Frequency of M&A disputes
There is no statistical or other publicly available information on the prevalence of disputes related to M&A transactions in France, whether on the percentage of disputes giving rise to formal dispute resolution procedures that are specific to M&A, or on the percentage of M&A transactions giving rise to such a procedure.
The majority of significant M&A disputes pertain to legal entities deemed to be ‘commercial’ under French law. Such disputes fall within the jurisdiction of the commercial courts but may also be referred to arbitration by the parties. Annual statistics published by the Ministry of Justice show the different types of decisions rendered by commercial courts every year (summary rulings, judgments on the merit, decisions related to insolvency proceedings, etc.). The subject matter of the disputes is, however, not the subject of published statistics, to the best of the authors’ knowledge.
The prevalence of M&A disputes in arbitration proceedings in France is also difficult to ascertain given the privacy in which arbitration proceedings are usually conducted. The statistics published by the International Court of Arbitration of the International Chamber of Commerce do not identify the proportion of administered disputes that are M&A disputes. The Paris Mediation and Arbitration Centre (CMAP), an arbitral institution run by the Paris Chamber of Commerce, provides a breakdown by subject matter only for the disputes mediated under its aegis (of which 5 per cent were M&A disputes in 2017).
As to the proportion of M&A transactions giving rise to some sort of formal dispute resolution procedure, whichever the means of dispute resolution involved, it is difficult to say. The authors believe this to be low, based on experience and market insight, except in hostile public offers where litigation regularly plays a substantive part in the process.
Form of dispute resolution
Given the absence of available statistics for French commercial courts or for arbitration proceedings, it is difficult to provide a fact-based assessment of the frequency of the different forms of dispute resolution used for M&A disputes in France.
In the authors’ experience, M&A disputes in France are generally subjected to a means of dispute resolution that includes third-party ruling. Although mediation seems to be increasingly used in France, it remains relatively rare for M&A disputes, as are other alternative means of dispute resolution. Among the dispute resolution means involving a third-party ruling, litigation is largely favoured in France. Inserting an arbitration clause in M&A transactions is not a standard market practice. It was assessed that only around 13 per cent of M&A transactions featured such a clause in 2019.
The reasons for agreeing on arbitration include the desire to avoid courts in jurisdictions where proceedings are time consuming and the outcome is highly unpredictable, the need for a neutral forum and easy enforcement, as well as the desire to prevent a public process for particularly sensitive data when the dispute concerns M&A transactions. These reasons are considered more compelling in international transactions.
Parties to domestic transactions in France tend to favour litigation, mainly out of concern about the relatively high costs of arbitration, especially in complex proceedings, and about the occasional failure to fulfil the potential efficiencies in practice. French court proceedings are less expensive than arbitration as there are no court fees (irrespective of the stakes of the dispute), the heavy reliance on written evidence and submissions leads to shorter hearings, and there is an absence of large-scale document production procedural phases.
The CMAP was established in 1995 at the initiative of the Paris Chamber of Commerce precisely to provide a less expensive alternative for minor disputes to the International Chamber of Commerce, which was historically favoured by French parties given that it is based in Paris.
Grounds for M&A arbitrations
There is no statistical or other publicly available information on the relative frequency of different grounds for M&A arbitrations in France.
In the authors’ experience, the most frequent subject of M&A disputes, whether litigated or arbitrated, lies in earn-out or price adjustment provisions and warranty claims, mostly in private M&A.
Claims based on pre-contractual failure to disclose or fraud are also rather frequent in the authors’ experience, considering that French law imposes a general pre-contractual duty on every party to disclose a minimum of information about the transaction (see below).
Claims for failure to complete the transaction are not a very common ground for arbitration in the authors’ experience. It is more common to have a party claiming that negotiations were wrongfully terminated by the other parties with a reference to the overarching duty to act in good faith. Such disputes are not usually covered by an arbitration clause as the parties generally terminate negotiating before reaching an agreement.
Fraud and failure to disclose
French law imposes a general duty on parties to disclose information to their counterparts before entering into an agreement.
Any information important enough to be decisive for the consent of the other party must be disclosed if the latter legitimately (1) does not know it and (2) relies on their counterpart on the subject.
Information about the market value of the object of the transaction need not be disclosed.
Failure to comply with this duty of disclosure is cause for compensation under tort law for the loss of a chance to contract in more advantageous terms and conditions.
