Under French law, put and call options commonly refer to unilateral undertakings to sell or purchase securities pursuant to predetermined terms and conditions. Such options are undoubtedly key points in M&A transactions – for instance, in the legal architecture of management packages (ie, good and bad leaver mechanisms) or in the context of liquidity contractual arrangements (eg, tag-along and drag-along clauses).
Nevertheless, the actual enforcement of such options has long been questioned by tribunals and even Supreme Court jurisprudence, and practitioners and legal scholars alike have lamented on the legal risks associated with this jurisprudence for some years. Addressing such criticism in the context of the recent general reform of contract law (scheduled to enter into force on October 1 2016), the legislature has replaced the binding force of contracts at the centre of transactions and proposed to strengthen the enforceability of put and call options.
In 1993 the Supreme Court ruled that if a promisor withdraws the option granted to the beneficiary before the exercise of the option by the latter, tribunals cannot impose the completion of the underlying transaction. The court first decided that the revocation of the option had prevented the agreement from entering into force, and that options are obligations that are strictly punished by the award of damages (Article 1142 of the Civil Code).
Practioners therefore developed various mechanisms in order to balance the negative consequences implied by such jurisprudence, either by:
- providing for a fixed indemnity, even though in such cases judges were entitled to reduce the amount if manifestly excessive (Article 1152 of the Civil Code); or
- obtaining from the promisor a waiver of any and all rights under Article 1142 of the Civil Code.
However, despite these clauses, there was no guarantee that put or call options could be enforced in the event of a withdrawal by the promisor. In light of this, the legislature has amended the legal regime in order to provide more clarity and safety for the transactions.
The new Article 1124 of the Civil Code departs from the Supreme Court's jurisprudence. It states that "the revocation of the option before its exercise by the beneficiary does not prevent the formation of the promised contract". Thus, the irrevocable and binding character of the promisor's undertaking to sell or purchase, as the case may be, is strongly enshrined.
Such praiseworthy reform of the legal regime for put and call options puts contractual freedom back in its rightful place as a valuable component of business transactions under French law. It also epitomises the ambition of the general reform that will take effect from October 1 2016, which was to simplify and liberate contract law.
For further information please contact Alain Levy or Gwenaëlle de Kerviler at AyacheSalama by telephone (+33 1 58 05 38 05) or email (firstname.lastname@example.org or email@example.com). The AyacheSalama website can be accessed at www.ayachesalama.com.
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