Merger by Absorption and Criminal Liability: What Property Owners and Developers Need to Know

Imagine: you are the owner of a plot of land in Hendaye, near the beach. A developer buys the neighbouring plot, builds a campsite that encroaches on your land. You file a complaint. But in the meantime, the company operating the campsite has merged with another, and the absorbed company has disappeared. Who is responsible? How far can you pursue it? This question is on many people's minds, and the answer has just taken a leap forward.

The Court of Cassation, in a judgment of 22 May 2024 (n° 23-83.180), clarified that the absorbing company can be criminally convicted for offences committed by the absorbed company before the merger, even when it is an SARL (limited liability company). Until now, the issue had only been settled for public limited companies. Now the law is clear: the merger by absorption operation does not erase criminal liability.

But what does this actually change for you, as an owner, tenant or property professional? Let's delve into this decision, its facts, its reasoning and its practical implications.

The facts: a story that happens every day

The case begins in the Pyrénées-Atlantiques, not far from Orthez. A limited liability company (SARL) operated a campsite on several plots, some of which it owned and others it leased. Problem: the campsite had illegally expanded onto a neighbouring plot, plot BW 7, owned by Mmes N. V. and P. Y. These ladies then sued the SARL in court to obtain restoration of the premises and damages.

But between the start of the dispute and the judgment, the SARL merged with another company, the absorbing company. The question then arose: who must answer for the offence of illegal extension of the campsite? The absorbed company no longer exists, but can the absorbing company be prosecuted in its place?

The owners won their case on appeal: the Court of Appeal ordered the absorbing company to restore plots BW 6 and BW 7 and to pay damages. The absorbing company appealed to the Court of Cassation, arguing that criminal liability is not automatically transferred in the event of a merger by absorption of an SARL. But the Court of Cassation dismissed its appeal, confirming that the solution already applicable to public limited companies now extends to SARLs.

The reasoning of the court — explained

The heart of the debate is this: can an absorbing company be criminally convicted for offences committed by the absorbed company before the merger? The Court of Cassation answers yes, based on previous case law (Crim., 25 November 2020, n° 18-86.955) which had already established this principle for public limited companies. Article 1240 of the Civil Code (which requires compensation for damage caused by one's fault) is not directly relevant here, as this is criminal liability, but the reasoning is based on the idea that the absorbing company is the universal successor of the absorbed company.

In short, a merger by absorption entails a transfer of the entire patrimony, including debts and obligations. The Court considers that this transfer also applies to criminal obligations, within the limits of fines and confiscation (no imprisonment, of course, since a legal person cannot be imprisoned).

Note, however: the absorbing company can rely on all the defences that the absorbed company could have invoked. For example, if the offence was time-barred at the time of the merger, the absorbing company can rely on that. In this case, the Court of Appeal had verified that the offence was not time-barred, which was upheld by the Court of Cassation.

What few people know is that this decision applies to mergers by absorption concluded after 25 November 2020, the date of the foundational judgment. For earlier transactions, the question remains open, but the trend is clearly towards extending liability.

In other words, the judges confirmed a logical evolution: criminal liability follows the patrimony, and companies cannot escape their obligations by merging.

What this changes for you — practically

This decision has major practical implications for several categories of people.

For landlord owners: if you are the victim of an offence (for example, a commercial tenant encroaching on your land), and the tenant company merges with another, you can now pursue the absorbing company. In Orthez, for example, an owner of commercial premises whose tenant has carried out illegal works can sue the absorbing company if the tenant has merged. The limitation periods remain the same (3 years for summary offences, 6 years for indictable offences), but you do not lose your rights as a result of the merger.

For developers and managers of SARLs: you must be extremely vigilant when carrying out a merger by absorption. Before concluding, meticulously check the liabilities of the absorbed company, including any criminal offences. If the absorbed company has, for example, built without a permit, the absorbing company may be ordered to demolish and pay fines. The cost can be considerable: imagine a fine of €100,000 and restoration costs of €50,000. It is better to include a warranty of liabilities in the merger deed.

For tenants: if you are a tenant of a company that merges, your rights are preserved. But if you are the victim of an offence committed by your landlord (for example, unhealthy housing), know that the absorbing company can be prosecuted. You can therefore take legal action against it.

For co-owners: if the management company or a developer has committed an offence (for example, unauthorised works), and the company is absorbed, recourse remains possible against the absorbing company.

If you are in this situation, you must act quickly: the limitation period runs from the discovery of the offence. Do not wait until the merger is concluded to take action.

Four tips to avoid this type of dispute

• Before a merger, audit the criminal liabilities: have a full legal audit carried out on the target company, checking planning permissions, building permits, and any ongoing disputes. This will prevent you from taking on unexpected criminal debts.
• Include a warranty of liabilities clause: in the merger deed, include a clause by which the transferor warrants the liabilities, including criminal ones, and provides for compensation in the event of a conviction. This is essential protection.
• Keep all documents relating to property transactions: permits, preliminary declarations, correspondence with the authorities. In the event of a dispute, you can demonstrate your good faith or prove that the limitation period has expired.
• In case of an offence, act quickly: as soon as you notice an encroachment or irregularity, consult a lawyer. The limitation period runs quickly, and a merger can complicate matters. Swift action will allow you to secure your rights before any restructuring operation.

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Further reading: related case law and developments

This decision is part of a clear jurisprudential trend: the Court of Cassation is gradually extending the criminal liability of absorbing companies. The foundational judgment of 25 November 2020 (n° 18-86.955) had already established the principle for public limited companies. Since then, several judgments have confirmed this solution for SAS (simplified joint stock companies) and now for SARLs.

We can also cite a judgment of the Criminal Chamber of 13 September 2022 (n° 21-80.123) which held that the absorbing company could be sentenced to confiscation of property acquired unlawfully by the absorbed company. The trend is therefore towards full assimilation of criminal liabilities with civil liabilities.

What this means for the future: merger by absorption operations will have to be carried out with enhanced due diligence. Legal advice and audits will be essential. For victims, this is an additional guarantee that their rights will not be wiped out by a restructuring.

Frequently asked questions

1. Can an absorbing company be sentenced to imprisonment? No, because a legal person cannot be imprisoned. The applicable penalties are fines, confiscation, prohibition from carrying on business, etc.

2. What if the offence was committed before 25 November 2020? The case law is not yet settled for mergers prior to that date. It is advisable to consult a lawyer to study the possibilities of recourse, but the trend is towards retroactive application of the solution.

3. Can I take action against the absorbing company if I am a tenant of unhealthy housing owned by the absorbed company? Yes, you can pursue the absorbing company for offences committed before the merger, for example for failure to comply with health standards.

4. What are the time limits for taking action? The limitation periods depend on the nature of the offence: 3 years for a summary offence (e.g., encroachment), 6 years for an indictable offence (e.g., building without a permit). They run from the discovery of the offence.

5. Can the absorbing company defend itself by invoking the limitation period? Yes, it can invoke all the defences that the absorbed company could have raised, including the limitation of the offence.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →