The Line Avocats

ASSET AND LIABILITY WARRANTY? HOW TO HANDLE SEVERANCE PAYMENTS MADE POST-ACQUISITION?

Are the financial consequences of a dismissal following a majority share transfer covered by the asset and liability warranty? This question fuels disputes due to the persistent disagreement between sellers and buyers regarding the applicability of this warranty. On this point, it has recently been ruled that the severance pay is covered by the warranty when an employee of a company, whose shares have been transferred, suffers a work-related accident prior to the transfer and is subsequently declared unfit and unemployable afterward (Court of Cassation, Commercial Chamber, July 6, 2022, No. 21-11.483). Therefore, it appears that the combination of two cumulative conditions allows the warranty to come into play : (i) On the one hand, the liability-triggering event must occur before the transfer. Previous case law has considered that the dismissal occurring after the share transfer constitutes the liability-triggering event for the employee's compensation (Court of Cassation, Commercial Chamber, March 31, 2009, No. 08-12.702). Thus, the severance pay will be borne by the buyer, even if the dismissal stems from a dispute preceding the transfer (Court of Cassation, Commercial Chamber, December 2, 2020, No. 18-11.336). (ii) On the other hand, and this is the key issue, the liability-triggering event does not originate from the employee's pre-transfer accident, but from the decision to terminate the employment contract by the company, which concluded that reassignment was not possible, provided that the company was able to offer the employee a reassignment solution in accordance with the terms of Article L. 1226-12 of the French Labor Code (Court of Cassation, Commercial Chamber, December 2, 2020, No. 18-11.336, Court of Appeal of Paris, March 20, 2008, No. 07/07204). The opinion of the occupational physician declaring the employee unfit for any job within the company does not release the employer from its obligation to seek reassignment solutions within the company and, if applicable, within the group to which it belongs (Court of Cassation, Social Chamber, July 7, 2004, No. 02-47.458). Therefore, the asset and liability warranty comes into play under the dual condition that the employee's accident occurs before the transfer and that this accident leads to the employee's unfitness without the possibility of reassignment, resulting in their dismissal by the company. In conclusion, while this warranty reduces risks occurring after the transfer, this clause can nevertheless be deprived of its full significance in terms of personnel management if the liability-triggering event does not originate before the transfer. **Heightened vigilance is therefore necessary in the context of M&A operations and highlights the increasing importance of pre-acquisition social audits, particularly in light of the growing social issues arising since the Covid-19 pandemic.**

Learn more