Trends and climate
What is the current state of the M&A market in your jurisdiction?
The M&A market in France seems quite robust; in particular, the private equity market appears to be attractive relative to the United States or the United Kingdom, with lower multiples for international companies and world famous brands. Several large private equity funds such as KKR and Silver Lake have returned to France over the past 12 months. In addition, the growth of private equity (with €6.6 billion raised and more than €6 billion invested in development and financing growth companies in 2018) appears dynamic.
The favourable economic situation should help to maintain this dynamic growth during the first month of 2019.
Have any significant economic or political developments affected the M&A market jurisdiction over the past 12 months?
Since the election of Emmanuel Macron, the French government has shown a strong commitment towards entrepreneurs with companies of all sizes and stages of maturity. In addition, low interest rates and the strong cash position of industrial buyers and investors should continue to sustain strong M&A activity.
Further, it remains unclear whether Brexit will have a negative impact on the French M&A market; while the United Kingdom is an important commercial partner for France, several international banks are transferring parts of their European desks across the channel to France. A similar movement has been observed for large tech and healthcare companies, which are transferring their IT departments and innovation centres to France. Paris is increasingly viewed as a viable alternative to London as an economic and financial centre, although Amsterdam, Frankfurt and Dublin provide strong competition.
Are any sectors experiencing significant M&A activity?
The most significant increase has been in venture capital investments, amounting to €809 million (an 42% increase), with 441 operations during 2018 to date and a certain focus on investments within the healthcare and software sectors.
Are there any proposals for legal reform in your jurisdiction?
There are no proposals at present for legal reform with respect to M&A in France. However, the French government is continuing its work towards implementing a more business-friendly legal environment, with the aim of simplifying French labour law and lowering the applicable corporate tax rate.
What legislation governs M&A in your jurisdiction?
The following rules apply, depending on the nature of the transaction:
- the Civil Code covers general contract law, which would govern a share purchase agreement;
- the Commercial Code sets out the rules that govern French corporate entities;
- the Monetary and Financial Code sets out the rules applicable to financial markets and the issuance and transfer of securities for listed companies; and
- the General Regulation of the Financial Market Authority (AMF) regulates investments in financial markets and public takeovers.
How is the M&A market regulated?
The Ministry of Economy supervises foreign investments in France and has the authority to restrict them. The scope of its control varies depending on the origin of the investor (ie, European or non-European) as follows:
- Investment by an EU investor is restricted only to the extent necessary to fight terrorism and criminal activities.
- Non-EU investors or French companies controlled by non-EU investors must seek prior authorisation from the Ministry of Economy for investments in a number of strategic and sensitive business sectors, such as cryptology, electricity and gas or the military.
If a merger or an acquisition reaches certain thresholds, it must be notified to the Antitrust Authority. Notification is also required for foreign acquisitions likely to materially affect the French market or that otherwise reach certain thresholds in respect of turnover or market shares.
The AMF regulates and oversees public takeovers. Public takeovers are governed by the general regulation, which provides for a standard and simplified procedure, as outlined below. Further, prior to making a public offer, a bidder must obtain a declaration of conformity from the AMF as follows.
- Standard offer procedure – where the offeror, acting alone or in concert, holds less than 50% of the shares or voting rights of the target, only the standard offer procedure will apply.
- Simplified offer procedure – the simplified offer procedure may be used for:
- an offer by a shareholder that already holds – directly or indirectly, alone or in concert within the meaning of Article 233-10 of the Commercial Code – 50% or more of the target's equity and voting rights; or
- an offer for no more than 10% of the target’s voting equity securities or voting rights, taking into account the voting equity securities and voting rights that the offeror already holds, directly or indirectly.
The general regulation also provides for mandatory takeover and withdrawal offer procedures as follows:
- Mandatory offer – when a bidder, acting alone or in concert, comes to hold more than 30% of a company's equity securities or voting rights, such person must, on its own initiative, inform the AMF immediately thereof and file a proposed offer for 100% of the company's equity securities, as well as any securities giving access to its capital or voting rights, on terms that can be declared compliant by the AMF.
- Squeeze-out offer – a bidder holding, alone or in concert, at least 95% of the target’s voting rights, can voluntarily choose (ie, a voluntary procedure) or be requested by the AMF, acting on behalf of the minority stockholders (ie, a mandatory procedure), to offer to acquire the remaining 5% of the shares.
Are there specific rules for particular sectors?
Dedicated supervisory authorities are in charge of supervising acquisitions in certain sectors, such as telecoms, which is monitored by the French regulatory authority for electronic communications, and banking and insurance under the supervision of the Prudential Supervisory Authority.
