General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
Aside from smaller transactions, where French law and language are typically used, larger deals featuring European or international lending syndicates use either French or English law-governed loan and intercreditor agreements, depending mostly on sponsors’ precedents and the composition of the syndicate. However, it is worth noting that the majority of recent larger syndicated transactions featured English law documents. In particular, in late 2015, the market developed an English law version (directed at European lenders) of the New York law-governed Term Loan B documentation, which was used in some deals since 2014. High-yield notes documents are mostly still governed by the laws of the state of New York. Security documents are normally governed by the law of the jurisdiction in which the assets are located.
Subject to exceptions, the French courts would uphold a choice of foreign law to govern an agreement in a suit brought before them where that foreign law is pleaded and proved, it being noted that notwithstanding the recognition of that governing law, where all other elements relevant to that agreement at the time of the choice are located in a country other than the country whose governing law has been chosen, it is possible that the choice of the law will not prejudice the application of provisions of the law of that other country that cannot be derogated from by agreement or, in one or more EU member states, it is possible that the choice of the law will not prejudice the application of provisions of EU law (where appropriate, as implemented in France) that cannot be derogated from by agreement. French courts may also take into account the law of the country in which performance takes place, in relation to the manner of performance and the steps to be taken in the event of defective performance. Further, if an original action is brought in France, French courts may refuse to apply the foreign law chosen by the parties if the application of that law is deemed to contravene French international public policy.
Enforceability in France of judgments from the courts of other EU member states is usually governed by the recast Brussels Regulation (EU) No. 1215/2012, which came into force on 10 January 2015. Pursuant to this Regulation, the recognition and enforcement by French courts of judgments obtained in other EU member states is achieved by way of application with a standard form certificate and copy judgment, rather than a requirement for the court to determine the merits of the case. The defendant has limited grounds to object, which include:
- that conflicting judgments exist;
- that recognition and enforcement would be manifestly against French public policy;
- that the defendant was not served with proceedings in sufficient time to prepare a defence; or
- that courts in a different jurisdiction should have had jurisdiction pursuant to the Regulation (eg, because the judgment relates to rights to immovable property in another jurisdiction).
The 2007 Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters applies to the enforcement of judgments from the courts of Iceland, Norway and Switzerland and is very similar to the recast Brussels Regulation.
For other countries, in the absence of a treaty for the reciprocal recognition and enforcement of judgments, a judgment rendered by any foreign court based on civil liability and enforceable in the relevant foreign country would not directly be recognised or enforceable in France. A party in whose favour that judgment was rendered could initiate enforcement proceedings (exequatur) in France before the relevant civil court that has exclusive jurisdiction over this matter. Enforcement in France of such a foreign judgment could be obtained following proper (ie, non-ex parte) proceedings if the civil court is satisfied that the following cumulative conditions have been met (whose conditions do not include a review by the French court of the merits of the foreign judgment):
- the foreign judgment is enforceable in the jurisdiction of the court that rendered it;
- the foreign judgment was rendered by a court having jurisdiction over the matter because the dispute is clearly connected to the jurisdiction of the court (ie, there was no international forum-shopping), the choice of the relevant foreign court was not fraudulent and the French courts did not have exclusive jurisdiction over the matter;
- the foreign judgment does not contravene French international public policy rules, both pertaining to the merits and to the procedure of the case, which include notably the right to a fair trial;
- the foreign judgment is not tainted with fraud under French law (for example, the parties did not submit the dispute to a foreign court in order to intentionally avoid the application of French law); and
- the foreign judgment does not conflict with a French judgment or a foreign judgment that has become effective in France and there is no risk of conflict with proceedings pending before French courts at the time enforcement of the judgment is sought and having the same or similar subject matter as that foreign judgment.
In addition to these conditions, it is well established that only final and binding foreign judicial decisions (ie, those having a res judicata effect) can benefit from an exequatur under French law. If the French civil court is satisfied that such conditions are met, the foreign judgment is likely to benefit from the res judicata effect as of the date of the decision of the French civil court and is, thus, likely to be declared enforceable in France. However, the decision granting the exequatur can be appealed.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
As a general rule, the acquisition of French companies by foreign entities is not restricted.
Nevertheless, certain transactions performed by foreign investors may entail one or more specific formalities, depending on several factors, such as the nature of the transaction, the industry sector or the amount of the contemplated investment.
