Transfer of Control in France: Fraud in All Its Forms

Transfer of Control in France: Fraud in All Its Forms

The Court of Cassation recently had to rule on a dispute in which, in the context of the transfer of control of the shares of a company, the acquirer failed in its obligation of transparency and information.

By a deed, a person transfers all of the shares that make up the company's capital for a price of one million euros, the deed providing that the transferor could substitute another purchaser. 

The purchaser obtains a reduction of the price by a first amendment to the maximum amount of 800,000 euros, of which 500,000 euros are payable on one date, and the balance of a maximum amount of 300,000 euros on another date, this balance being determined according to the results of the company for the years 2008 to 2012. 

300,000 euros, would be immediately payable if the buyer ceased to be directly or indirectly a director or majority shareholder of the company. 

By two other amendments, the seller and 
the buyer of the shares fixed the sale price of the company's shares at 600,000 euros, and the seller, in execution of these agreements, received the sum of 100,000 euros as the final balance of the sale price.

Shortly thereafter, the purchaser sold its shares to a third party.

The initial seller requested the cancellation of the deeds of sale on the grounds of fraudulent maneuvers and reluctance on the part of the initial purchaser of the shares.

The Court of Appeal, seized of this case, considers the sale valid, considering on the one hand that the initial purchaser was, at the date of the resale, in a position to claim a higher additional price by the simple effect of time, and on the other hand, that an amendment had been signed between the parties in which the initial seller deliberately accepted, in exchange for the immediate collection of the new price agreed upon, to release his purchaser from any previous commitment.

The Court of Cassation disagreed and overturned the decision of the Court of Appeal, considering on the contrary that the initial seller of the shares was the victim of fraud on the grounds that he might not have sold them if he had been informed of the plan to resell them by the initial buyer.

It considers its request for cancellatin of the sale thus made as well-founded, in application of article 1116 (former) of the civil code:

• Fraud may be constituted by the silence of a party, concealing from his co-contractor a fact, which if it had been known to him, would have prevented him from contracting or would have convinced him to contract under other conditions,

• If the amendment had not been signed, the transfer of control of the company would have obliged the initial purchaser to pay, shortly afterwards, 300,000 euros and not 100,000 euros as the balance of the sale price, it was therefore incumbent on the initial purchaser to reveal to his seller, at the time of the signature of this amendment, his plan to transfer control of the company again in the near future

It should be noted that the provisions of article 1116 (old) of the Civil Code were substantially taken over by articles 1130 and 1137 of the Civil Code which came into force on 1 October 2016, and that according to article 1112-1 of the Civil Code, which came into force on the same date:

«One of the parties who knows information whose importance is decisive for the consent of the other must inform him of it whenever, legitimately, the latter is unaware of this information or trusts his co-contractor.»

With this decision and the clarifications provided by article L 1112-1 of the Civil Code on the obligations of transparency of the parties to an act as to the information they hold, the Court of Cassation tends to extend the qualification of fraud in business relationships to a large number of situations.

In the interests of legal certainty and to counter this trend in case law which taints the validity of the documents they sign, the parties are invited to be more vigilant in their drafting.

Cass. com. 9 novembre 2022 n°21-14995

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