M&A on Company Involved in a Demerger? Beware of Creditors

The demerger is the corporate operation by means of which a company can transfer its assets, in whole or in part, to one or more pre-existing or newly established companies with the transfer of the relevant shares or quotas to its shareholders of the former.

The principle of “untouchability” is applied to the demerger: its effects, after the registration of the deed, become definitive, therefore irretractable, so that their effective date also represents the moment from which the effects of the operation can no longer be contested or revoked.

Does untouchability mean that unsatisfied creditors of the demerged company have lost their guarantees and therefore their hopes of recovering their credit?

Can the companies resulting from the demerger hope not to be subjected to actions by the creditors of the demerged company?

A general principle in our legal system (art. 2740 Civil Code) provides that the debtor is liable for his obligations with all his present and future assets. A direct application of this principle is represented by art. 2506-quater, last paragraph, Civil Code, which establishes the principle of the subsidiary joint and several liability of the companies involved in the demerger, identifying the limits within which this liability operates: “each company is jointly and severally liable within the limits of the actual value of the net assets assigned to it or left over for the debts of the company being demerged which have not been satisfied by the company to which they refer“.

This rule therefore allows the creditor to have recourse to the assets of all the companies involved in the demerger, albeit with the limit of the assets resulting from it, thus avoiding that pre-demerger company creditors may suffer the negative consequences of the disproportionate division of the original assets.

Case law (see, for example, Cass. Civ., 7.03.2016, no. 4455) helps us to better understand the operation of this rule.

The conditions that must be met by the creditor in order to initiate the action against the companies involved in the demerger transaction are as follows:

  1. antecedence of the debt with respect to the demerger;
  2. non-fulfillment of the obligation by the company to which the debt has been transferred or retained (the “principal debtor“);
  3. default by the principal debtor: action against the joint debtor can only take place after the prior request for payment by the principal debtor has failed. The creditor can therefore take action against one or all of the jointly-obligated companies without the need to take prior executive action against the principal debtor.
  4. extent of the actionable claim: given the joint liability of the companies involved in the demerger, the liability of the principal debtor must be distinguished from that of the other companies. Only the principal debtor is liable for the entire debt; the other companies are liable only to the extent of the amount assigned to them at the time of the demerger. The limit of the actual value of the net assets assigned or retained thus constitutes the extent of the claim actionable against companies other than the principal debtor.

These conditions and limits do not apply to tax debts incurred prior to the demerger of the company, in relation to which all the beneficiary companies of the demerger are jointly and severally liable. This principle was also recently reaffirmed by the Constitutional Court (C. Cost. 26.04.2018, no. 90), which declared the questions of constitutional legitimacy unfounded insofar as the greater protection afforded to the tax authorities with respect to other creditors is justified by the special nature of tax credits with respect to other credits and the need to ensure easy collection of taxes in compliance with the constitutional principle of balanced budgets.

Therefore, independently of the untouchability of the demerger, the joint and several liability of the companies involved in the operation itself is aimed at maintaining intact the patrimonial guarantees in favor of the company’s creditors prior to the demerger. The purchaser interested in acquiring a company involved in a demerger operation must therefore take into account the liability that could arise from the actions of creditors, whether they be third-party creditors (within the limits and under the conditions set out above) or tax creditors (without any conditions or limits). This responsibility must therefore be well assessed and reflected in the acts and documentation relating to the possible acquisition operation.