby buyers’ protection.
On the basis of contract law, buyers will now be entitled to request the annulment of any share transfer in the event of a fraudulent concealment, that is deemed determinant of their consent, even in the absence of a proper indemnification clause in the share purchase agreement.
Significantly too, the sellers argued before the Court that the share transfer could only be annulled with proof of dol principal (i.e., substantial fraud, absent which the victim would not have entered into the contract). They asserted that this was not the case here where the Court of appeals only identified instances of incidental fraud (dol incident, fraud, absent which the victim would have agreed to different terms but would have nonetheless entered into the agreement).
However, this distinction failed to convince the commercial division of the Cour de Cassation which abandoned the traditional distinction between dol principal (i.e., fraud on the substance of a contract, which would result in the rescission of the contract) and dol incident (fraud on secondary elements of a contract, which would result in the imposition of damages only). The Cour de Cassation anticipated the entry into force of the amended section 1130 of the French Civil code, which will provide as from October 1, 2016, that any willful misrepresentation invalidates the consent if it is of “such characteristic that without [it] one of the parties would not have entered into the agreement or would have done so with substantially different conditions”.
April 15, 2016 Mergers and Acquisitions
