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03 June 2015
On February 3 2015 the Supreme Court confirmed that seller's warranties granted under a securities sale and purchase agreement do not deprive a purchaser of the right to seek remedy pursuant to statutory warranties.(1)
This recently published decision reaffirms earlier, more confidential rulings and its publication affirms the coexistence in security transfers of contractual and statutory warranties.
The decision involved a sale and purchase agreement under which the defendant acquired a limited liability company from the plaintiff. A vendor loan had been granted but not paid and the plaintiff summoned the defendant in order to obtain payment of the loan. The defendant replied by seeking avoidance of the sale and purchase agreement pursuant to Article 1116 of the Civil Code, claiming that its consent had been vitiated by a dol (intentional misrepresentation). The plaintiff had agreed to give a number of contractual representations relating to the accuracy of the target's equity capital. The defendant discovered after completion that the target's equity capital had dropped below the amounts set forth in the contractual representations shortly before completion and claimed that, in agreeing to the acquisition, it had relied on the false representations regarding the target's equity capital.
The Pau Court of Appeal found that such circumstances could not justify avoidance of the sale and purchase agreement on the grounds of the dol according to statutory warranties, since the seller had provided a contractual warranty regarding the target's equity capital. The Supreme Court rejected the Pau Court of Appeal's decision and held that contractual warranty provisions do not deprive a purchaser which claims that its consent was vitiated from the right to seek avoidance of the sale and purchase agreement pursuant to statutory warranties.
Under French law, a purchaser may seek avoidance, rescission or even indemnification pursuant to the Civil Code – notably, in case of vitiated consent pursuant to Articles 1109 to 1122 or eviction and hidden defects pursuant to Articles 1625 to 1649. However, in securities transfers, the protection provided to the purchaser by the statutory warranties is often insufficient and legal practitioners prefer to negotiate additional contractual warranty provisions with a wider scope. One major drawback of contractual warranties is that the only remedy for the purchaser consists of damages – the transfer of securities cannot be cancelled. Therefore, statutory warranties remain of interest to a purchaser which prefers to seek avoidance rather than damages. In such cases, the question of whether a contractual warranty should be considered as exclusive of any claim based on vitiated consent is often raised during litigation on warranties. The Supreme Court has now provided a clear answer to this question by publishing its decision.
The commercial section of the Supreme Court has clearly stated that contractual warranties are not automatically exclusive of statutory warranties, even if a valid claim can be brought under the contractual warranties. It has thereby confirmed that statutory and contractual warranties coexist in order to ensure adequate protection of a purchaser. The Supreme Court decision reinforces the solidity of the legal framework of securities transfers and has been welcomed by the M&A community.
For further information please contact Alain Levy, Gwenaëlle de Kerviler or Linda Erlandsson at AyacheSalama by telephone (+33 1 58 05 38 05) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The AyacheSalama website can be accessed at www.ayachesalama.com.
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