In acquisitions of group companies, the parties enter into various agreements (eg, investment protocol, share purchase or put option agreements) which often provide that the purchaser may substitute itself with another entity to fulfil its obligations under the agreement and thus assign all of its rights and obligations under the agreement to the substituted entity. The substituted entity then becomes a party to and benefits from the rights and is bound by the obligations of the original purchaser under the agreement, while the original purchaser is released from all of its obligations under the agreement.

The reason for this substitution clause is that when such agreements are signed, the acquisition's structure is often not yet final and the acquisition vehicle seldom incorporated.

By a decision of 19 June 2019, the Supreme Court validated this substitution mechanism and considered that an original purchaser that had been replaced by a substituted purchaser was no longer bound by an agreement that it had initially executed and, unlike the substituted purchaser, was released of its obligations thereunder.


In 2006 Mr A entered into an agreement – in his name and in the name of some of the target's shareholders – relating to the sale of the target's shares provided that certain conditions precedent were met. According to the agreement, the acquisition price was payable in several instalments: a payment was to be made at the date of signing the sale agreement and two additional payments thereafter.

The agreement also contained a substitution clause under which the original purchaser could substitute any entity of its choice to fulfil the obligations provided for under the share purchase agreement.

In accordance with the substitution clause, the original purchaser substituted an entity and the acquisition was completed in January 2007 by the substituted purchaser. The substituted purchaser paid the first instalment of the acquisition price; however, it went into receivership before the other two instalments were paid.

Mr A considered that the substitution of the initial purchaser by the substituted purchaser, even if executed without any reserve or conditions, did not release the initial purchaser from its obligations towards the sellers under the agreement. Mr A sued the initial purchaser in order to obtain the payment of the balance of the acquisition price.

On 23 May 2017 the Versailles Court of Appeal dismissed Mr A's claims.


On 19 June 2019 the commercial division of the Supreme Court also dismissed Mr A's claims.

The Supreme Court considered that:

  • the sale of the company's shares had been rightfully completed and executed to the benefit of the substituted purchaser in accordance with the terms of the substitution clause provided for in the share purchase agreement;
  • the sale agreement had confirmed the substitution and discharged the original purchaser of its obligations under the share purchase agreement; and
  • the substitution by the initial purchaser of its rights and obligation under the share purchase agreement to the substituted purchaser had occurred before fulfilling the conditions precedent of the acquisition.

On the above grounds, the court concluded that the initial purchaser was no longer a party to the share purchase agreement and consequently could not be sued for the payment of the balance of the acquisition price.


In the case at hand, the Supreme Court held that:

  • the conditions set out in the share purchase agreement were satisfied;
  • the shares were effectively transferred to the substituted purchaser who had paid the first instalment of the acquisition price; and
  • the sale of the shares was therefore duly completed to the benefit of the substituted purchaser.

The court's decision confirms that the substitution was validly completed in accordance with the relevant contractual provisions before the conditions precedent were met, and that the original purchaser was thus no longer a party to the agreement and was released of its obligations in this respect. However, it provides limited details on the original agreement entered into between the parties and the drafting of the substitution clause – details that would have provided great contextual clarity.

Although the decision does not clarify the legal qualification of the substitution mechanism, it validates the mechanism in the context of M&A transactions. It is also good news for investors, as substitution mechanisms are often used in M&A transactions despite legal practitioners' and scholars' attempts to ascertain such validity. The mechanism is particularly helpful in M&A transactions where a sponsor signs the initial agreements and, once a structure has been agreed, substitutes a special purpose vehicle to carry out the transaction. However, M&A practitioners should remain vigilant when drafting substitution clauses to ensure that they clearly state the parties' intentions as to the full release (or not) of the original party.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.