Applicable regulations are less restrictive for EU investors than for non-EU investors, although it should be noted that it is the residences of the ultimate shareholders of the investor that are scrutinised by the French authorities.
The making of a foreign investment may be subject to one or more of the following formalities:
- a prior authorisation to be obtained from the French Ministry of Economy, in the event of an investment being made in sectors considered as sensitive and strategic (such as the military sector);
- a simple declaration for administrative purposes to be filed with the French Ministry of Economy (treasury department); or
- a simple declaration for statistical purposes to be filed either with the Bank of France or with the French Ministry of Economy (treasury department), as the case may be.
In addition to the above general rules governing foreign investments in France, certain specific laws and regulations reserve to French or EU persons the right to control, or set particular conditions for non-EU investors to invest in, companies of particular business activities. These include:
- insurance companies (article R.322-11-1 of the Insurance Code);
- financial institutions (articles L.511-12 and L.611-1 of the Monetary and Financial Code);
- press companies (article 7 of Law No. 86-897 of 1 August 1986);
- entities involved in the manufacturing and marketing of war materials (article 9, II-b of the Decree of 6 May 1995);
- publications dedicated to young people (article 4 of Law No. 49-956 of 16 July 1949);
- the audiovisual sector (articles 40 and 63 of Law No. 86-1067 of 30 September 1986);
- the air transport sector (article R.330-2 of the Civil Aviation Code); and
- investments regarding ship ownership (article 3 of Law No. 67-5 of 3 January 1967).
Cross-border lending is limited by French banking monopoly rules as further described in question 6. However, it should be noted that these do not apply to the subscription and transfer of bond instruments, as further described in question 3.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
The component parts of debt financing will vary depending on the overall amount of financing required and the availability, or lack thereof, of liquidity in the relevant debt markets. Financing can include senior term (amortising and bullet in variable proportions) and revolving debt, mezzanine bullet debt, payment-in-kind (PIK) bullet debt and high-yield bonds. While second lien debt and vendor financing were commonly seen a few years ago, they are currently almost absent from French acquisition financing structures. Unitranche or unirate facilities have developed in the French market over the past few years. These facilities are typically made available by private debt funds (often mezzanine debt funds converting to private debt) and replace both the senior debt and mezzanine debt components with a single bullet (or with limited amortisation) facility. They are, by nature, acquisition or refinancing debt (and more rarely capital expenditure or investments) facilities, and do not purport to serve working capital finance needs. They are generally committed and documented quicker than traditional senior debt. Both mezzanine and unitranche facilities often comprise an element of remuneration in the form of equity warrants giving their holders a right to subscribe for shares from the issuer at a price generally equal to the face (and not actual) value of these shares. They traditionally combine a cash pay interest element with a PIK capitalised element.
While smaller transactions generally comprise senior debt only, or a mix of senior and mezzanine debt, it is common for larger financings to comprise a combination of senior and mezzanine debt or high-yield bonds and senior debt. The top end of mid-market transactions can even be financed by all senior or unitranche debt pieces. Market conditions have, for some time, made it more difficult to fund acquisitions solely with traditional bank debt, except for smaller transactions.
Mezzanine debt, to the extent legally possible, is usually guaranteed by and secured on the same assets as senior debt (subject to legal feasibility, as outlined below). Intercreditor arrangements are put in place, pursuant to which in certain circumstances payment on the mezzanine debt is subordinated to the senior debt and the ability of the mezzanine lenders to enforce their guarantee and security package is subject to a standstill. Mezzanine debt is never structurally senior to the senior debt; it generally sits at the same level as the acquisition portion of the senior debt and is, therefore, contractually subordinated to it and will be applied to fund the purchase price and acquisition costs of the transaction. While a significant amount of the senior debt will be borrowed by the same holding company as the mezzanine debt, some senior debt may be borrowed at a structurally senior level to refinance existing debt within the target group at closing. Senior debt that is borrowed at operating company level and which is used to refinance existing debt or to finance capital expenditure or working capital requirements will benefit from an enhanced guarantee and security package that will not be available to senior acquisition debt and mezzanine debt due in particular to corporate benefit and financial assistance restrictions, and other legal considerations.
Mezzanine facilities traditionally mature one year after the latest dated senior debt. Financing structures, including second lien debt, are similar to mezzanine debt, except that the second lien debt is typically an additional tranche in the same credit agreement as the senior debt, but with a maturity date six months later than the other senior loans. Under the intercreditor agreement, second lien debt is contractually subordinated to the other senior bank debt in a similar manner to mezzanine debt, except that the second lien lenders may not have an independent right to enforce in some cases, and are subordinated to the senior debt when it comes to sharing the enforcement of security proceeds.
