In a ruling of 24 January 2024 (no. 20-13.755), the Cour de cassation provided important practical clarifications on the enforcement of liability warranties, following on from its landmark ruling of 30 August 2023 (no. 22-10.466). The Cour de cassation thus held - in relation to the change-of-control transfer of a company by four of its shareholders to two purchasers - that while the sellers were jointly and severally liable for the entirety of the warranted liabilities towards the first purchaser (even though the transfer deeds were separate and no clause provided for such joint and several liability), they were not so liable towards the second purchaser, who had acquired only 1% of the shares from just one of the sellers (Cass. Com., 24 January 2024, no. 20-13.755). The transfer of shares or units is in principle civil in nature, which excludes the presumption of joint and several liability (article 1310 of the Civil Code), which applies only in commercial matters. Nevertheless, case law considers that such transfers are commercial in nature where their effect is to transfer control of the target company, which entails a presumption of joint and several liability among the sellers. This is why, where several sellers have granted separate liability warranties to the same purchaser, the sellers are jointly and severally liable for the warranty of liabilities of the target company, even in the absence of a clause to that effect. It is therefore essential for practitioners to be vigilant when drafting liability warranties and, to that end, to have a thorough understanding of their regime.
Brief reminder of the regime governing liability warranties
The inadequacy of statutory warranties has led practitioners, when transferring shares or units, to provide for warranties covering the liabilities of the target company, in order to protect purchasers against the subsequent emergence of an increase in liabilities or a decrease in assets whose cause predates the transfer. While these contractual warranties are in addition to the statutory warranties (Cass. Com., 3 February 2015, no. 13-12.483), they must nonetheless be express and cannot result from the silence of the deed or even from ambiguous terms. The scope of these warranties will depend directly on the events they cover and on their drafting, which must be carefully considered and tailored (and not a standard clause). As a reminder, their regime is not based on the legal liability of the guarantor but on its contractual undertaking to provide a warranty. Thus, the existence of a liability and/or the decrease in the value of an asset displaying the characteristics covered by the warranty is sufficient to trigger the seller’s payment obligation, regardless of the existence of any loss, unless otherwise stipulated (Cass. Com., 21 March 2018, no. 16-13.867). The parties enjoy considerable drafting freedom and may decide to expressly include or exclude certain items, to limit their amount or duration, or even to provide for warranties specific to certain sectors, such as in industrial or environmental matters.
Sellers in a change-of-control transaction are presumed jointly and severally liable for the warranty of liabilities
In the case of a change-of-control transaction, case law considers that the sellers are jointly and severally liable for the entire warranty of liabilities unless otherwise stipulated, even where they do not have the status of merchant (Cass. Com., 28 November 2006, no. 05-14.827), which is in principle the case for an individual seller. A change of control is characterised by the courts solely by reference to the purchaser and to the common intention of the parties. Traditionally, there is a change of control if it results in a change of majority (Cass. Com., 29 April 1987, no. 85-17.093), even where the transaction concerns a minority stake in the capital, provided that it enables the purchaser to hold the majority (Cass. Com., 15 March 1994, no. 92-12.617). The proportion of the securities held by a given seller is, for its part, irrelevant. This solution is particularly unfavourable to the ultra-minority seller, who may be required to bear alone the entirety of the warranted liabilities if it is particularly solvent and/or the only one located in France, leaving it to seek recourse against the other sellers so that each seller bears the final burden of the debt corresponding to the percentage transferred. In a landmark ruling of 30 August 2023, the Cour de cassation thus held that ultra-minority sellers who each held 1 share out of the three thousand transferred (i.e. 0.03% of the capital) were jointly and severally liable as guarantors, the disputed transfer having brought about the transfer of control of the target company. Each of them was therefore liable for the entirety of the liabilities covered by the warranty (Cass. Com., 30 August 2023, no. 22-10.466). This finding invites the drafter who wishes to protect a minority seller to insert into the liability warranty a clause expressly excluding the purchaser from the scope of joint and several liability. Indeed, since the transaction is assessed globally and solely by reference to the purchaser, the mere fact of transferring the securities in separate deeds is not sufficient to exclude the application of the presumption of joint and several liability in the case of a change of control (Cass. Com., 24 January 2024, cited above).
Focus: environmental liability warranties
In a context of climate change, the obligations weighing on economic operators are increasingly numerous, as illustrated by the duty of vigilance, which covers serious harm to the environment, or, more recently, by the publication by the AMF - on 9 February 2024 - of a guide intended for companies subject, since 1 January 2024, to the Corporate Sustainability Reporting Directive (known as the CSRD). These standards may create an additional risk for companies, in particular for the purchaser, who generally does not have a sufficiently precise knowledge of the past operating conditions of the target company’s business (despite its due diligence). In industrial matters in particular, the purchaser will therefore have an interest in providing for broad warranties covering the consequences of environmental damage revealed after the transfer but whose cause predates it, by specifying at a minimum the types of compensable damage, such as bringing facilities up to standard, or by obtaining a warranty that the transferred site was operated in compliance with the regulations in force.