Some of these administrative bodies may be entitled to issue rules or guidelines, with which companies within the sector should comply.
Types of acquisitions
What are the different ways to acquire a company in your jurisdiction?
The acquisition of a privately owned company can occur through:
- a share sale, where a buyer acquires all or the majority of a company’s shares;
- an asset sale, where a buyer acquires certain assets and liabilities of a company;
- the acquisition of a business (asset sale) as a going concern, requiring specific additional formal procedures set out in the Commercial Code; and
- a merger, where the target is merged with the buyer.
As for publicly traded companies, an acquisition is possible through a public tender offer.
Due diligence requirements
What due diligence is necessary for buyers?
As in any other comparable jurisdiction, the buyer should consider what level of due diligence is required based on the target’s business and other transactional circumstances. In that respect, the buyer should consider:
- the size and complexity of the transaction;
- the nature of the target’s business and its regulatory environment;
- the importance of the transaction to the buyer;
- the scope of the warranties and the level of indemnification;
- the buyer’s level of knowledge and expertise; and
- the available time and resources.
In conducting the due diligence, the prospective buyer and its representatives will assess and identify the material risks associated with the target and its business.
If a representation and warranty insurance policy will be obtained for the transaction, the demand levels on the due diligence may vary.
What information is available to buyers?
Public information regarding a company includes:
- the target’s financial statements and articles of association;
- the target’s business purpose;
- a list of the management of the target;
- information regarding historical mergers or demergers (if any); and
- the extent to which the company filed for bankruptcy if applicable.
As regards non-public information, the investment bank in charge of the bid process usually circulates a teaser to prospective buyers, disclosing the target’s main characteristics (without disclosing confidential information). Further, the target will provide an information memorandum with more detailed information on the target and its business (often including certain confidential information).
As regards non-public information, the seller and the target can prepare a data room for the due diligence process. In general, a data room is populated with information covering the previous three to five years of a company’s activities.
In respect of legal due diligence, a data room typically includes the following information:
- corporate documents;
- commercial contracts;
- details of financial arrangements and agreements;
- details of tax matters;
- details of real estate matters;
- environmental arrangements and agreements;
- details of regulatory matters;
- details of labour law matters;
- details of data privacy matters;
- details of litigation; and
- details of IP matters.
What information can and cannot be disclosed when dealing with a public company?
The EU Market Abuse Regulation (596/2014) prohibits the disclosure of ‘inside information’, defined as information of a precise nature which has not been made public relating directly or indirectly to one or more issuers or one or more financial instruments that if made public would be likely to have a significant effect on the prices of the debt and equity securities or related derivative financial instruments.
The EU Market Abuse Regulation prohibits the use of inside information for the purpose of acquiring or disposing of, for one’s own account or for the account of a third party, directly or indirectly, securities to which such information relates.
Consequently, particular attention must be paid when planning a public transaction to ascertain that the buyer does not become an insider and is thus prohibited from acquiring shares in the target (unless the information is made public, which might not be in the interest of either the buyer, the seller or the target).
How is stake building regulated?
The acquisition of a minority stake in a company whose shares are traded on a regulated market must comply with the notification and disclosure constraints set out in the Code of Commerce and the general regulation.
A bidder, either acting alone or in concert, when crossing certain thresholds upwards or downwards (ie, 5%, 10%, 15%, 20%, 25%, 30%, one third, 50%, two-thirds, 90% or 95%) of the target’s capital or voting rights, must notify the target and the AMF of its stake in the company.
Further, a bidder acting alone or in concert will also notify the AMF of its strategy going forward (in particular whether it intends to take control of the company) whenever the thresholds of 10%, 15%, 20% or 25% of the capital or voting rights are exceeded.
What preliminary agreements are commonly drafted?
Early in the negotiation process, the parties enter into a non-disclosure agreement to ensure confidentiality of information made available to the buyer for the purpose of assessing the transaction.
Further, a non-binding document (ie, a letter of intent) outlining the main terms of the acquisition is usually entered into. The letter of intent often includes certain binding terms, such as exclusivity, transaction expenses and confidentiality.
What documents are required?
Bidders express their interests in acquiring targets via letters of intent (either non-binding or binding). In addition, the following agreements are usually entered into with respect to M&A transactions:
- a non-disclosure agreement; and
- a share purchase or asset sale and purchase agreement.
Additional documentation may be required depending on the nature of the transaction (eg, a non-competition agreement, a transition services agreement, an escrow agreement or an agreement aiming at conveying specific assets).
Which side normally prepares the draft?
In general, the buyer prepares the first draft. However, if the seller (with its adviser) runs an auction sale, it will likely prepare the first draft and communicate it to potential buyers.