PIK debt and vendor financing are the most junior pieces of debt finance in the capital structure. They may be issued by the same holding company as the one issuing the senior and mezzanine debt (in which case they would also be subject to contractual subordination through the intercreditor agreement), but are also often issued by holding companies of the senior and mezzanine debt borrowers, and in each case tend to have limited, if any, recourse to security and guarantees. They mature after all other debt in the structure. The interest on PIK facilities generally capitalises, but there may be an option for the borrower to pay part in cash, if permitted under the terms of the other debt in the structure.
As pricing and liquidity in the bond markets has been more competitive than the bank markets, acquisitions have also been financed with the issue of secured high-yield bonds combined with a revolving credit facility with priority over the realisations of security enforcement (known as a ‘super senior’ revolving credit facility) or term debt ranking pari passu. High-yield bond issues are generally only suitable for larger transactions where the debt will not be repaid quickly because of the cost and non-call features.
One particular feature of the French market is that, owing to the banking monopoly restrictions set out in question 6, private debt funds can only make loans available to borrowers incorporated in France (or French branches of foreign companies) under newly adopted specific conditions, related to the eligibility criteria for the European ELTIF label, or the fulfillment of particular criteria recently introduced into French law.
However, traditionally mezzanine debt, unitranche debt and, more generally, any debt to be underwritten or made available by such private debt funds take the form of a bond instrument rather than a loan. French obligations are governed by a set of mandatory provisions enshrined in the Commercial Code.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
In public-to-private transactions (and more generally all acquisitions with respect to publicly traded instruments) the sponsor bank is required by law to guarantee to the holders of targeted shares, or other securities, that they will be paid their purchase price in the event that they contribute those securities to the offer, whether voluntarily or pursuant to any mandatory squeeze-out mechanism. This would obviously apply whether or not the offeror itself has sufficient funds to pay the purchase price. Consequently, sponsor banks have historically been very careful that the terms of the financing leave very limited, if any, room for the lenders to avoid making the corresponding facilities available.
It is common practice that the offeror’s lenders be asked to provide a first demand counter-guarantee in favour of the sponsor bank should the offeror not have sufficient funds to discharge the purchase price itself, or should it be legally prevented from doing so (eg, in the event of insolvency). To our knowledge, however, guarantees provided in the French public-to-private transactions market in favour of the sponsor bank only relate to the debt portion of the purchase price relating to the offer, and do not cover equity funded sources, so that the offeror and the sponsor bank enter into separate arrangements in this respect. The result of these counter-guarantee arrangements is that the offeror’s lenders will end up financing their share of the purchase price for the offer, whether in the form of acquisition debt made available to the offeror or through payment to the sponsor bank. Nevertheless, offerors still pay much attention to certainty of funds language in the facilities agreements because they would obviously prefer the funding of the purchase price to take place in the conventional way.
In France, as in many other jurisdictions, bidders and sellers have imported ‘certain funds’ provisions into the private acquisitions sector. While certainty of funds has become market practice for the larger transactions, the lower end of the market continues to see a substantial number of financing agreements with no ‘certain funds’ language. The language of certain funds in French transactions is substantially similar to that found in the other European jurisdictions.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
As in other jurisdictions, financing agreements usually include a purpose clause specifying how the proceeds of the loan facility or debt securities are to be used. However, such language would not result in the creation of a trust over proceeds so advanced but not so applied. Certain general French legal principles would also restrict the ability of the borrower to use a facility’s proceeds, typically where those proceeds were to be applied in a manner that is illegal or contrary to the borrower’s corporate benefit. Finally, ‘sanctions’ provisions have found their way into financing agreements relating to French transactions just as they have in other jurisdictions and, as a result, facilities and other financing agreements now customarily contain provisions that forbid the borrowers from using proceeds for purposes that would breach applicable sanctions laws.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
There are numerous indemnity provisions contained in a credit agreement covering various matters, including:
- stamp duty;
- loss arising from participating in the transaction or providing funding;
- the costs of translation of a payment from one currency into the currency that was due under the finance documents;
- increased costs protection resulting from a change in law and costs and expenses arising from the transaction and amendments to the documentation; and
- enforcement and preservation of security.