Are the financial consequences of a dismissal following a majority share transfer covered by a representations and warranties clause (GAP)? This question remains a source of litigation, due to the ongoing disagreement between sellers and buyers regarding the enforcement of the GAP.
On this point, it was recently held that a severance payment was covered by the GAP where an employee of a company—whose shares had been sold—suffered a workplace accident prior to the transfer, and was subsequently declared unfit for work and unassignable after the transaction (French Supreme Court, Commercial Chamber, 6 July 2022, No. 21-11.483). This ruling suggests that two cumulative conditions must be met for the GAP to apply:
(i) First, the event giving rise to the liability must occur prior to the share transfer. To date, case law holds that the dismissal itself, when it takes place after the transfer, constitutes the triggering event for the severance payments owed to the employee (French Supreme Court, Commercial Chamber, 31 March 2009, No. 08-12.702). As a result, severance payments will be borne by the buyer, even if the dismissal follows a dispute that originated before the transfer (French Supreme Court, Commercial Chamber, 2 December 2020, No. 18-11.336).
(ii) Secondly—and this is the key issue—the event giving rise to the liability does not stem from the employee’s accident that occurred prior to the share transfer, but rather from the company’s decision to terminate the employment contract based on the conclusion that redeployment was impossible. This is particularly relevant when the company was in a position to offer a redeployment solution to the employee, pursuant to Article L.1226-12 of the French Labour Code (French Supreme Court, Commercial Chamber, 2 December 2020, No. 18-11.336; Paris Court of Appeal, 20 March 2008, No. 07/07204). The occupational physician’s declaration that the employee is unfit for any position within the company does not relieve the employer of its obligation to seek redeployment opportunities within the company and, if applicable, within the group to which it belongs (French Supreme Court, Labour Chamber, 7 July 2004, No. 02-47.458).
Consequently, the GAP applies only if two cumulative conditions are met: the employee’s accident occurred prior to the share transfer, and the accident resulted in the employee being declared unfit for work, with no possibility of redeployment, ultimately leading to the employee’s dismissal by the company.
In summary, while the GAP helps to mitigate post-closing risks, this clause may lose all practical effect in matters relating to personnel management if the triggering event giving rise to the liability does not originate prior to the share transfer.
In this context, heightened vigilance is essential in M&A transactions, highlighting the growing importance of pre-acquisition social audits, particularly in light of the rise in employment-related issues that have emerged since the Covid-19 pandemic.
