BY: FRANÇOIS MEUNIER

A fundamental principle involved in the restructuring of companies (typically through mergers, demergers and partial asset contributions pursuant to the rules governing demergers) – and it is a major advantage of these operations – is the transfer of all corporate property and obligations. Hence, in the case of a merger, all of the assets and liabilities of an absorbed company will be transferred as a matter of law to the absorbing company, without the need for particular formalities in that regard.

A fundamental principle involved in the restructuring of companies (typically through mergers, demergers and partial asset contributions pursuant to the rules governing demergers) – and it is a major advantage of these operations – is the transfer of all corporate property and obligations.  Hence, in the case of a merger, all of the assets and liabilities of an absorbed company will be transferred as a matter of law to the absorbing company, without the need for particular formalities in that regard.

However, contracts concluded intuitu personae (in the sense of legal personalities) have put into question this principle contained in the Commercial Code.  Indeed, the determinant character of the signatories of an intuitu personae contract presents an obstacle to the principle of transferring the entirety of the assets and liabilities, since, by virtue of the restructuring operation, the personality of one of the parties to the contract as the basis for the commitment, has changed.

Three decisions of the Court of Cassation have provided some useful guidelines in that regard.  

The first decision, of December 13, 2005, involved the stipulations of a resale agency contract characterized as intuitu personae(I), and the second, of November 8, 2005, addressed the guarantee issue in the situation of a merger (II).

I – The strength of contractual stipulations in a merger operation : Decision of December 13, 2005.  

This decision is particularly interesting, not simply in its affirmation that contracts concluded intuitu personae depart from the principle of transferring the entirety of assets and liabilities, but because it applies this principle to a contractual stipulation.

Indeed, in this case, it was a « resale agency contract» concluded between a car dealership and a company operating a garage, which contract was stipulated to be intuitu personae. As the « agency » company had been subject to a merger, the dealership terminated the contract, which the new company contested.  But the Court of Appeal, and then the Court of Cassation held that, with the merger, the contract no longer existed.  This decision is interesting on two accounts.

First, it shows the strength of the legal personality, recognized here as a legal person to the same effects as a natural person, the participation of which was precisely the purpose of the contract, regardless of the personality of the managers or shareholders that are maintained after the merger. That is demonstrated even more pointedly here since the sole purpose of the merger was the family reorganization of the company without changing the executive team or even the company name.  Therefore, merely a change in the legal entity was sufficient to eliminate the intuitu personae character and to prevent any assignment of the contract.

In addition, this decision clearly affirmed the parties’ intention even to obstruct the principle of the transfer of the entirety of assets and liabilities.  In this case, it was stipulated that, as the contract was concluded as a function of the legal personality (intuitu personae), the resale agency’s rights and obligations could not have been subject to any transfer without the dealership’s prior agreement.

The Court of Cassation thus puts an end to a debate of legal doctrine regarding the strength of the transfer of the entirety of assets and liabilities, with some authors (such as Professor A. VIANDIER) arguing that this principle is imperatively imposed on third parties.  The High Court opts for a contrary result, since the contractual stipulations thus appear to circumscribe the application of that principle which is attached to a merger.

II – Contract of guarantee in a merger operation: Decisions of November 8, 2005.  

In its two decisions of November 8, 2005, the Court ruled on the outcome of the contract of guarantee in a restructuring operation, particularly in a merger. These two cases are all the more interesting because they involve two converse assumptions, the first being the merger of the debtor secured by the guarantee, and the second being the merger of the creditor provided with the guarantee.

Regarding the merger/absorption in respect to the debtor, the Court of Cassation affirms its decision by stating with certainty and absolute clarity that the contract of guarantee is not as a matter of absolute right transferred by virtue of the merger, and the guarantor shall therefore not be bound to pay debts born subsequent to the merger.  

This result relates directly to the intuitu personae character of a contract of guarantee. The guarantor committed itself as a function of the personality of the debtor. So, to change the debtor amounts to changing the scope of the contract of guarantee and, consequently, the guarantor’s commitment. That is why the Court of Cassation refused to assign the contract of guarantee in a merger, as it appears as an exception to the principle of transfer of the entirety of assets and liabilities that governs restructuring operations.

This absence of assignment of the contract of guarantee leads one to make a distinction between the obligation of coverage and the obligation of payment: the obligation of coverage disappears because of the merger, the guarantee not covering debts born after the operation, whereas the obligation of payment remains; in other words, the guarantor will be bound to cover all of the debts born prior to the merger.

The guarantor is thus not released in the strict sense of the word by a change of debtor accompanying the merger, but the contract of guarantee ends as of completion of the merger.

Regarding the merger/absorption in respect to the creditor, the decision rendered by the Court of Cassation must be regarded as a novelty.  Indeed, the High Court states that the guarantee « is transferred as a matter of absolute right».  The contract is subject to the principle of transfer of the entirety of assets and liabilities related to the merger; the guarantor is thus bound to payment of debts born prior to the merger, as well as those born subsequently.

Here again, this result rests on a determination as to whether or not the contract of guarantee has an intuitu personae character. Indeed, such a contract does not reveal any intuitu personae character between the guarantor and the creditor, since the guarantor committed itself based on the personality of the debtor and not on that of the creditor.

A change of creditor does not affect in any regard the object of the guarantor’s commitment; hence, it cannot obstruct the principle of transfer of the entirety of assets and liabilities stipulated in article 236-3 of the Commercial Code, the guarantor being bound to guarantee the debtor.

The notion of a contract concluded intuitu personae may thus turn out to be a major obstacle to that principle related to merger operations, whether this intuitu personae character originates from simple contractual stipulations or from the precise nature of the contract (guarantee).

There is indeed a true limit to this principle, which limit should be integrated and assessed at the time of a merger or, more generally, a restructuring operation (TUP, etc.), in order to avoid the elimination of contracts that might be essential for the new company that is born of the merger.

Indeed, in a decision of June 7, 2006 rendered in a matter of dissolution-liquidation specified by article 1844-5 of the Civil Code, the Court of Cassation concluded that the dissolution with liquidation of a company results as a matter of absolute right in the termination of the intuitu personae contract, unless the parties to the contract have expressly specified that a dissolution without liquidation, more commonly known as TUP, does not terminate said contract.   

The exception to this principle of transfer of the entirety of assets and liabilities henceforth applies to mergers, but also to TUP.

One cannot help but regret these solutions in that they substantially reduce the security of legal operations transferring the entirety of assets and liabilities (merger, TUP…).

By giving priority to protection of the contracting parties of a dissolved company, the Court of Cassation creates a perverse effect: In matters involving transfer of the entirety of assets and liabilities, the search for legal security will lead to very thorough examination of intuitu personae contracts due to the absence of an objective definition.

François MEUNIER

Former Tax Inspector

Partner, LEXAND, Paris

 (http://www.lexand.eu)

http://www.lexand.eu/