Since the era of Napoleon Bonaparte, French contract law has largely been governed by the same Civil Code. This year has seen a quiet revolution in the French legal system, bringing about modernisations that will improve the investment environment for buyout firms, particularly as relates to management equity. In our view, these changes will help drive further growth in private equity investment in France, building on what has already been a strong year for deal activity.
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The French government is addressing perceptions that France is not business friendly, earlier this year approving sweeping reforms to the Civil Code to make the country’s legal system more attractive. The changes came into effect last month, providing private equity firms with a simpler legal framework for deals, enhancing France’s appeal as a place for buyouts.
So what is new? A key change in the reformed code relates to the enforcement of leaver terms and related call options. Call options are commonly used in French PE deals, like all other European PE deals, to ensure that managers sell their stake when they leave a business. The Latham & Watkins 2016 European Private M&A Market Study found that multiple categories of leaver existed in 47% of deals and 64% of deals provided for managers to be subject to a vesting schedule. In the past, PE firms had to rely on specific drafting in call option agreements and on court precedents to enforce leaver terms, categories and vesting schedules in French transactions. This led to uncertainty, particularly when a manager was a ‘bad leaver’ and was trying to withdraw from his obligations under the call option agreement. The new Civil Code clearly states that the manager cannot withdraw his undertaking, hence avoiding potentially costly and time-consuming management disputes, strengthening the position of buyout firms and removing previous uncertainty.
The new Civil Code also provides greater certainty in cases where contractual obligations are breached, including by managers. The Civil Code clearly establishes specific performance as a legal sanction available against a defaulting party, regardless of whether it is included as a remedy in the contract. While performance in kind could be included in agreements as a default sanction prior to the reform, provisions were subject to court interpretation, and French courts were more commonly inclined to grant damages instead of compelling compliance with the relevant provision. The change is a positive step forward for enforcement of key provisions such as transfer restrictions, drag obligations and other management undertakings.
In our view, the Civil Code changes should be welcomed by deal makers, particularly those who have been deterred from making investments in France due to the complexity of the French legal system. As France’s buyout market goes from strength to strength, the new and improved legal framework will make it easier for established investors and new entrants to do deals and manage investments.