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Company Law – Acts Before Incorporation

posted 3 weeks ago

On 29 November 2023, the French commercial, financial, and economic chamber of the Cour de cassation (FS-B+R) ruled the practical question of acts performed by founders before incorporation of their company. This case is considered as a reverse of the common understanding of the French Supreme Court’s case law.

According to article L210-6 alinea 2 of the French commercial Code (applicable to commercial companies), “Persons who have acted in the name of a company in the process of being incorporated before such company being granted the legal personality are jointly and indefinitely bound by acts therein entered into, unless the company, after being duly constituted and incorporated, takes over such acts entered into. Such acts are thus being deemed as having been entered into in the first instance by the company”. This article is a replica of the common rule applicable to companies i.e. 1843 of the French civil Code which shows the importance given by French law to this possibility for the company to take over pre-incorporation acts.

In the same perspective, EU derivative regulation (article 8 of directive 2009/101/EC of 16 September 2009) states that “If, before a company being formed has acquired legal personality, action has been carried out in its name and the company does not assume the obligations arising from such action, the persons who acted shall, without limit, be jointly and severally liable therefor, unless otherwise agreed.”). It is thus only by way of exception that the company can assume such pre-incorporation acts by the willingness of their founders (and only with the mention of specific wordings in the relevant acts).

These articles are one of the keystones of the French regulation of companies aiming at preserving freedom of commerce and legal safety. The period pending before incorporation can be considered as a grey zone, as future business partners need to start their business facing at the same time the obligation to accomplish legal formalities to formally incorporate their company. French law provides for a balance between the necessity, for the future business partners, to swiftly take any opportunities of business and being at the same time protected by the corporate veil before incorporation (due to a retroactive affect by law).

The particularity of French law, in this respect, as mentioned by the Cour de cassation itself, is the existence of a sliding of the interpretation of the law. Pre-incorporation acts are void if the act does not contain a specific wording: acts entered into “on behalf” or “in the name” of the company. On the contrary, if such wording is mentioned and the company assumes such pre-incorporation acts, the company will be liable of such acts.

As to the present case, a commercial lease was granted on 21 January 2019 to two persons representing founding partners of a company in the process of being incorporated. Following a disagreement between such founding partners, one of such partners sued the lessor on 11 March 2020 in the view of cancelling the commercial lease. On the basis of the existence of specific wordings inserted in the commercial lease, the Court of appeal of Dijon (in Burgundy) ruled the cancellation of the lease and the personal commitment of the founding partners for illegal occupation. In this perspective, the Court considered that future partners did not act on behalf of the company, but personally.

In this context, the founding partners seized the French Cour de cassation in the view of the cancellation of the Dijon’s Court of appeal decision. The main mean of cancellation invoked by the founding partners was precisely the existence of specific wordings: the commercial lease (entered into before notary) indeed stated that “the persons named herein are the sole founding partners of the company” and “the present operation is made in the name and on behalf of the company in the process of being incorporated”, referring to articles L210-6 et seq. of the commercial Code, specifically, and stating also that “the registration of the company in the commercial and company registry will, as of right, with retroactive effect be taken over by the company by the hereby, such acts being deemed to have been entered into by the company as from the start”.

The answer of the Cour de cassation is to refer to the position of its case law, stating that acts that may be taken over after the incorporation are only those expressly entered into “in the name” or “on behalf” of the company in the process of being incorporated and that are void acts entered into by such company without such wording, albeit the acts or the circumstances revealing that the willingness of the parties was that the act was entered into in its name or on its behalf.

Having stated that, the Cour de cassation follows its reasoning by observing that the “in the name” or “on behalf” requirement does not explicitly arise from French regulation. This position is considered to be enough to leave the door open to a reverse of case law. By this decision dated 29 November 2023, the position of the Cour de cassation moves towards a global appreciation of the common intention of the parties to determine whether the said pre-incorporation acts were entered into in the name and on behalf of the company (with an intrinsic and extrinsic appreciation) and whether, furthermore, after incorporation and acquisition of the legal personality the company may decide to assume the pre-incorporation acts.

It remains that this decision does not put into question the current true procedures available entitling the company to take over pre-incorporated acts (R210-5 et R210-6 of the commercial Code): (i) listing the said acts entered into on behalf of the company in a detailed schedule at the end of the by – laws, the signature of the by-laws evidencing the willingness of the partners to take over such acts after incorporation (ii) a specific mandate granted by founding partners to other partners (or manager not partners) to enter into pre-incorporation acts, such acts being taken over after incorporation (it being specified that the mandate, may, in certain circumstances be given after  the conclusion of the said contract – see J. Mestre, M.E Pancrazi, I. Grossi, N. Vignal, L. Merland, A.S. Mestre-Chami, Droit commercial T1, Activité commerciale, structure d’entreprise (commerçants, sociétés et autres groupements) LGDJ 31th ed. 2021 n°457 p 386) and (iii) the general meeting of the partners, after incorporation, may decide to take over such pre-incorporated acts (even if the requested formalities are not complied with – see M. Germain, V. Magnier, Traité de droit des affaires T2, Les Sociétés Commerciales, LGDJ, 23th ed. 2022, n°82 p.71).

The other side of the coin reveals that, the fact that a person enters into a contract naming himself as duly authorized to act on behalf of a company (without mentioning that the company is in the process of being incorporated) results in the contract being void due to its lack of legal personality (if the company not being in fine incorporated – e.g. C. cass. com. 9 January 2019, n°17-15.386). The company scheme also reveals that if the company is in fine incorporated, founding partners are personally bound by such pre-incorporated acts in the lack of the specific taking over procedures after incorporation (in particular in respect of a bill of exchange, C. cass. com. 3 avril 1973, n°71-13.527 and see also P. Didier, Ph. Didier, Droit commercial, T2 Les sociétés commerciales, Economica 2011, n°502 p 407).

As to the scope of the taking over, one should be interested in knowing that torts (e.g. unfair competition) cannot be taken over by the company (see. P. Le Cannu, B. Dondero, Droit des sociétés, LGDJ, 10th ed. 2023, n°348, p. 262) and that the Cour de cassation shows a reluctance to admit the taking over of procedure acts, ruling majority against while at the same time admitting the taking over of auction tenders (see. P. Le Cannu, B. D0ndero, op. cit. n°348, p. 262). In addition, the legal practitioner may be interested in using the substitution process, the company stepping into the shoes of the founding partners by performing the said act (but, in this later case, without a retroactive effect) (see D. Legeais, Droit commercial et des affaires, Sirey, 29th ed. 2023, n°407, p.210).

It remains that the new global appreciation of the common intention of the parties to determine whether the said pre-incorporation acts were entered into in the name or on behalf of the company (with an intrinsic and extrinsic appreciation) should be praised, as this new guidance given by the Cour de cassation gives only more latitude to lower courts to apply it and to limit the voidness of pre-incorporation acts. It is also possible to encourage lower courts to use the concept of bad faith (or fraud – as fraus omnia corrumpit) to open the possibility to make founding partners personally liable, as a sanction (and not the company).

Up to date 29 November 2023.

Author

Ludovic Timbal Duclaux de Martin

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