French Court of Cassation, 18 September 2024 (No. 23-10.183)

Introduction

The Seller was the sole shareholder of a company. On 12 June 2019, he sold all his shares to the Buyer, transferring full ownership of the company.

The Dispute

The Buyer alleged that the Seller had failed to disclose essential information about the company’s financial situation, in particular the existence of outstanding debts and ongoing contracts. Arguing that this omission constituted fraudulent concealment (“réticence dolosive” under French law), he initiated legal proceedings seeking to have the transfer annulled and to recover the purchase price.

The Courts’ Decisions

Douai Court of Appeal

The Court of Appeal of Douai dismissed the Buyer’s claim. The Court held that, as a former manager of a company, he should have conducted his own due diligence prior to the acquisition. Consequently, the Court found that the Seller’s failure to disclose financial information did not amount to fraudulent concealment.

Court of Cassation

The Buyer appealed to the Court of Cassation. The Court of Cassation overturned the Court of Appeal’s decision. It reaffirmed that, under Article 1139 of the French Civil Code, an error induced by fraud is always excusable. By reasoning that the Buyer should have conducted prior verifications, the Court of Appeal had failed to establish a proper legal basis for its decision. Thus, the Court of Cassation referred the case back to the Amiens Court of Appeal for it to examine the question of fraudulent concealment in the light of the Seller’s disclosure obligations.

Takeaways

The Seller must disclose all essential financial information relevant to a transfer of a company’s shares. Withholding key details – such as the outstanding debts or ongoing contracts – may be considered as fraudulent concealment. Under French law, fraudulent concealment is considered a vice de consentement which justifies the annulment of the contract. Prior business experience does not place the burden of uncovering such information solely on the Buyer. While due diligence is always advisable, the Buyer’s failure to investigate does not excuse the Seller’s failure to disclose key financial information.

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