New rules on signing authorities were introduced in Article 1161 of the revised Civil Code, which came into effect on October 1 2016. They aim to prevent direct and indirect conflicts of interest by providing that a representative may not act on behalf of both parties to a contract (multiple representation) or contract on his or her own behalf with the represented party (self-contracting), unless he or she is permitted to do so by law or by authorisation or ratification by the represented party.
Although the new rules refer to bilateral contracts, they can apply to multi-party contracts frequently entered into in M&A transactions (eg, share transfer agreements, investment protocols and loan and shareholders' agreements). The new Article 1161 does not expressly target legal entities, but does have consequences for the representation of corporate entities.
The application of Article 1161 has become a source of concern for M&A practitioners and the impact of the new rules of representation of multiple parties in M&A agreements is a complex issue subject to ongoing legal debate.
Article 1161 of the Civil Code contains general rules that are applicable to any form of representation, except when special provisions apply. In this regard, corporate law includes specific rules relating to the prohibition or approval of specific contracts in order to prevent conflicts of interest, particularly in corporate groups. So-called 'regulated related-party agreements' entered into between a commercial company and its legal representative or between two companies with the same legal representative are already subject to a specific authorisation procedure by the shareholders.
However, it is unclear whether contracts that fall outside the scope of the specific authorisation procedure under corporate law should be authorised or ratified by the represented parties as per the new Article 1161 in order to be valid.
Legal representatives of corporate entities are granted full powers and authority to act in the name and on behalf of the company, pursuant to specific rules under corporate law that prevail over the rules of representation under the Civil Code. When several companies have the same legal representative, they may be represented by such representative without any special authorisation at the time of entering into an agreement with a third party.
After the introduction of Article 1161 of the Civil Code, the question has arisen as to whether multiple representation of several parties to a contract by the same legal representative should be authorised or ratified by the shareholders of each party as per this article. When applied to multilateral contracts, Article 1161 prohibits one person from acting on behalf of all parties to a contract, but does not necessarily prohibit him or her from acting on behalf of several parties, provided that:
- the represented parties have no conflicting interests; and
- none of the represented parties takes an advantage from the contract that does not benefit the other represented parties, as the case may be in M&A-related agreements.
In the event that Article 1161 applies to the multiple representation of several parties to a contract by the same legal representative, the legal powers and authority of that legal representative would be limited. According to several authors, the outcome would be inconsistent with corporate law and the legislature's intent to simplify and improve the French legal system. M&A practitioners are looking forward to clarification from the legislature on this point.
Corporate entities are often represented by one of their employees acting by virtue of power of attorney granted by its legal representative. In M&A transactions, it is common for several entities – whether in a corporate group or not – to grant power of attorney to act on their behalf in favour of the same person. The question thus arises as to whether such representation is governed by special rules under corporate law or whether it falls in the scope of Article 1161 of the Civil Code. Opinions differ on this issue. Pending confirmation from the courts, M&A practitioners remain cautious and – as per application of Article 1161 – representation of multiple entities is specifically permitted in the power of attorney granted by each legal representative.
In leveraged buy-out transactions, managers become parties to various agreements entered into and may – depending on the types of contract – intervene as managers, shareholders, legal representatives of a corporate entity and/or representatives by virtue of power of attorney. When a manager acts simultaneously as a representative for one or several other managers and on his or her own behalf or on behalf of a corporate entity, the rules of representation under Article 1161 of the Civil Code automatically apply, and such multiple representation must be authorised in the power of attorney granted or subsequently ratified by each represented party.
M&A practitioners agree that precautions should be taken until the legislature or courts clarify when Article 1161 of the Civil Code shall apply in relation to multiple representation involving corporate entities.
For further information please contact Alain Levy, Gwenaëlle de Kerviler or Linda Erlandsson at AyacheSalama by telephone (+33 1 58 05 38 05) or email ([email protected], [email protected] or [email protected]). The AyacheSalama website can be accessed at www.ayachesalama.com.
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