Transfer of Company Shares Without a Liabilities Warranty: Risks and Disputes

A manager buys the shares of a profitable SARL (French limited liability company). Three months after signing, URSSAF (the French social security contributions body) notifies an adjustment relating to contributions due before the transfer. Then a former employee brings a claim before the employment tribunal (conseil de prud'hommes) for a dismissal that predates the transfer. The price was calculated on accounts that ignored these debts, and the transfer agreement contains no warranty clause. The buyer then discovers a harsh reality: under French law, a person who buys company shares (parts sociales) without a liabilities warranty has only narrow remedies, which are difficult to invoke and often doomed to fail. This article analyses what the buyer concretely risks, which remedies under the general law (fraud, mistake, latent defects) remain open, and why post-transfer disputes are won above all by proving intentional concealment.

What the seller actually warrants in the absence of a clause

The first mistake is to believe that the buyer of shares buys the business and its assets. Legally, the buyer acquires corporate rights, that is, a fraction of the capital of a separate legal entity. The company retains its own existence, its assets and above all its debts. The buyer becomes a shareholder in a structure whose liabilities remain attached to the company, not to the buyer personally, but whose value of the shares collapses as the hidden liabilities come to light.

In a transfer of company shares, the statutory warranty owed by the seller is limited. Under Article 1626 of the French Civil Code, the seller warrants to the buyer the peaceful possession of the thing sold, which the case law here translates into the warranty against eviction (garantie d'éviction): the seller must warrant the existence of the shares, their ownership and the fact that they are free of any third-party right. The seller does not warrant the value of the shares, the consistency of the company's assets or the absence of hidden debts.

In other words, if the shares exist, genuinely belong to the seller and are transferred without any third-party claim, the statutory warranty obligation is satisfied. The fact that the company conceals a hidden liability that ruins the value of the shares is not, on its own, enough to engage the seller's liability. It is precisely this limit that makes a contractual warranty indispensable.

The liabilities warranty, a purely contractual mechanism

The liabilities warranty (garantie de passif) is not provided for by any statute. It results exclusively from the will of the parties and the drafting of the transfer agreement. Its function is to make the seller bear the financial consequences of any liability whose origin predates the transfer but which comes to light afterwards. Without it, that liability remains with the company and therefore, economically, with the new shareholder.

Distinguishing the protective clauses

Market vocabulary covers several mechanisms that need to be distinguished:

• the liabilities warranty clause proper: the seller indemnifies the buyer for any increase in liabilities whose triggering event predates the transfer (tax adjustment, social security debt, employment tribunal award, commercial dispute revealed after the event)
• the assets warranty clause: it covers the overvaluation of an asset item, for example irrecoverable trade receivables or non-existent stock
• the so-called assets and liabilities warranty (garantie d'actif et de passif, GAP), the broadest formula, which combines the two
• the price adjustment clause: rather than indemnifying, it adjusts the transfer price downwards according to the liabilities revealed

These clauses almost always come with precise terms: a cap (maximum amount of the warranty), a deductible or a trigger threshold, a duration (often aligned with tax and social security limitation periods), and a guarantee of the warranty (escrow, bank guarantee, retention on the price) intended to ensure that the seller will be solvent on the day the buyer calls on it. The notification rules and the forfeiture periods applicable to calling on this warranty are detailed in our article on enforcing an assets and liabilities warranty.

In the complete absence of these stipulations, a transfer of company shares without a liabilities warranty leaves the buyer alone in the face of unpleasant surprises. The buyer can then only turn to the general law of contract, which is a markedly less certain ground.

The concrete risks of a transfer without a warranty

Hidden liabilities take various forms, and what they have in common is that they do not appear in the accounts presented to the buyer at the time of negotiation.

On the tax and social security side, the most frequent risk is the adjustment. The tax authorities and URSSAF may audit financial years closed before the transfer and notify reassessments of VAT, corporation tax or contributions, increased by penalties and late-payment interest. The debt arises legally from an earlier event but materialises after the transfer of the shares, when the buyer is already in charge.

On the employment side, proceedings before the employment tribunal brought by an employee dismissed before the transfer, or a requalification of current contracts, may result in a heavy award several months later. On the commercial side, a dispute with a supplier, a warranty claim by a customer or a dependence on a contract that cannot be renewed may collapse the profitability on which the price had been set.

In the property sector, the transfer of shares in a société civile immobilière (SCI, a French property holding company) perfectly illustrates the danger. A buyer who acquires the shares of an SCI that owns a building indirectly inherits the defects affecting the property. If works were carried out before the transfer and defects falling within the ten-year construction warranty (garantie décennale) appear afterwards, or if a neighbourhood dispute or a co-ownership debt had been concealed, the value of the shares is affected without the seller's statutory warranty coming into play. The approval of the transferee (agrément), the setting of the price and the liabilities warranty specific to this type of transaction are dealt with in our article on the transfer of SCI shares between investors.

