French courts call PE a 'co-employer'

Private equity firms will have to exercise more caution when selling a shareholding in a distressed French portfolio company, as recent case law in France’s courts has extended the potential liability for a seller post closing.
 
The new principle was driven by recent court decisions, including a judgment against a private equity fund that was held liable for damages to the employees of a portfolio company in liquidation. The ruling was based on the fact that the firm was considered a co-employer of the portfolio company’s employees. According to Olivia Guéguen, a partner in the corporate and securities department of Dechert, this indicates that French courts are broadening the cases in which a shareholder is considered a “co-employer”, meaning that private equity firms will have to take greater care to ensure that the buyer of a distressed asset can secure the continued activity of the business after the sale.
 
“What French courts tend to say is that when you have sold the subsidiary the story doesn’t end there, that doesn’t void your responsibility,” Guéguen said. “From a period of 18 to 20 months, someone can come back and claim you made a fault when selling the company because you sold the company to someone who did not have the capability to ensure the continuity of the company, or because they were not a serious purchaser.”

If that occurs, the employees of the sold entity may now have grounds to claim damages from the former shareholder, for instance if they are dismissed post-sale and lose out on the generous collective dismissal plan that would have been implemented if the entity had remained under the ownership of the private equity firm.

Guéguen says there are several elements that firms should pay attention to, as they will be likely be heavily scrutinised by judges in France. These include a purchaser’s financial resources, knowledge of the business sector and acquisition track record. Support from banks will also demonstrate the seriousness of the project, as will the purchaser’s business plan.

“From a practical standpoint the best security you can have when you sell a distressed asset is to make sure you sell it to someone with a real business plan and who has the financial means to implement such plans,” she said. “This is why when the purchaser itself draws up the business plan, you make sure it is consistent with your own knowledge of the company and market and that they have either adequate internal resources or support from banks.”