Acquisition of a Distressed Business: Can Directors, Shareholders and Interposed Persons stand as candidates?
The prohibition on acquiring a distressed business does not apply only to official directors
Article L.642-3 of the French Commercial Code (Code de commerce) prohibits certain persons connected to a distressed company from submitting a takeover offer. The purpose of this rule is to prevent individuals who participated in the management of the company from recovering its assets under privileged conditions to the detriment of creditors. In practice, however, the issue is rarely as straightforward as it may appear. Behind a title, a corporate function or a shareholding may lie far more complex situations.
Being a shareholder does not automatically mean being excluded
Many shareholders mistakenly believe that they can never acquire a company in which they already hold shares. This is not necessarily the case. The mere ownership of shares does not automatically prevent a person from submitting a takeover offer. Courts primarily examine the role actually exercised within the company and assess whether the person held any real managerial authority or exercised effective control over the business.
The concept of a de facto director represents a major risk
This is often where difficulties arise. A person who is neither officially a manager nor a president may nevertheless be regarded as a de facto director if they actively participate in strategic decisions or the day-to-day management of the company. In such circumstances, their takeover offer may be challenged. Courts conduct a factual analysis of the situation and do not limit themselves to the positions appearing on an organizational chart.
Former directors are not always excluded
Contrary to a common misconception, a former director is not automatically barred from acquiring the company. The French Supreme Court (Cour de cassation) has already accepted that a former director who genuinely ceased performing managerial functions before the opening of insolvency proceedings may submit a takeover offer (Cass. com., 23 September 2014, No. 13-19.713). Courts nevertheless carefully verify that the resignation was genuine and does not conceal a continuing exercise of power or an attempt to circumvent Article L.642-3 of the French Commercial Code.
Groups of companies often raise specific difficulties
Where several companies are involved, the analysis becomes even more complex. Courts may examine whether the offer is submitted directly or through an interposed person. Family, financial, corporate or organizational links may therefore be scrutinized closely. Within domestic and international corporate groups, the control structure may become a decisive factor in determining the admissibility of a takeover offer.
Supervisory bodies may benefit from a specific legal status
Not every corporate function is considered a management function. The French Supreme Court has notably held that a member of a supervisory board is not, in principle, a director of the company, as their role is primarily one of oversight and control (Cass. com., 8 January 2020, No. 18-23.991). This distinction may be particularly significant when assessing the admissibility of a takeover bid.
A financially sound offer may be rejected for legal reasons
A takeover project may be fully financed, preserve business operations and protect jobs, yet still be challenged because of the profile of the proposed acquirer. De facto director status, former management functions, the use of an interposed person, group structure issues or links with the distressed company are all factors that may become decisive during the court’s review of the proposed acquisition.
Anticipating risks before submitting an offer
The success of an acquisition of a distressed business does not depend solely on financing or on the economic merits of the proposed project. It also requires a thorough assessment of the legal position of the prospective acquirer. Where a transaction involves shareholders, current or former directors, holding companies, subsidiaries or foreign investors, a preliminary legal review will often help identify risks, secure the proposed offer and avoid the possibility that a strategically important transaction could be challenged after months of preparation.