Under French law, the divestiture of an unprofitable business can create specific legal risks resulting from the status of the sold business. International companies should anticipate a number of issues when selling a French loss-making subsidiary, including, but not limited to, issues surrounding the sale price, the risk of post-closing liabilities under bankruptcy proceedings and the risk of post-closing liabilities relating to employee claims.
Under French law, shares must be sold for a cash consideration. In order to be valid, the sale price should meet two basic conditions or the share purchase agreement could be nullified. First, the price set out in the share purchase agreement must be a specific amount, or an amount that is determinable by an objective calculation formula or by the assessment of a third-party expert.
Second, the price must be realistic, in the sense that it must not be unrealistically low in light of the value of the shares. This also means the price cannot be “negative”.
Despite these conditions, it is possible for a parent company to sell the shares of its French loss-making subsidiary for a token consideration, which is all potential buyers are likely to offer if the business is heavily loss-making. Case law shows that French courts consider a sale of shares for €1 valid in circumstances where the shares have no value, or where there is a consideration other than the €1 payment, e.g., the seller is reimbursed a shareholder loan before the transaction is closed.
A negative price could occur where a post-closing price adjustment mechanism triggers a downward adjustment of the €1 base price. To avoid this risk, the parties could structure the downward adjustment as an indemnity to be paid by the seller to the buyer, although it could be argued that this is purely formal and does not change the nature of the adjustment. Another option would be for the seller to inject the amount of the downward adjustment as equity into the target company after closing, immediately following with a transfer of the newly issued shares by the seller to the buyer for no additional consideration. This option presents an additional benefit in that the funds are injected directly into the distressed business rather than being paid to the buyer.
Another situation that could potentially trigger a negative price arises where the buyer offers to acquire the French target for €1, subject to the seller providing preclosing funding, such as paying a sum of cash directly to the buyer before closing. Such a payment to the buyer could be deemed a negative price under French law and could put the transaction at risk. One alternative is for the seller to inject the funds directly into the loss-making business through a capital increase immediately prior to closing.
Seller’s Post-Closing Liabilities in Cases of Bankruptcy
In most circumstances, the reason why a parent company tries to sell its loss-making subsidiary is that it considers itself unable to turn it into a profitable business. The buyer, conversely, probably believes it can turn the business around. There is always, however, a risk that the lossmaking subsidiary will become insolvent once it belongs to the buyer which, under French law, would compel the buyer to file for bankruptcy. How would this affect the seller?
The French bankruptcy court has the ability to “backdate” the insolvency of the French business up to 18 months prior to the opening judgment. During this period, known as the “suspect period”, certain transactions and payments can be nullified, including the sale of the French business to the buyer. To mitigate this risk, companies being sold can implement prevention measures, such as obtaining a certificate from the statutory auditors of the French business and/or from an independent auditor, certifying that the business was not insolvent on the closing date.
The seller could be held liable for mismanagement of assets if certain conditions are met. The seller could be found liable if (1) it acted as a de facto manager of the French business, i.e., it was directly involved in the day-to-day management of the business; (2) it has committed acts of mismanagement, e.g., caused the French business to incur an unreasonable level of debt; and (3) as a result, it has contributed to the insolvency of the French business. In order to limit the risk of liability, parent companies should allow the day-to-day management of their French subsidiaries to be handled locally, and should document the fact that management decisions are made in France. This does not prejudice the normal involvement of the parent company in the life of its subsidiary, including in relation to major strategic decisions.
Seller’s Post-Closing Liabilities Relating to Employee Claims
In a landmark case in 2007, the French Supreme Court (Cour de Cassation) recognised that, under certain circumstances, French employees could bring a valid tort claim against their former parent company. In this case, the French IT company, Bull, had sold a loss-making French subsidiary to a US buyer, which subsequently put it into liquidation. The employees claimed that Bull sold its subsidiary solely for the purpose of avoiding the implementation of a redundancy plan and the payment of related indemnities. The employees argued that the subsidiary was sold to a buyer that Bull knew, or should have known, was unreliable and in a weak financial condition. As a consequence of this, the employees claimed, the French subsidiary was put into liquidation, thereby depriving the employees of the benefit of a redundancy plan that Bull should have financed.
In this case, the employees’ claim against Bull was ultimately dismissed because the French Supreme Court found that Bull had not failed in its diligence in selecting the buyer, which had a sound business plan and solid financial grounding. Other court decisions have, however, held parent companies liable for indemnifying the employees of their former subsidiaries.
There are several ways to significantly minimise such risks. First, the seller should ensure the buyer can demonstrate a credible business plan and produce evidence that it has financial resources to fund the company, if necessary. Second, when the works council of the French subsidiary (if any) is consulted on the transaction, the seller should request that the buyer’s business plan be presented to the works council and to its appointed accountant (if any). If the accountant’s report describes the buyer as financially sound and its business plan as credible, then it would be difficult for employees to later claim that the buyer was unreliable. Similarly, if the works council gives a positive opinion of the buyer, subsequent employee claims would not be credible. Third, the seller and the buyer could ask the local commercial court to “approve” the buyer’s business plan, thereby emphasising the seller took the selection of the buyer very seriously. Finally, the share purchase agreement should be drafted in such a way that it demonstrates the seller’s good faith and limits its exposure to employeerelated liability.