In all these cases, the buyer has paid a price reflecting a distorted net position. The loss is real, but the basis for a remedy has still to be built.

The remedies under the general law open to the buyer

In the absence of a clause, the buyer falls back on the law of contract, reformed by Ordinance No. 2016-131 of 10 February 2016. There are three main routes, each with its own conditions and limits.

Fraud and fraudulent concealment, the most effective remedy

Fraud (dol) is defined in Article 1137 of the French Civil Code as a party obtaining the other's consent by deceitful manoeuvres, lies or the intentional concealment of information that the party knows to be decisive. Its second paragraph expressly refers to fraudulent concealment (réticence dolosive):

Fraud is also constituted by the intentional concealment by one of the contracting parties of information which that party knows to be decisive for the other party.

This is the preferred basis for post-transfer disputes. The case law has long accepted that the seller's knowing silence about a liability of which the seller was aware, an ongoing adjustment, an imminent dispute or a doubtful receivable, may constitute fraud and justify either annulment of the transfer or an award of damages.

The interest of this basis is twofold. First, it allows the buyer to seek nullity of the contract (Articles 1130 and 1131 of the French Civil Code) and restitution of the price, or to keep the transfer while claiming damages for the loss of value. Second, fraud makes excusable a mistake that would not otherwise have been: the buyer cannot be met with his or her own negligence where the counterparty deliberately deceived the buyer.

The difficulty lies in the evidence. The buyer must show that the seller knew of the liability, intentionally kept silent about it, and that this information was decisive for the buyer's consent. The mere existence of a liability revealed after the event is not enough: a tax adjustment based on a position that the seller could legitimately believe to be correct does not necessarily amount to intentional concealment.

Mistake as to essential qualities

Mistake is governed by Articles 1132 and 1133 of the French Civil Code. It is a ground of nullity where it relates to the essential qualities of the performance, provided it is excusable. The buyer could argue that he or she was mistaken as to the profitability or the real financial position of the company.

This basis is more fragile. The case law distinguishes mistake as to substance, which is admitted, from mistake as to value or economic profitability, which is in principle irrelevant. Being mistaken about the price or the prospects of gain is not enough: Article 1136 states that a mistake as to value, by which, without being mistaken as to the essential qualities of the performance, a party merely makes an inaccurate economic assessment of it, is not a ground of nullity. The buyer will therefore have to show that the mistake related to a substantial quality of the shares themselves, a delicate exercise where the dispute in reality concerns hidden debts.

The warranty against latent defects, a route most often closed

Article 1641 of the French Civil Code requires the seller to warrant the buyer against latent defects in the thing sold which make it unfit for its use. Applied to a transfer of shares, this warranty meets an obstacle: the defect must affect the shares themselves, that is, make them unfit for their purpose, and not relate to the company's assets.

The case law largely considers that a concealed liability is not a latent defect of the share, since the share remains legally capable of conferring shareholder rights. This basis succeeds only in marginal cases, for example where the liability is such that it jeopardises the very existence of the company. In practice, the buyer can hardly count on it.

The warranty against eviction, a limited safeguard

The warranty against eviction in Article 1626 protects the buyer against a third party's challenge to title and prevents the seller from taking back the customer base or the business transferred. It does not cover hidden liabilities, but it deserves to be known because it forms the irreducible foundation that the seller owes even without any clause.

The procedural and evidential obstacles of post-transfer disputes

Bringing an action after the transfer means overcoming several difficulties that the buyer often underestimates.

The first is the burden of proof. On the basis of fraud, it is for the buyer to prove the seller's knowledge of the liability and intention to conceal it. This proof is built from documents: internal emails, minutes of meetings, correspondence with the authorities, provisions not booked while a dispute was pending. Without these elements, the action remains theoretical.

The second is limitation. An action for nullity on grounds of defective consent is time-barred after five years from the day on which the mistake or fraud was discovered, pursuant to Article 1144 of the French Civil Code, within the limit of the five-year general extinctive limitation period of Article 2224. The buyer must therefore act diligently as soon as the liability is discovered and document the date of that discovery precisely.

The third is the characterisation of the loss. Even where fraud is established, the loss still has to be quantified. The buyer will have to show the gap between the price paid and the real value of the shares in light of the concealed liability, which frequently requires an expert report. Post-transfer litigation is therefore long, technical and costly, which explains why prevention by a well-drafted clause is always preferable to a lawsuit.

