French Court of Cassation, 21 April 2022 (No. 20-20.421)

Introduction

On 5 November 2013, the purchaser acquired all of the shares in the target company,20% of which were held by the sellers. The purchase price for these shares included, in addition to a fixed price, a "gross margin earn-outpayment" payable upon the target company achieving a certain level of gross margin for the 2016 financial year and representing a percentage of such margin, and an "additional earn-out payment", payable annually for the financial years 2013 to 2017, upon the target company achieving a certain level of EBITDA and corresponding to a fraction thereof.

The purchaser's successive offers referred, for the calculation of the earn-out payments, to the objectives defined in a business plan entitled "Business plan synergies" (the BPS). However, the share purchase agreement of 5 November 2013 contained an entire agreement clause stipulating that "[the agreement] and the documents referred to therein constitute the entirea greement between the parties [...] and supersede all prior negotiations,discussions, correspondence, agreements and undertakings between the parties relating to the subject matter of the said agreement", and made no reference to the BPS.

The sellers brought proceedings against the purchaser for damages, contending that the purchaser had prevented them from receiving the earn-out payments to which they were entitled by failing to implement the synergies provided for in the BPS. They claimed compensation for the loss resulting from the reduction in the earn-out payments as well as the tax loss suffered.

The Dispute

The dispute concerned the question of whether the purchaser was required to implement theactions provided for in the BPS in order to enable the sellers to receive the conditional earn-out payments. The sellers argued that the purchaser had breached its contractual obligations and its duty of good faith by failing to implement the synergies necessary to achieve the performance targets conditioning payment of the earn-out.

The purchaser relied on the entire agreement clause in the share purchase agreement, which in its view excluded any reference to the BPS and, consequently, any obligation to implement the actions provided for therein.

The Judicial Decisions

Paris Court of Appeal (19 May 2020)

The Court of Appeal of Paris delivered its judgment on 19 May2020, dismissing the sellers' claims for damages.

The Court of Appeal noted that whilst the purchaser's successive offers referred, for the calculation of the earn-out payments, to the objectives defined in the BPS, the agreement of 5 November 2013 nevertheless stated that "[the agreement] and the documents referred to therein constitute the entire agreement between the parties [...] and supersede all prior negotiations, discussions, correspondence, agreements and undertakings between the parties relating to the subject matter of the said agreement" and made no reference to the BPS. It held that the fact that the contract mentioned a gross margin target identical to that in the offer of 6 September 2013 and specified that this figure had been "determined by mutual agreement" was not sufficient to establish that this constituted a reference to the BPS.

The Court of Appeal also considered that it had not been established that the exclusion of the BPS from the contractual scope was contrary to the common intention of the parties.

Court of Cassation (21 April 2022)

The sellers appealed against the Court of Appeal's judgment. Their appeal was based on four main grounds:

First ground: The sellers contended that an entire agreement clause cannot have the effect of excluding the general duty of good faith, and criticised the Court of Appeal for failing to investigate whether the purchaser had breached the requirements of good faith by maintaining the sellers in the illusion that it would cooperate and make its resources available to achieve the announced objectives.

Second ground: They argued that a contract containing an earn-out clause based on results obliges the purchaser to cooperate with the seller with a view to achieving the best result.

Third ground: They contended that the share purchase agreement, whilst containing an entire agreement clause, did not exclude the pre-contractual documents on which the calculation of the additional price had been based, given that Article 3.2.4 expressly referred to the gross margin target resulting from the application of the BPS.

Fourth ground: They invoked the principle that a condition precedent which is not met due to a breach by the beneficiary is deemed to have been satisfied.

The Court of Cassation dismissed the appeal, thereby upholding the Court of Appeal's analysis.

On the first ground, the Court of Cassation held that the Court of Appeal had carried out the requisite investigation concerning good faith and had exercised its sovereign power of assessment of the common intention of the parties, finding that the purchaser's bad faith had not been established and that the failure to implement the actions provided for in the BPS did not constitute contractual breaches.

On the other grounds, the Court of Cassation held that the Court of Appeal had correctly inferred from its findings that the sellers had not demonstrated that the purchaser had prevented the condition from being satisfied, given that the purchaser had not undertaken to implement the actions stipulated in the BPS.

Key Takeaways

French courts uphold the principle that legal certainty prevails when the parties have clearly formalised their commitments. Where a memorandum expressly states that it "constitutes the entire agreement between the parties and supersedes all prior negotiations, discussions, correspondence, agreements and undertakings", these courts give effect to this clause by virtue of the binding force of contracts. In earn-out sale transactions, any obligation to cooperate or to implement a business plan must be expressly stipulated in the final contract, failing which it may be set aside by the completeness clause.