M&A : Nothing to Declare ?
The Scope of the Duty to Inform in the Pre-Contractual Phase (obligation précontractuelle d’information)
Getting to a deal: transaction dynamics
During a M&A transaction, identifying the risks likely to affect the target company and its projected return is a key issue in terms of valuation and allocation of liability between the parties. On one side, the seller seeks to make and maximise their gain while being released from any liability relating to the assets and liabilities of the target. On the other side, the purchaser aims to identify and assess the risks involved. If they agree to bear future risks, they will generally expect the seller to provide a warranty for past risks, although such warranty is usually limited—except in cases where the risk relates to the very substance of the transaction (e.g. existence of the shares or the assets transferred).
From the outset of discussions, the seller and their counsel will seek to limit—or even exclude—their liability in connection with the information provided and the termination of negotiations, by leveraging competitive pressure arising from parallel discussions with multiple prospective purchasers. If the negotiations succeed, the sale and purchase agreement is entered into. Nothing must be overlooked by the parties and their counsel during the drafting and negotiation of the share purchase agreement, which is intended to determine the purchase price, terms and conditions, specific undertakings, and warranties. The share purchase agreement memorialises the deal and becomes the law of the parties so that one may think all prior communications become legally irrelevant.
Civil law as a limit to contractual freedom
There are, however, limits to what an agreement may encompass and set forth. In particular, by definition, the so-called pre-contractual phase falls outside the bounds of the agreement. As a cornerstone to civil law, the general theory of lack of consent (mistake (erreur), fraud (dol), duress (violence)) may render an agreement null and void. In 2016, this framework was further strengthened by the introduction of a positive duty to inform prior to entering into an agreement. Article 1112-1 of the French Civil Code imposes on a party who “knows information of decisive importance for the other party’s consent” the obligation to disclose such information where “the other party is legitimately unaware of it or relies on its co-contractor.” The article further provides that this duty may not be excluded or limited by mutual consent of the parties, and that a breach thereof may lead to annulment of the agreement if it constitutes an irregularity of consent.
First case law defining the scope of the duty to inform in the pre-contractual phase
Case law relating to Article 1112-1 of the French Civil Code remains scarce. Two recent court decisions2 provide useful clarification of the scope of the duty to inform in the context of an M&A transaction, specifically regarding financial information.
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