Introduction
Overhaul of structuring of management packages?
Evolution of private equity transaction financing
Electronic closings are here to stay… as are physical closings
Comment
2021 is not yet over, but it has already been an important year for the French private equity market, having brought changes that will have a long-lasting impact.
The International Private Equity Market conference (IPEM) took place in Paris on 8 and 9 September 2021 and marked the first large-scale meeting for the French private equity market since the beginning of the covid-19 pandemic. All players in attendance confirmed that French private equity is currently booming. In fact, 2021 is anticipated to be a record-breaking year for the industry, following a thriving summer and 170 leverage buyout deals recorded between January and mid-July in France. A number of factors have driven this surge, in particular the abundance of investors, as well as money and optimistic growth forecasts. The legal side of the market is also moving fast, not only due to recent reforms and case law that have impacted the structuring of transactions but also because transactions are increasingly being made electronically.
Overhaul of structuring of management packages?
On 13 July 2021, the Council of State ruled by way of three decisions that gains from share acquisition (in the context of management packages) must be taxed as "salaries and wages" and not as "capital gains from the sale of securities" if an employee benefitted from them in exchange for completing their duties within their company. The Council of State considered that this less favourable taxation may not only be caused by the acquisition or subscription of instruments (eg, share subscription warrants or stock options) at a preferential price but also by gains resulting from the sale of these instruments (if they constitute the counterpart of the activities performed by an employee). These decisions align with a previous decision on social contributions that the Court of Cassation made in 2019. The whole private equity industry is now trying to understand the ramifications of these new developments, which may result in additional costs for managers and the companies that employ them, not to mention the risks of litigation on past packages. All private equity players are now wondering about the future and how they can build secure packages.
Evolution of private equity transaction financing
An ordinance dated 15 September 2021 that reforms the law on security interests will come into force on 1 January 2022. This new piece of legislation was long overdue as a result of the archaic nature of French security instruments, which made them complicated for foreign investors to understand. This is no longer the case with the new ordinance, which modernises existing regulations and considers market practices.
Another ordinance dated 15 September 2021, which comes into force on 1 October 2021, transposes the EU Restructuring and Insolvency Directive (2019/1023). This new piece of legislation will undoubtedly trigger changes to intercreditor agreements that are governed by French law.
Electronic closings are here to stay… as are physical closings
Thanks to, or rather because of, the covid-19 pandemic, French private equity players have started to regularly use electronic signatures in order to facilitate deal closings during lockdowns. Electronic signatures were already in use in France before the pandemic, but closings for private equity transactions were mostly in-person with all parties, intermediaries and advisors in attendance. The on-going pandemic made such meetings impossible and the immediate switch from physical to electronic closings was necessary. After 18 months of the pandemic, the situation seems to have stabilised and French private equity players have not modified such proceedings so that they always take place virtually. Provided that no lockdowns are in place, closings for private equity transactions in France will be held both in person and remotely with the help of the electronic signature. It is important to note that sequencing is proving to be the key to a successful closing (for further details, please see "How to close a deal during lockdown… and in the future").
The past few months have been busy ones for the French private equity market, not only because of the considerable activity that has been observed but also because of new regulations and case law that will have a strong impact on the structuring and documentation of future deals.
For further information please contact Alain Levy, Gwenaëlle de Kerviler or Valérie Attia at AYACHE by telephone (+33 1 58 05 38 05) or email ([email protected], [email protected] or [email protected]). The AYACHE website can be accessed at www.ayachelaw.com.