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New legal regime for mergers of associations and foundations : entry into force and consequences

December 4th 2015

The relatively belated publication of the decree no.2015-832 of July 7, 2015, taken in application of the law no. 2014-856 of July 31, 2014 on social and solidarity economy, in particular, concerning its Articles 71 and 86, relating to mergers of associations and foundations raises the issue of the actual date of entry into force of the legislative provisions.

1. Pursuant to Article 1 of the French Civil Code, in principle, laws enter into force on the day following their publication, unless their enforcement requires that the regulatory authorities adopt implementation measures; in the latter case, the law shall enter into force at the time of entry into force of the regulatory decision.

The “need” for implementation measures, which defer the entry into force of the law, may result expressly from the terms of the law, but not exclusively. For the Conseil d’Etat (the French Supreme Administrative Court), “the entry into force of a law shall be deferred when it includes provisions that expressly or requisitely subordinate its enforcement to a certain condition” (as a recent example, Conseil d’Etat, October 15, 2014, no. 362.767; adde, EC, February 26, 2001, Laloubère, no. 220.021). And, on the contrary, the fact that the law specifies that certain enforcement methods shall be defined by decree does not always suffice to defer the date of entry into force (Cass. Civ. 1st, June 3, 2015, appeal no. 14-16.424).

2. In view of these principles, it appears that the entry into force of the law no. 2014-856 of July 31, 2014 on social and solidarity economy shall be deferred until the entry into force of the decrees of July 1 and July 7, 2015.

Article 71 of the law, in its paragraph V, grants to the regulatory authorities the task of “fixing the terms of enforcement of this Article”. If this does not always suffice, as we mentioned, to defer the entry into force of the law, the text per se of Article 71 seems to replenish this.

Thus, it is provided in section 4 of Article 71, I, that “the associations that participate in one of the operations mentioned in the first three paragraphs, which establish a merger plan, spin-off or partial contribution of assets, shall be subject to a publication on a support medium authorized to publish legal advertisements, in the conditions and time periods fixed by the regulations”.

Furthermore, the following section provides that “when the total value of all the contributions is of an amount at least equal to a threshold fixed by the regulations, the deliberations provided in the first three sections are preceded by the examination of a report established by a merger, spin-off or contributions independent auditor, appointed by mutual agreement by the associations making the contribution”.

The same applies for the provisions of Article 86 of the law on the social and solidarity economy relating to the restructuring of foundations.

The law seems to make explicit reference, or at least requisitely, to enforcement measures taken by the regulatory authorities, which makes the entry into force correspond to that of the decree of July 7, 2015, i.e., October 1, 2015. This, incidentally, is what is indicated on the ministry of economy’s website:

 http://www.economie.gouv.fr/files/loi_ess_mesures.pdf

3. In practice, the deferral of the entry into force of the ESS law places the merger which shall have occurred prior to October 1, 2015 in a somewhat unusual situation, insofar as the legal validity of mergers of associations has already been accepted by the Cour de cassation, outside of any legal context (in particular, Cass. Com., 12/07/2004, no. 03-12672).

The real issue if that of the enforceability to third parties of assignments of receivables and debt transfers in absence of a publicity procedure comparable to that required for company mergers; such publicity of which is now required for associations by the ESS law.

According to the analysis presented in point 1, the operations carried out prior to October 1, 2015 shall remain subject to the previous state of the law, which was definitely unsound from a conceptual perspective, but which did not seem to cause too many difficulties if we consider the very great number of operations carried out under its remit and the limited litigation resulting therefrom.

The issue is particularly awkward for the partial contribution of assets which, by definition, do not give rise to the dissolution of the contributing association. More troublesome for the partial contributions is the fact that the contributors are not released from the liabilities resulting from a transfer which, upon failure to be enforceable against the creditor, may only cause an imperfect delegation, by virtue of which the previous debtor shall remain obliged along with the current debtor.

In the case of mergers, if the absorbed association is dissolved, the creditors shall be unarmed, unless they can claim a preferential right on the shares transmitted by initiating a kind of revocation action to offset any impecuniosity of the absorbing company.

With regard to the debtors of the contributing or absorbed associations, they may resist payment claims by the companies benefiting the transmission of receivables in their regard, as long as these transmissions are not notified to them pursuant to Article 1690 of the French Civil Code.

4. To surmount these difficulties, could, perhaps, the setup of a publication provision such as provided by the ESS law, prior to the entry into force of this law, enable the enforceability of transfers of receivables and debts?

