Cancelation of a share transfer as a result of fraudulent concealment

In a March 30, 2016 judgment, the commercial division of the Court of Cassation, France’s highest court, held that sellers of shares who misrepresented the financial results of the company prior to the sale of their shares, and who concealed information they held from the buyer regarding the foreseeable collapse of revenue derived by said 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 no buyer would have accepted the same acquisition terms had they been apprised of the company’s exact financial situation. As a consequence, the fraudulent concealment attributed to the sellers warranted the annulment of the sale agreement.

This ruling of the Court of 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.

The Court of Cassation thus sought to compensate the parties’ information asymmetry by reinforcing the sellers’ duty to inform, thereby increasing the 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 which is deemed determinant of their consent, even in the absence of a proper indemnification clause in the share purchase agreement.

Significantly as well, the sellers argued before the Court that the share transfer could only be annulled with proof of “dol principal” (i.e., substantial fraud, without 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 “dol incidental” (incidental fraud, without 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 Court of 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 the contract, which would result in the imposition of damages only). The Court of Cassation anticipated the entry into force of the amended article 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”.

May 15, 2016 | Corporate Law