The Supreme Court recently ruled that the granting of a call option over an asset which is subject to a pre-emption right violates such pre-emption right.(1) In this specific case, the call option had been exercised when the pre-emption right was no longer applicable. However, the court held that the transfer was in breach of the pre-emption right as it resulted from the exercise of a call option agreement that was entered into when the pre-emption right was still applicable.
This decision highlights the fact that, despite the recent reform of contract law – which entered into force on 1 October 2016 and has strengthened, in particular, the enforceability of put and call options (for further details please see "New rules for put and call options") – timing and drafting are critical to secure M&A transactions.
Timing: context matters in transactions
The pre-emption right mechanism is widely used in shareholders' agreements and articles of association to prevent one or several shareholders from unwelcomed new shareholders. If the grantor of the pre-emption right intends to transfer their shares, the beneficiary of the pre-emption right has the right to pre-empt the shares which are subject to such transfer.
It could be assumed that the shareholder who granted a pre-emption right agreed not to transfer their shares to a third party before the shareholders' agreement was terminated. In light of this decision, shareholders' undertakings appear to be much broader. The grantor of the pre-emption right must inform the beneficiary of the pre-emption right as soon as they intend to transfer their shares, including when negotiating and executing a call option.
Shareholders that are willing to secure the sale of their shares before the expiry of a pre-emption right granted over such shares should therefore consider the adverse effects of entering into negotiation when the pre-emption right is still applicable.
Drafting: caution is of the essence
The execution of a put option agreement (instead of a call option agreement) may have changed the Supreme Court's decision. However, a cautious approach is necessary as even if a shareholder has granted a pre-emption right, they are not allowed to enter into any preliminary agreements (ie, agreements aiming at agreeing on the term of a future transaction, such as put and call option agreements) until the pre-emption right expires.
Conducting due diligence can comfort buyers, but it is key that representations and warranty provisions in preliminary agreements cover these aspects, especially in light of the new Article 1123 of the Civil Code. Indeed, the law now states that a transaction occurring in breach of a pre-emption right is voidable if the buyer acted in bad faith.
To avoid such risk in M&A transactions, it is highly recommended that buyers ascertain from the seller's declaration that they are the sole owner of the shares and that such ownership is free and clear from any undertaking to sell at the time of the signature of the agreement and the completion of the transaction.
When entering into agreements in the context of M&A transactions, sellers and buyers should always bear in mind that the enforcement of such agreements might be strongly hindered by existing undertakings and unprecise provisions.
Endnotes
(1) Cass Civ 3, 6 December 2018, 17-23.321.
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