Alain Levy Gwenaëlle de Kerviler July 6 2016 Changes to contract law: impact on M&A and private equity AYACHE | Corporate Finance/M&A - France Alain Levy, Gwenaëlle de Kerviler Corporate Finance/M&A Confidentiality dutyDisclosure dutyPreferential agreementSpecific performanceChange of circumstancesFrench contract law will soon face a disruption with serious consequences for corporate finance practice following the issuance of Order 2016-131 (February 10 2016). The introduction of new principles to the Civil Code will significantly alter the way that negotiations and deals are structured.Confidentiality dutyA confidentiality duty has been inserted into the Civil Code, pursuant to which any person that uses or discloses confidential information obtained during negotiations may be held liable for damages, notwithstanding the absence of an express confidentiality undertaking entered into between the parties to the negotiation. The parties to a negotiation may nevertheless still have an interest in entering into confidentiality undertakings to determine precisely the nature of the information that will be deemed confidential.Disclosure dutyThe Civil Code revision creates a general, reciprocal pre-contractual duty to disclose among the parties. However, the language of the new order makes determining its precise scope difficult. The disclosure requirement applies to information of "a determining importance for the counterparty's consent" that is "known by a party" and is "directly and necessarily connected with the content of the contract or the capacity of the parties". Moreover, the counterparty must legitimately ignore the information or have legitimate reasons to trust its counterparty. This creates a de facto duty to make reasonable enquiries on the basis of 'legitimate trust', a concept yet to be defined in the context of M&A transactions. The text produces legal uncertainty and will be a source of litigation, as parties are likely to seek post-acquisition indemnities on the basis of a counterparty's failure to satisfy its pre-contractual duty to disclose.Preferential agreementThe new Civil Code dedicates an article to preferential agreements which, in the context of private equity, are most commonly encountered in the form of a pre-emption right or a right of first refusal. The new order falls short of practitioners' expectation of legal certainty. In practice, violation of a preferential agreement will result in an award of monetary damages. To obtain cancellation of the contract, the beneficiary of the preferential agreement will have to prove that the third party knew not only that the preferential agreement existed, but also that the beneficiary of the agreement intended to exercise its right.Specific performancePreviously, in private equity and M&A contracts non-performance was in principle resolved with punitive damages and specific performance was unavailable as a remedy. Although jurisprudence had already tempered this principle in limited circumstances, the provision of specific performance in the new order is more than welcome, as it provides a better form of protection. Unfortunately, however, a creditor will be unable to obtain specific performance where it entails a manifest imbalance between the cost for the debtor and the benefit to the creditor.Change of circumstances Contrary to prior jurisprudence, agreements may now be subject to a revision of their terms by a judge in the event of a change of circumstances that makes a term's execution excessively onerous. Previously, M&A contracts protected against material adverse changes that could occur between signing and closing with clauses allowing the purchaser to withdraw from the transaction. The general principle will now apply to all kinds of obligation (eg, earn-out clauses and warranties).While it appears that the new order will facilitate the execution of contracts, its implementation remains to be seen and creates legal uncertainty in the meantime.The amendments to contract law will become effective on October 1 2016 and will apply to contracts concluded after this date, with the exception of limited provisions that may apply to agreements concluded before this date.For further information please contact Alain Levy or Gwenaëlle de Kerviler at AyacheSalama by telephone (+33 1 58 05 38 05) or email ([email protected] or [email protected]). The AyacheSalama website can be accessed at www.ayachesalama.com.