What are the substantive clauses that comprise an acquisition agreement?
Under French law, an acquisition agreement includes the following:
- a detailed description of the parties’ intent;
- a specification of what is included in the acquisition;
- the purchase price and payment terms;
- conditions precedent and closing conditions;
- representations and warranties;
- indemnification and remedies (including a statute of limitations);
- the costs and charges of the different parties; and
- details of the governing law and dispute resolution.
What provisions are made for deal protection?
As mentioned above, the parties will seek to secure the confidentiality of the provided information through a confidentiality agreement.
What documents are normally executed at signing and closing?
The parties will normally execute a sale purchase agreement, setting out the terms and conditions purporting to the sale and purchase of the target’s shares. On fulfilment of all condition precedents (eg, approval of the transaction by the relevant regulatory authorities) the acquisition will be complete. Documents signed after this phase (ie, at closing) will likely include the closing deliveries of the buyer (eg, bank undertakings and minutes of the shareholders approving the sale) and the seller (eg, share transfer forms and wire transfer certificates regarding the transfer of the purchase price).
Are there formalities for the execution of documents by foreign companies?
French law requires no particular formalities for the execution of documents by a foreign company.
Are digital signatures binding and enforceable?
To be enforceable under French law, a signature in electronic form must apply a reliable process of identification, proving the relation to the document to which it is attached. In practice, physical signatures are preferred.
Foreign law and ownership
Can agreements provide for a foreign governing law?
The parties may freely elect the law governing the agreement.
What provisions and/or restrictions are there for foreign ownership?
All foreign investments are subject to an administrative notification for statistical purposes. Further, if the investment pertains to one of the following sectors, it is subject to prior approval from the Ministry of Economy:
- activities likely to jeopardise public order, public safety or national defence interests; or
- research in or the production or marketing of arms, munitions or explosive powder substances.
The approval granted may have special conditions attached to ensure that the planned investment does not jeopardise national interests.
If the Ministry of Economy finds a foreign investment to be in violation of any of the conditions attached to the approval, it may:
- order the investor to desist from proceeding with the investment;
- alter the nature thereof; or
- restore the status quo at its own expense.
Such order requires prior formal notice to the investor. If the order is not complied with, the Ministry of Economy may, without prejudice to restoring the status, impose a financial penalty on the investor. The amount of the financial penalty will be proportional to the seriousness of the violations committed and is capped at twice the size of the prohibited investment.
Valuation and consideration
How are companies valued?
Although there are several valuation methods, companies are in general valued pursuant to:
- market comparables and precedents; or
- a discounted-cash flow method, in particular when it comes to international transactions.
What types of consideration can be offered?
In general, a buyer may offer cash, stock or any other means (eg, by agreeing to more limited warranties or statutes of limitations).
What issues must be considered when preparing a company for sale?
Early planning and efficient organisation are key components of a successful sale process. In particular, the seller should determine the deal structure (ie, a share or asset sale) and ensure that the company’s main assets and finances are in order and up to date. In that respect, the market practice is that vendor due diligence is conducted in order to address potential issues prior to initiating the sale process.
In addition, the following should be considered:
- establishing a deal team, including an external team with advisers;
- evaluating the company’s tax position and structure;
- drafting a seller friendly acquisition set of contracts, which would notably address usual concerns on merger control and antitrust aspects of the transaction;
- identifying the company’s material contracts and any change of control provisions provided for therein;
- ensuring that permits and licences are collected and in good order; and
- ensuring that corporate housekeeping is correct and up to date.
What tips would you give when negotiating a deal?
- Anticipation – successful bidders appear to be those that thoroughly and promptly investigate:
- the background of the sale (eg, its motivation);
- the extent to which the bidding process is competitive;
- any potential competitors;
- the deal breakers for potential buyers; and
- the seller’s tax and regulatory constraints.
- Communication – clear and uniform communication must be organised from the outset to optimise the process and avoid misunderstandings.
- Adequate timing – the preparation of a clear and tight timeline may ensure that no valuable time is lost during the transaction process. It will also keep pressure on all parties to sustain momentum and execute the deal rapidly.
Are hostile takeovers permitted and what are the possible strategies for the target?
Hostile takeover offers (ie, unsolicited by the target’s management) are feasible in France. Prior to 2014 it was mandatory for a target’s board of directors to maintain a neutral position with respect to any bids. However, since 2014 this neutrality principle must be stipulated in the target’s bylaws to be valid.