Fraud, understood as the act of implementing deceptive schemes or willingly providing false, misleading or deceitful information to have the opposing party accept terms and conditions contrary to their interests, corresponds to the legal concept of dol in French law. Dol extends to the voluntary withholding of any information that is decisive for the consent of the other party.
The applicable standard for fraud is that the other party would not have entered into the agreement in the absence of the fraud or would only have entered into the agreement on the basis of significantly different terms and conditions. This standard relates to the people and circumstances in which consent was given.
Agreements resulting from fraud may be annulled at the request of the victim of the fraud, including partially in some circumstances, and compensation may be granted.
Burden of proof
French law follows the actori incumbit probatio principle, according to which a person who makes a claim should prove it is valid and grounded. The burden of proof is automatically switched on the defendant in some circumstances, often where one party is a professional and the other is a consumer. It is noteworthy that whoever has a disclosure duty also bears the burden of proving they complied with it.
Agreements on the allocation of the burden of proof are admissible under French law when they relate to rights the parties may dispose of (which excludes matters governed by mandatory provisions to which the parties are not allowed to derogate by contract). Such agreements are limited in that they may not have the effect of overturning legally imposed conclusions, modifying the probative weight attached to confessions in court or to oaths, nor can they establish an irrebuttable presumption to the benefit of one of the parties.
It is generally considered that arbitral tribunals are not bound by national law provisions in regard to proof and evidence. Parties are free to agree on a different burden of proof allocation or on the weight of the different forms of evidence within the limits of fair trial, although this appears to be very rare in practice. In the absence of such an agreement, arbitral tribunals have broad discretion to determine the admissibility, relevance, materiality and weight of evidence or on the allocation of the burden of proof, whether by referring to the provisions of a given national law or not.
French law, whether statutory or case law, does not set forth any rule on the pooling of knowledge of sellers with management or other representatives of the target, although the question of the amount of information actually deemed to be known by the buyer at the time of conclusion of the contract is often a matter of importance in M&A disputes. Parties to M&A transactions therefore generally address this subject in their agreements.
The remedies available under French law for a breach of contract are listed in the Civil Code. Parties facing a breach of contract by the other party may:
- refuse to fulfil or suspend the performance of their own obligations;
- request specific performance of the non-performed obligation;
- ask for a reduction of the price agreed under the contract;
- terminate the contract unilaterally or seek a judicial ruling to this effect; or
- request compensation for the harm they suffered as a direct consequence of the breach.
Exception of non-performance may be validly invoked after a formal notification to the breaching party and only if the breach is significant. In an M&A dispute, a buyer could typically be tempted to refuse to pay, or suspend the payment, of all or part of the purchase price; for instance, if the seller fails to cooperate effectively during a contractually organised transition period.
Specific performance may be requested from the other party except if the performance became factually impossible or if the other party acted in good faith and the costs of performance would be manifestly disproportionate to its benefit for the claimant. There is no concept of contempt of court under French law, and specific performance is therefore usually ordered under a financial penalty for each day of late performance. Performance may also be obtained from a third party at the expense of the breaching party.
A price reduction may be requested when the other party only partially delivered the performance obligation stipulated in the contract, and when the price has been paid and no exception for non-performance may be effectively invoked. Courts and arbitral tribunals are not granted the power to substitute their own assessment of the price that should have been applied to a given transaction. They may only reduce the price agreed by the parties in proportion to the partial performance.
Termination of the contract may be unilaterally imposed on one party in the event of non-performance on the part of the other party. Where no specific stipulation grants a right to terminate the agreement, unilateral termination is possible after a formal notice to the breaching party and under the standard that the breach must be significant enough that a reasonable person would consider it impossible to continue the contract. Termination may also be sought from the competent court or arbitral tribunal. In M&A transactions, decisions to terminate the agreement usually lead to the unwinding of the entire operation and are to be very carefully considered.
Compensatory damages may be awarded to the victim of the breach to reinstate the situation they would have been in had the breach not been committed. Parties may agree beforehand on a lump sum compensation in their contract or on limitations of liability (see below).
Remedies may be cumulated under French law, where compatible.
Measure of damages
Under French law, damages merely serve the purpose of compensating the harm suffered. Non-compensatory damages are not available as a remedy, whether in the form of punitive damages or disgorgement of profits.