In practice, this course of action was used for numerous operations which had to be carried out between the enactment of the law and that of its implementing decrees, as the operators generally proceeded by replicating the rules applicable to companies for the publication in a legal advertisement journal.

Nonetheless, the press publications, on the model of those related to companies, do not include the reproduction of the essential elements of the merger treaty since, for companies, this is fully published in the Registry of Trade and Companies. This type of publication does not meet the requirements of the decree (Article 15‑2) which makes it mandatory to have a much more detailed publication, on the financial conditions of the operation and that is geographically wider in scope, as it must be made at the address of the registered offices of all the associations in question. Therefore, there is a concern that the limited publication made on the “company model” shall be considered insufficient.

5. Finally, thought needs to be given to the persistency of the pragmatic case law of the Cour de cassation on the notion of the total transfer of assets and liabilities which was accepted without any special publication provision. Insofar as the law currently organizes mergers of associations and thereby, gives a structure and legal conditions to the total transfer of assets and liabilities resulting from such operations, this case law may have become obsolete, being considered purposeless, by transposition into the case law of the dictum “cessante ratio legis, cessat lex”.

There should not be a problem for the period prior to October 1, 2015 as it appears legitimate to consider (at the very least, to hope…) that the intention behind the lengthy delay for the publication of the decree was to enable the termination of the “previous formula” operations, which were pending on July 31, 2014 or which were able to be completed between this date and October 1, 2015.

6. Yet, as from October 1, 2015, the issue needs to be examined more closely, based on the delimitation of the scope of a contractual commitment.

In this context, it is undoubtedly important to differentiate between the transmissions, which follow or cause the legal elimination of the settlor, and those which are made by a settlor, whose legal capacity continues despite the operation: the former falls within the notion of merger by absorption and the latter, within the mechanism of the partial contribution of assets.

With regard to the effects of contract, the fundamental distinction between these two types of operations resides in the ascertainable nature, or not, of the elements of assets and liabilities which are the subject of the agreement between the parties.

If the settlor shall become non-existent from a legal perspective, like an individual upon his demise, the delimitation of the assets and liabilities transmitted shall not involve uncertainty as it is defined as the total assets and liabilities of the settlor. This is the case for a residuary legacy.

On the other hand, if it is only a part of the assets and liabilities of the settlor which is affected by the transmission, the efficiency of the agreement demands that the components of the transmission be specifically defined or definable. Failing that, the deed shall be void for indetermination of its purpose (Article 1129 of the French Civil Code).

7. Yet, in the case of a partial contribution of assets concerning the transmission of a sector of activity, it is usual and difficult to overcome that the definition of the elements comprising this contribution shall remain quite general and shall not, strictly speaking, meet the requirement of the French Civil Code for determination.

In the areas where the law provides and organizes the partial contributions based on branches of activities, by instituting them as universal, the requirement of determination shall be flexible by the legal premise of the notion of activity branch.

On the other hand, if there is no specific legislative flexibility, it shall not be possible to consider that the determination of the purpose of the contributions agreement may be sufficiently guaranteed by the simple reference to the notion of activity branch.

Therefore, it appears that since the entry into force of the legal rules applicable to mergers and partial contributions of assets between associations, the contributions between branches which would be made without complying with the regulatory procedure, in particular publication, would be exposed to a risk of nullity for the indetermination of their content.

8. On the other hand, the mergers which accompany the legal elimination of the absorbed entity shall not be faced with any difficulty in principle with regard to the determination of the elements transmitted, as, by the very definition, it shall involve all the assets and liabilities of said entity.

Clearly, whilst this transmission may have full effect between the parties, its enforceability to third parties shall remain subject to conditions and limits recalled in point 4 supra.

9. In sum, we are entitled to believe that “unlawful” mergers shall be the exception in the future, but the problems that have been identified for the latter shall apply to the devolutions of Article 9 of the 1901 law which involve the transmission of all the assets and liabilities of the dissolved association for the benefit of one or several assignees.

The only means of avoiding the legal incertitude of these transmissions, when the patrimony to be transmitted is complex, shall be to sufficiently anticipate the elimination of the association so that the latter may validly conclude a merger treaty with a successor association.

From this point of view, the ESS law has provided a welcome clarification of the context in which the operators must now take action.

Jean-Claude Cavaillé
Stéphane-Laurent Texier