Sale of a business: what happens to the contracts attached to the business?
The sale of a business is a complex and important operation in the life of a company. Valuation of the business, negotiation of the sale price, the fate of employees and the administrative formalities to be carried out are all key points that need to be given particular attention in order to prepare for the sale of a business.
However, when preparing for the sale of a business, there is one point that is often overlooked: the fate of current contracts. Yet this is not a neutral issue. Contracts play a decisive role in the valuation of the business, whatever the nature of the activity.
On the seller’s side, the value of the business may be based entirely on certain operating contracts, and the sale price will be all the higher as a result. On the buyer’s side, the assumption or non-assumption of certain contracts (exclusivity, debts, guarantees and liabilities, ongoing litigation, etc.) may or may not be a decisive factor in the buyer’s decision.
It is therefore essential to consider the fate of the contracts attached to the business.
What are the applicable regulations on the fate of contracts attached to the business?
The law provides for the transfer of the following contracts: commercial leases, employment contracts and insurance policies. Also included are publishing contracts, which will not be dealt with here as they are highly specific to the literary world.
For other contracts, such as distribution contracts, operating contracts or supplier contracts, the law does not regulate the question of their future. According to established case law, the principle is one of non-transfer, even if the contract is essential to the business. It is therefore up to the parties to organize the terms and conditions of any takeover by the purchaser.
Depending on the nature of the contracts in question, the contractual negotiating levers will be totally different. That’s why it’s important to be familiar with the relevant rules, so as to anticipate and ask the right questions.
Contracts assigned at the same time as the business
The assignment of these contracts is subject to a number of imperative formal and substantive conditions.
Article L 145-16 of the French Commercial Code governs the fate of commercial leases in the context of the transfer of a business, and provides for the nullity of any clause in the lease contract which would tend to prohibit the transfer of the lease to the purchaser of the business.
As a result, the right to the lease is transferred to the purchaser when the business is sold. However, the lessor must be informed of the transfer. This can be done by any means (registered letter, bailiff’s notice, notarial deed, etc.), subject to compliance with the specific provisions of the lease contract. It is not uncommon for lease contracts to contain clauses requiring prior approval by the lessor, or compliance with specific formalities.
Failure to comply with these formalities could render the transfer of the lease unenforceable.
Pursuant to article L 1224-1 of the French Labor Code, the transfer of a business entails the transfer of all employment contracts in force on the day of the transfer. No special formalization is required, nor is the employee’s agreement required. Employees will retain all seniority, wages, rights and benefits granted on an individual or collective basis.
The sale of the business does not constitute an event likely to justify the dismissal of certain employees, and the purchaser will therefore have to deal with current employment contracts. It is therefore advisable to carry out a social audit prior to the sale, in order to gain precise knowledge of any existing difficulties.
Damage insurance contracts
As a matter of principle, and in the absence of a clause to the contrary in the deed of sale, non-life insurance contracts are transferred to the purchaser at the same time as the transfer of the business. This transfer takes place ipso jure at the time of the sale, and has an impact on both coverage and the policyholder’s obligations. From a formal point of view, Article L 121-10 paragraph 3 of the French Insurance Code stipulates that the seller must notify the insurer of the transfer by registered letter with acknowledgement of receipt, failing which the seller remains guarantor as joint and several surety for premiums due.
Please note that this automatic transfer applies only to property and casualty insurance policies, and does not apply to personal insurance policies such as “key man” insurance, or to creditor or motor vehicle insurance.
It is therefore necessary to analyze current insurance contracts on a case-by-case basis to determine which ones are to be transferred with the business, and if necessary, for the parties to decide on the fate of other contracts by mutual agreement.
Contracts for which the transfer must be provided for in the deed of sale
Apart from the restrictive cases listed above, other operating contracts are not transferred with the business. However, these contracts are often essential to the business, and represent a major asset.
Under these conditions, the principle of contractual freedom prevails, and the parties will be free to determine by mutual agreement (i) the contracts to be transferred with the business, (ii) the conditions of transfer, if any, and (iii) the contracts to be excluded from the transfer.
In order to do this, it will be necessary to analyze the contracts at issue, in order to determine at least the nature of the contract, its term, and to ensure that it does not contain a clause prohibiting the assignment or making it subject to the agreement of the other party.
It will then be up to the parties to negotiate and agree the terms of the assignment. Here again, a rigorous analysis of the contract is required to understand any obligations that may be placed on the buyer, and to specify in the deed of assignment the respective obligations of the buyer and seller. Similarly, in the case of contracts that are not taken over by the purchaser, the question arises as to whether they should be terminated, and how any resulting costs should be apportioned.
Last but not least, the seller’s co-contractor must of course be notified of the contracts in question, either for information purposes only, or because a clause in the contract requires the seller’s co-contractor’s agreement.
In any case, each situation is different, and must be analyzed in the light of the overall terms and conditions of the proposed transfer.
It will then be a question of good negotiation, but also of rigorous drafting of the deed of transfer in line with the agreement of the parties, to avoid any potential conflict in the future.
Whether you are a seller or a buyer, a lawyer can help you to negotiate the sale of a business.
Our lawyers are ready to assist you in the sale of a business. A lawyer in your area belonging to the AGN network will deal with your question, and provide you with all the answers you need. Don’t hesitate to contact us by phone or e-mail, or schedule an appointment online at www.agn-avocats.com.
AGN AVOCATS – Sale of Business Department
09 72 34 24 72