Damages are assessed by reference to the harm suffered, whatever their nature (moral, loss incurred, gain foregone). According to the principle of full compensation, damages must have the effect of reinstating the situation of the victim of the breach to what it would have been had there been no breach. There is no legal guidance as to the calculation method to be used to evaluate the harm to be compensated. Parties are in charge of discussing this evaluation, usually with the assistance of expert evidence, under the supervision of the court or arbitral tribunal. In M&A disputes, this frequently entails discussing the valuation of a business.
The principle of full compensation is somewhat limited when claims are based on contract law, by opposition to claims based on tort law. Under French law, harms suffered from a breach of contract are compensable only to the extent that they were foreseeable at the time of the contract. The rationale is that parties must be able to grasp the full extent of their risks when they enter into business transactions, and to rely on this assessment even if the transaction fails. However, this limitation does not apply if the breach is intentional or amounts to gross negligence.
Parties to a contract may stipulate that breaches give rise to lump sum compensation. Such stipulations are enforceable under French law except where the amount stipulated is manifestly excessive or derisory, in which case courts and arbitral tribunals have the power to adjust the amount agreed on between the parties.
Limitations of liability clauses are also enforceable under French law except when they have the effect of depriving a party of the benefit of the main performance they were to expect from the transaction. Clauses excluding all liability in the case of breach of the main obligations of the contract are in most cases unenforceable under French law on this basis.
Special substantive issues
Parties contracting without any bargaining power, although this is very rare in M&A transactions, have been protected under general contract law in France since 2016. Where non-negotiable terms and conditions are imposed on a party in a given transaction, these terms and conditions are deemed of null effect when they result in a significant imbalance between the rights and obligations of the parties (for instance, one party may terminate a contract at any time without cause while the other needs a grounded prior notice of several months). Imposing, or attempting to impose, such an imbalance on a weaker party may also entitle that party to compensation. The balancing of rights and obligations in non-negotiable terms and conditions falls under the purview of the courts, but not the fairness of the bargain itself. Courts and arbitral tribunals are not empowered to review the price agreed between the parties.
Another potential issue concerns options contractually granted to parties. Traditionally such options, whether put or call, could not give rise to specific performance when retracted before being exercised by their beneficiary, except where expressly stipulated otherwise by the parties. The withdrawal of an option could only be remedied by damages, which proved to be inadequate in numerous M&A disputes. The Civil Code was reformed on this particular issue in 2016 to reverse this approach, and provide that options may give rise to specific performance even if the parties had not expressly agreed on it.
Special procedural issues
Under French law, choice of court clauses are only valid when agreed among professionals. This rule has proved to be a recurring difficulty in M&A transactions, as it is not uncommon that at least one of the parties be an individual person with no professional activity (the spouse or children of the majority shareholder for instance, or a retired professional). As a consequence, parties cannot exclude the risk of having to refer potentially complex M&A disputes to a local court with little experience of related issues. Arbitral clauses are, however, valid in these circumstances and may be a desirable alternative.
French courts tend to frequently resort to court-appointed experts in technically complex matters such as M&A disputes. A separate phase of the proceedings then takes place with the parties exchanging arguments in a contradictory debate under the supervision of the court-appointed expert. Courts are not bound by the factual conclusions of the experts they appoint, but they usually consider their evidence to be more convincing than party-appointed experts’ reports. In the authors’ experience, arbitral tribunals are less likely to appoint experts directly and tend to rely more frequently on party-appointed expert evidence.
M&A disputes tend to be multipartite, which could lead to difficulties where arbitration clauses are not carefully drafted. In 1997, the French Court of Cassation stated in the Dutco case that fair trial entails all parties having an equal influence on the composition of the arbitral tribunal. In that case, the claimant had initiated arbitral proceedings against two German companies, both of whom claimed to be entitled to appoint their own arbitrator given that their interests were not strictly aligned. They were forced to make a joint nomination in accordance with the arbitration clause and the applicable rules of arbitration. The final award was annulled by French courts on the ground that the claimant had had a greater influence on the composition of the arbitral tribunal than the two respondents. The need for the parties to have an equal influence on the composition of the tribunal has since become a matter of close attention for drafters of arbitration clauses, as well as for counsels involved in multipartite arbitration proceedings.
 Jean-Fabrice Brun is a partner and Edouard Vieille is an associate at CMS Francis Lefebvre Avocats.
 CMS European M&A Study 2020, page 80.
 Article 1112 of the French Civil Code.
 id., Article 1112-1.
 id., Article 1137.
 id., Article 1353
 id., Article 1356.
 id., Article 1217 et seq.
 id., Article 1231-5.