If the neutrality principle is not included in the bylaws, the board is free to take any of the defensive measures listed below, provided that it acts in the company’s corporate interest and does not violate the powers of the target’s shareholders. Defence strategies include:
- interventions on the stock market;
- the acquisition of an asset;
- free share issues;
- share capital increase;
- defence bonds;
- the PacMan defence;
- a white knight search;
- exceptional dividends;
- independent expertise;
- public to private mergers;
- amendment of the bylaws;
- puts and calls; and
- a buyback and share capital decrease.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Warranties are usually negotiated between the parties and cover a wide range of areas, from corporate and financial matters (eg, the company’s due incorporation, accuracy and completeness of its books, records and financial statements) to insurance, litigation and intellectual property (among other things).
The buyer will understandably request a broader range of warranties while the seller will try to provide as few warranties as possible.
In addition, the seller often provides for specific indemnification in areas identified as at risk during the due diligence process. These may include, for example, pending litigation or environmental issues.
Limitations and remedies
Are there limitations on warranties?
Under French law, the amount of indemnities which may be obtained through representations and warranties is capped at the purchase price. In addition, for a loss to be indemnified under representation and warranties, it must be direct, certain and foreseeable at the conclusion of the agreement.
What are the remedies for a breach of warranty?
Should a party breach a warranty, the non-breaching party can bring an indemnification claim.
Are there time limits or restrictions for bringing claims under warranties?
Time limits depend on the terms of the indemnification provisions freely negotiated between the parties. In general, the statute of limitations under French law usually expires after five years.
Tax and fees
Consideration and rates
What are the tax considerations (including any applicable rates)?
Acquisition of business through asset sales
Registration duties – the acquisition of a business is subject to transfer tax due by the acquirer and assessed on the sale price as follows:
- 0% up to €23,000;
- 3% for the portion of the sale price (or fair market value, if higher) between €23,000 and €200,000; and
- 5% for the portion of the sale price (or fair market value, if higher) that exceeds €200,000.
The acquisition of a business is in principle not subject to value added tax (VAT) by application of the Transfer of Going Concern Rules (Article 257bis of the Tax Code).
For assets other than an acquisition of an entire business, the applicable VAT and transfer tax rates will depend on the nature of the assets transferred and the region in which the assets (ie, real estate property) are located.
Acquisition of business through share sale
Registration duties – the acquisition of shares is subject to transfer tax payable by the acquirer at a rate of 0.1% for joint stock or simplified joint stock companies or 3% of private limited liability companies, property management companies or general partnerships. Exemptions may apply to transactions within the same corporate group.
Transfer tax applies at a rate of 5% for real estate entities, notwithstanding their corporate form. The acquisition of shares is not subject to VAT.
Capital gains on sale of shares – capital gains on the sale of a business are subject to corporate income tax at the standard rate of 34.43% (including additional contributions) with the possibility to offset carry-forward tax losses (to a limit of €1 million and 50% of the taxable result exceeding €1 million). Please refer to the question on fees below for further information regarding deductions to corporate income tax.
Under certain conditions, after a two-year holding period, capital gains on the sale of shares in the participation regime are in principle eligible for a reduced capital gains rate treatment (leading to an effective tax rate of 4.13%, expected to be decreased to 1.72% as of 2019).
Capital gains on sale of real estate entities are ineligible for the reduced rate of capital gains tax (they are subject to corporate income tax at standard rate of 19% for listed real estate entities).
Exemptions and mitigation
Are any tax exemptions or reliefs available?
Corporate income tax will decrease as follows:
- 32.02% as of 1 January 2019 (28.92% for the first tranche of €500,000 in profits);
- 28.92% as of 1 January 2020;
- 27.37% as of 1 January 2021; and
- 25.83% as of 1 January 2022.
Small and medium-sized companies can, under certain conditions, benefit from lower tax rates (15% instead of the above listed rates) for the first tranche of €38,120 in profits.
Further, the actual corporate tax rate is typically lower due to various tax deductions, including:
- exempted foreign profits under double tax treaties;
- the participation exemption regime on dividends which may only be subject to corporate tax of 1% or 5% when the corporate shareholder holds at least 5% of the share capital for a two-year period (the subsidiary must also comply with certain requirements);
- a reduced tax rate for certain patent income; and
- a tax group regime which allows, under certain conditions, the consolidation of taxable results of corporate entities which are directly or indirectly held to be at least 95% of the same parent company.
Depending on the location or the size of goodwill, specific exemptions may apply (eg, registration duties or corporate tax on capital gains).
For share deals, please refer to the above.
What are the common methods used to mitigate tax liability?
Tax advisers intervene to set out an efficient tax structure (displayed in a tax structure memo) and mitigate tax risks. Specific indemnity provisions in relation to tax liabilities are commonly set to circumscribe the risks identified in the tax due diligence.