Securing the transfer upstream rather than litigating downstream

Disputes are prepared before signature. Three levers make it possible to reduce the risk drastically.

The first is the acquisition audit, or due diligence. Before fixing the price, the buyer has the accounts, current contracts, tax and employment position, declared disputes and off-balance-sheet commitments examined. This audit has a dual function: it informs the buyer's consent and it documents what the buyer knew, which will be valuable on the day the seller tries to argue that the information was known.

The second is the drafting of a complete assets and liabilities warranty clause, together with its terms: basis, cap, deductible, duration aligned with tax and social security reassessment periods, and above all a mechanism guaranteeing the seller's solvency. A liabilities warranty whose debtor is insolvent is worthless. Retaining a fraction of the price in escrow, or a bank guarantee on first demand, turns a paper undertaking into effective protection. Where the transaction concerns a property asset, the coverage of the risk of soil pollution is dealt with separately in our article on the environmental liabilities warranty.

The third is the articulation of the seller's representations with the warranty. The agreement must contain precise representations by the seller on the absence of disputes, the accuracy of the accounts and tax and employment compliance. These representations, when they turn out to be false, make it easier to demonstrate fraud and trigger the contractual warranty without having to prove intention.

Conclusion

A transfer of company shares without a liabilities warranty is not a transfer without protection, but a transfer whose protection depends entirely on the buyer's ability to prove deception. The general law offers a way out through fraud, provided that the intentional concealment of a decisive liability can be established. But mistake is fragile, the warranty against latent defects is almost ineffective, and the warranty against eviction is powerless against concealed debts. The balance of power is therefore structurally unfavourable to the buyer who neglected to negotiate a clause.

The position taken is clear: no transfer of shares, even between parties who trust each other, even at a moderate price, should be concluded without a prior audit and without a warranty clause accompanied by a solvency mechanism. A fraud claim remains uncertain; a well-drafted clause is a certainty. Before any signature, have the company's tax and employment position audited and have the agreement reviewed by an adviser: this is the moment when the balance of power is decided, not before the court two years later.

Frequently asked questions

Can a transfer of company shares be annulled for a hidden liability without a warranty clause? Yes, but only by demonstrating a defect of consent, principally fraud under Article 1137 of the French Civil Code. The buyer must prove that the seller knew of the liability, intentionally concealed it, and that this information was decisive for the buyer's consent. The mere appearance of a liability after the transfer is not enough: without proof of intentional concealment, the action most often fails.

What is the difference between a liabilities warranty and an assets and liabilities warranty? The liabilities warranty covers the increase in liabilities whose origin predates the transfer, for example a tax adjustment or an employment tribunal award. The assets warranty covers the overvaluation of an asset item, such as irrecoverable receivables or overstated stock. The assets and liabilities warranty (GAP) combines the two and offers the buyer the broadest protection.

Within what period must one act after discovering a hidden liability? An action for nullity for fraud or mistake is time-barred after five years from the discovery of the defect, under Article 1144 of the French Civil Code, within the limit of the five-year general limitation period of Article 2224. One must act without delay and document precisely the date on which the liability was revealed, since the starting point of the period is often disputed by the seller.

Does the warranty against latent defects apply to a transfer of company shares? Rarely. The case law considers that the defect must affect the shares themselves and make them unfit for their use, and not relate to the company's assets. A concealed liability therefore does not generally constitute a latent defect of the share, except in the extreme case where it jeopardises the very existence of the company. This basis is of little reliability in practice.

Is the buyer of SCI shares exposed to the same risks? Yes. By acquiring the shares of a société civile immobilière, the buyer indirectly inherits the liabilities attached to the building: co-ownership debts, neighbourhood disputes, defects capable of falling within the ten-year construction warranty on earlier works. Without a warranty clause, the value of the shares may fall with no automatic recourse against the seller, hence the importance of a technical and legal audit of the property before the transfer.

Is a liabilities warranty clause enough to protect the buyer? No, not on its own. A clause has value only if the seller remains solvent on the day the buyer calls on it. It must therefore be accompanied by precise terms (cap, deductible, duration) and above all by a guarantee of the warranty: retention of part of the price in escrow, a bank guarantee or a guarantee on first demand. Failing that, the buyer holds a right with no debtor to pay it.

Does fraud allow damages to be obtained without annulling the transfer? Yes. A buyer who is the victim of fraud may choose to keep the transfer while claiming damages for the loss of value of the shares, or seek nullity with restitution of the price. Maintaining the contract with compensation is often preferred where the buyer wishes to keep the company. The amount awarded corresponds to the gap between the price paid and the real value of the shares taking account of the concealed liability.