Law stated as at Dec-2015
Recent developments in France have made it one of the leading countries for investment by foreign companies, prompting in 2014, over one thousand major investment decisions from foreign businesses.
France continues to attract investments in high value-added business activities, particularly in production/manufacturing and research:
- Foreign companies invested primarily in production/manufacturing activities (303 projects), which accounted for 30% of all investments made in France;
- Foreign investment projects in R&D, engineering design activities accounted for 9% of all investments. 27% of all R&D expenditures in France is carried out by foreign-owned subsidiaries;
- New headquarter investment decisions were also made: 16 new Global/European headquarters were recorded in 2014, versus five in 2013, and 12 in 2012.
However, foreign companies wishing to enter France are still troubled by the apparent complexity of French law, and the relative lack of basic French legal texts and documents available in English. This difficulty has been compounded by substantial changes in French corporate law in the past years. Changes resulting from both European regulations and internal economic conditions (especially the recent loi Macron last August).
This article summarizes the general process relevant for any foreign company seeking to acquire a French company, whether through a share purchase or on-going business acquisition.
First step: Choose the structure of acquisition (share purchase, on-going business acquisition or merger)
A distinction must be made between a transfer of assets that constitutes an identifiable business with, for instance, goodwill and customers (“fonds de commerce”), and a transfer of isolated assets.
The key advantage of an asset deal (on-going business purchase), is that it enables the purchaser to avoid the acquisition of undesired liabilities. As a general rule, the existing liabilities of the transferred business do not go to the buyer, but rather remain with the seller. There are exceptions to this principle especially with regard to employment relationships, as employment contract are automatically transferred along with employment liabilities. In terms of formalities, the acquisition of assets generally requires several fillings and specific content into the sale agreement which can differ according to the nature of the acquired assets.
An acquisition of shares of a company is an acquisition of a separate legal entity which has entered into contracts and incurred liabilities on its own account, so that when a buyer buys a company it takes on all the liabilities of that company and its business. Such acquisition however is pretty simple in terms of formalities as such acquisition does not require any formal filling other than registration.
Control may also be acquired by way of a merger, although this mechanism is rarely used in the context of merger and acquisition in France, where mergers are more commonly seen as a restructuring tool.
Second step: Follow a strict route to avoid and limit risks and disappointment
Select a Target
You can identify a target either by your own means or by using a market specialist, commonly called a business broker. Business brokers are instructed to find a suitable business that fits parameters, including location, industry and size.
It is really important to instruct a French law firm as soon as the target is selected. If possible, we recommend instructing a law firm that has corporate, labor law and tax experts.
Audit the Target
Acquiring a business involves carrying out a full investigation of the target company.
Your instructed lawyer (s) will carry out the “due diligence” process in the following areas: (i) corporate structure and group, if any, (ii) real property and lease, (iii) intellectual property, (iv) commercial and contract agreements, (v) licenses and required authorization, (vi) employment matters, (vii) litigations, (viii) tax matters, (ix) insurances, (x) loan arrangement, (xi) environmental matters.
Due diligence investigations will then be detailed in a report by your lawyer. It will be the basis of the different warranties and securities that you will require in the acquisition agreement.
Secure Transaction with Appropriate Documentation
- Negotiate and Sign a Letter of Intent (LOI)
Either before due diligence starts or at the end of the due diligence process, the buyer and the seller may enter into what is called a “Memorandum of Understanding” (MoU) also called a “Letter of Intent” (LOI).
This document is really important as it records the principal terms of the transaction that the buyer and the seller have agreed upon.
It is vital that this document states expressly that this is not an undertaking to purchase but only a statement of the terms and conditions, on the basis of which the buyer is ready to start negotiating with the seller. Otherwise, there is the risk that the document could create a binding legal contract, even though the full details of the transaction have not been determined yet.
We strongly recommend that you have your lawyer review the LOI/MoU.
- Consult and inform the Work Council or Employee’s Representative
The French labor code provides for an “information and consultation” procedure which must be completed with the target’s work council, before the terms of the transaction are agreed upon between the buyer and the seller.
The buyer has to ascertain this consultation is being done on a regular basis, failure to do so is a criminal offence. The procedure is also vital to avoid strikes or employee’s legal actions.
- Negotiate and Sign an Acquisition Agreement
The Acquisition Agreement is usually written in French (for tax filing purposes) and English (when necessary); it should typically address the following issues:
(a) Consideration: potentially with price adjustment clauses – part of the consideration paid will be calculated on the basis of closing financial statements available after closing.
(b) Deferred Payments Clauses (Earnouts): Drafting such clauses in France must be done carefully, using various technical terms (included in the French commercial code or French civil code) which may interfere with the intended meaning.
(c) Guarantees: Usually demanded by the seller in order to guarantee payment
(d) Representations and Warranties: In France, warranties are limited in and necessary to guarantee that the assets are in a saleable condition, that there is no material hidden defects. The clause will refer to the risks identified in the due diligence report.
(e) Covenants: i.e. Undertakings by the seller, dealing with (mainly) the business conduct during the interim period, and non-compete covenants (after closing). Again, such clauses must be drafted carefully to be valid under French law (reasonable limits are required).
(f) Indemnification: i.e. A provision pursuant to which the buyer shall be indemnified for liabilities, losses or costs incurred as a result of a breach of any representation, warranty or covenant by the seller.
(g) Closing: this clause is a list of all the conditions that must be fulfilled before the transaction is closed. It may include third party consent, material adverse change clause, governmental approvals, etc.
(h) Governing law and Dispute Resolution
- Negotiating Warranties
The seller will attempt to limit its liability under the warranties contained in the acquisition agreement by disclosing to the buyer all matters which are not under warranty and, to the extent that any such matter is disclosed, the seller will therefore not be liable for breach of that warranty.
In practice, the disclosures are usually made in a specific document called asset and liability guarantee (Garantie d’actif et de passif) which is attached to the acquisition agreement.
Extreme attention and consideration must be given to the disclosure made by the seller as it can substantially undermine the value of the warranties given.
In summary, France’s industry and technology have made it the leader of many European industrial sector. All the while the government has created an economic environment favorable to foreign investment.
The French government is committed to improving France’s attractiveness for investors and is therefore making a concerted effort: A Loi Macron II is expected soon, which we hope, will take the matter further!