The Action Plan for Business Growth and Transformation (PACTE) was adopted on 22 May 2019. This ambitious law introduces (among other things) a new arsenal for the French state to monitor foreign investments in sensitive industries (for further details please see "Private M&A transactions and PACTE: part one"). It also clarifies and improves areas of corporate law, which will be of interest in the context of private M&A transactions, particularly those involving preferred shares and free share allocation plans.

Preferred shares: French version of Swiss knife

PACTE seeks to improve the preferred shares regime in order to make it even more attractive.

Since their creation in 2004, preferred shares have become a standard fixture in private equity transactions. Their success with investors, managers and key employees can be explained by the flexibility of the regime governing these securities. With this flexibility in mind, the lawmakers took one step further with PACTE.

Until PACTE, the voting rights of preferred shares had to be proportional to the share of capital that they represented. This restriction has now been lifted for all unlisted companies that can issue preferred shares bearing multiple voting rights. Therefore, preferred shares become an interesting and powerful tool for existing investors to monitor any future dilution.

Another interesting improvement that has been welcomed by M&A practitioners concerns the buy back of preferred shares.

Before PACTE, such buy back in unlisted companies was exclusively at the hand of the issuing company. Any buy back required at the initiative of a holder of preferred shares was excluded. PACTE introduces the possibility for a private company to buy back any of its preferred shares at:

  • the sole initiative of the holder;
  • the sole initiative of the company; or
  • the joint initiative of the holder and the company.

Investors holding preferred shares may consider this new possibility in order to organise their exit in advance.

New revolving cap for granting free shares

In private M&A transactions, implementing free share allocation plans is a way to structure management packages provided to key employees.

Employees who are granted free shares will legally own them when an acquisition period ends. The acquisition period is usually followed by a minimum holding period during which the free shares cannot be sold or transferred.

According to the previous regime, the free shares could not represent more than 10% of the company's share capital when the shares were attributed. Therefore, if the 10% cap was reached and the company's share capital remained the same, no additional free share allocation plan could be granted.

PACTE amends this regime so that the 10% will not take into account:

  • the shares which have not been transferred to the employee when the acquisition period ends (eg, because one or several conditions were not satisfied); or
  • the shares which are no longer subject to the holding period.

In other words, as result of PACTE, companies now benefit from a revolving facility to issue free shares. Once the free shares have been transferred fully to employees and the holding period terminated, a company's ability to issue new free shares returns to 10%.


PACTE has brought several answers, clarifications and improvements to the rules currently applicable to the preferred shares and free share allocation plans regimes, which will undoubtedly be useful to investors and companies when undertaking private M&A transactions.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.