What fees are likely to be involved?
Although there is no exhaustive list of potential fees to be incurred, an M&A transaction will entail fees including, but not limited to:
- investment banking fees;
- legal fees (which will commonly include tax adviser’s fees in France);
- accounting fees; and
- industry specific appraisals.
Management and directors
What are the rules on management buy-outs?
Corporate officers have a duty to act in accordance with the company’s corporate interest. A corporate officer who approaches investors in order to set up a management buy-out should be mindful of their fiduciary duties to the company and should not disclose any confidential information to such investors without the shareholders’ prior approval.
What duties do directors have in relation to M&A?
Corporate officers must act in accordance with the company’s corporate interest. Potential allegations for a corporate officer may include fraud, breach of law, breach of bylaws or mismanagement.
Consultation and transfer
How are employees involved in the process?
Since Decree 2017-1398 was adopted regarding collective bargaining, the different bodies representing workers are expected to merge by 2020 into a single entity: the social and economic committee (CSE). In principle, a CSE is informed and consulted on matters concerning the organisation, management and general running of the company. In particular, any modification of its economic or legal organisation (notably in the case of an acquisition or merger) entails an information and consultation undertaking. A CSE’s position has no impact on a merger or acquisition. The modalities of the consultation may be set by a company collective agreement.
A CSE’s involvement in an M&A transaction will vary depending on whether the transaction entails a takeover bid:
- Tender offer – when filing a takeover bid, employers of the company to which the offer relates and employers who are the authors of such offers must immediately inform their respective CSEs. During the meeting of the target CSE, the employer indicates whether the offer has been solicited. The CSE may decide whether it wishes to hear the offeror and appoint a chartered accountant.
- No tender offer (ie, private operation) – the consultation of a CSE is mandatory and must be finalised prior to the implementation of the contemplated transfer of securities, transfer of business assets or transfer of activity. The market practice is to attach the negotiated sales purchase agreement to a put option to the benefit of the seller, thus when the CSE consultation has been finalised, the seller can exercise the put option and the deal will be complete.
What rules govern the transfer of employees to a buyer?
Pursuant to Article L 1224-1 of the Labour Code, in the event of a change in the employer's legal situation, in particular in the case of a sale, acquisition or merger, all employment contracts in force on the date of such change will remain effective (on unaltered terms and conditions).
What are the rules in relation to company pension rights in the event of an acquisition?
Retirement schemes in France comprise two mandatory systems:
- a standard state social security pension; and
- a supplementary plan managed by both employee and employer representative organisations.
Supplemental employee savings plans may be added to these two schemes.
Acquired rights with regard to retirement pension are transferred together with the employment contracts.
Other relevant considerations
What legislation governs competition issues relating to M&A?
The EU Merger Regulation (139/2004) applies when certain thresholds relating to a company’s worldwide or EU turnover are reached. If the EU Merger Regulation applies, the EU Competition Authority’s consent is required.
French provisions regarding merger control apply where the EU Merger Regulation does not apply and certain revenue thresholds in France or overseas are reached.
Are any anti-bribery provisions in force?
The Criminal Code criminalises public and private as well as passive and active bribery. The unlawful proffering, at any time, directly or indirectly, of any offer, promise, gift, present or advantage of any kind to obtain from any judge or prosecutor, juror or any other person holding judicial office, arbitrator or expert (whether nominated by the court or the parties) or a person entrusted by judicial authority with a duty of conciliation or mediation, in a foreign state or a public international organisation, to carry out an act or abstain from carrying out an act of their office, duty or mandate or facilitated by their office, duty or mandate, with a view to obtaining or keeping any market or other unjustified advantage in international commerce is punished by up to 10 years' imprisonment and a fine of €1 million.
The same penalties apply to any person specified in the previous paragraph who unlawfully solicits, at any time, directly or indirectly, any offer, promise, gift, present or advantage of any kind to carry out or abstain from carrying out an act specified in the previous paragraph.
What happens if the company being bought is in receivership or bankrupt?
When the target is in receivership, an appointed administrator prepares a plan for the sale of the business after consultation with the employee representatives. The commercial court approves the sale plan through a court order and ensures that it is properly enforced. The purchaser under a sale plan must comply with the undertakings set out in the plan (in particular, with respect to the work agreements taken over under the plan).
When the target is bankrupt, the commercial court would usually order the sale of the company’s assets. It is then possible for the purchaser to pick and choose assets and liabilities to purchase. The purchaser is thus in a position to precisely delineate the assets and the liabilities it takes over from the bankrupt business.