The risks of transferring criminal liability following an M&A transaction

A recent Constitutional Court ruling has reopened the debate on whether the criminal liability of companies can be transferred after a merger or acquisition. Let’s take a closer look at the state of play.

Banco Santander receives a sanction for a violation by Banco Popular

The story goes back a few years. In 2018 Banco Santander took over Banco Popular. Shortly afterwards, in January 2019, Banco Santander was indicted for allegedly criminal acts that took place years earlier at Banco Popular. In this case, the case concerns a failure to comply with the regulations on the prevention of money laundering and the financing of terrorism.

In May 2019, Banco Santander was sentenced to pay an administrative fine of one million euros. However, the Criminal Division of the National High Court overturned the indictment of Banco Santander, citing, among other criteria, the absence of typical behaviour in the resulting entity.

Everything has now changed with the ruling of the Constitutional Court no. 179/2023 of 11 December, which resolves an appeal for protection in a contentious-administrative case and concludes that the transfer of the administrative sanction to the successor does not violate the principle of culpability. It therefore upheld the financial penalty imposed on Banco Santander for an infringement that would have been committed by Banco Popular prior to its takeover.

The criminal liability of the company being acquired is transferred to the acquiring company

The debate focuses on whether in cases of succession between legal persons, criminal liability for acts committed by the absorbed company is transmitted to the absorbing company. In this respect, the Constitutional Court points to the principle set out in Article 130.2 of the Criminal Code: “to admit that the dissolution of the legal person entails the extinction of all liability for offences, as happens with the death of natural persons (Art. 130.1.1 CP), would be tantamount – as the State Attorney and the Public Prosecutor argue – to allowing liability to be evaded by continuing under another legal form the same activity in the exercise of which the typical conduct was committed“. However, in order to be able to declare the transfer of liability from one company to another, there must be “substantial economic identity” between the activity carried out by the absorbed entity and that carried out by the new legal owner.

In any case, it should be noted that this judgment is pronounced in relation to an administrative sanction and with respect to the challenge of that sanction before the Contentious-Administrative Chamber of the Supreme Court. In other words, it cannot be automatically extrapolated to penal sanctions of a criminal nature.

How this ruling affects mergers and acquisitions

This ruling highlights the risk assumed by company purchasers. Because the wording of Art. 130.2 PC opens the door to an automatic transfer of criminal liability. Following this ruling, the importance of the due diligence phase in M&A transactions is more evident than ever. Because it is essential to determine with the greatest possible certainty:

What criminal liabilities may have arisen in the acquired, merged or acquired company;
Whether there is “substantial economic identity” between the activities of the acquiring and acquired companies;
Whether there are other circumstances that mitigate the potential criminal liability of the acquiring company.

At Confianz we have a team of M&A specialists capable of foreseeing all these possible complications. Our extensive experience in this type of operations allows us to carry out the entire process with maximum guarantees.

By Álvaro Mendiola