Vol 17 (2020) - Issue 2

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A Tale of Life and Death of Personal Guarantees in Merger Scenarios: The French Perspective

Synopsis

In most countries and circumstances, a merger is a complex transaction with plenty of inherent issues and details to be addressed ahead of the merger becoming effective. These issues generally include the analysis of the tax consequences of the merger, the determination of possible filing duties and prior authorisations including from a competition perspective, the need to inform and/or consult the work force and its representatives, reviewing the articles of association of the target’s subsidiaries and identifying new shareholder approval provisions, reviewing the loan and leasing facility agreements and determining whether possible acceleration provisions may apply to the contemplated merger and also determining the fate of the guarantees issued by, or to the benefit of, one of the parties to the merger. Regarding guarantees, beyond the transaction per se, advisers and particularly lawyers must consider the proper handling, and quite possibly, the transfer or reiteration of guarantees. Failure to do this may entail a risk of losing the agreed coverage or of a breach of a covenant, leading to potentially adverse consequences for the stakeholders involved.

In this article, the authors focus on the impact of merger on a specific type of personal guarantee, cautionnement, (‘Guarantee’). This is probably the most commonly used form of guarantee in France and one of the most complex to deal with. A Guarantee can be issued by individuals and/or companies. When issued by individuals, a Guarantee, including a joint and several Guarantee (cautionnement solidaire) must contain specific handwritten notation signed off by the Guarantor.

When issued by public limited companies, sociétés anonymes, also known under the acronym SA, a Guarantee is subject to prior statutory authorisation by its board of directors (conseil d’administration, L. 22535, § 4 of the French Code de commerce).

When issued by a société par actions simplifiée or SAS, the articles of association may define whether the Guarantee is subject to any specific authorisation requirements or a decision of the shareholders subject to majority voting conditions provided for in the articles (Article L.227-9, § 1 of the French Code de commerce). The general legal regime of a Guarantee is provided for in law. However, key principles affecting application of the regime have been developed in case law. As well, a number of practical issues are still disputed by various authoritative legal commentators. The impact of a merger on the scope and enforceability of a Guarantee essentially depends on whether the relevant party to the merger is (i) the beneficiary of the Guarantee, (ii) the guarantor, or (iii) the debtor of the guarantor. Each of these situations is addressed below, including suggestions and remedial measures for protection of stakeholders’ rights in the case of a merger.