Private Equity Comparative Guide

• Published date: 07 January 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Government, Public Sector, Tax, Financial Services, M&A/Private Equity, Corporate and Company Law, Money Laundering, Tax Authorities
• Law Firm: Valther
• Author: Mr Idris Hebbat

1 Legal framework

1.1 Which general legislative provisions have relevance in the private equity context in your jurisdiction?

The main legislative provisions applicable to private equity operations in France are set forth in the Commercial Code, the Monetary and Financial Code and the Civil Code.

The Civil Code's provisions on contract law were substantially amended in 2016, which has important implications for M&A practice in general, including private equity.

For instance, the new Article 1124 of the Civil Code has reinforced the binding effect of unilateral promises to buy or sell by establishing the ineffectiveness of the revocation of such a promise by the promisor. As result, the withdrawal of a promise during the period within which the beneficiary may exercise the option no longer prevents the formation of the promised contract. Therefore, beneficiaries are now entitled to seek enforcement of the relevant promise against the defaulting promisor, pursuant to new Articles 1221 and 1224 of the Civil Code.

In practical terms, such developments have enhanced the effectivity of mechanisms often used in private equity transactions, such as put and call options and tag-along and drag-along rights, which are all based on unilateral promises to buy and sell under French law.

1.2 What specific factors in your jurisdiction have particular relevance for and appeal to the private equity market?

As Europe's second largest private equity market, France provides a safe and stable legal environment for investors. Indeed, France has developed a solid legal framework, with effective standards for investor protection. Having dealt with such matters for years, French courts are quite familiar with private equity litigation and enforcement. Therefore, private equity investors investing in France can rely upon an effective and affordable judiciary system, providing concrete solutions to their disputes.

2 Regulatory framework

2.1 Which regulatory authorities have relevance in the private equity context in your jurisdiction? What powers do they have?

Depending on the nature and size of the deal, the following authorities may have a role to play:

French Competition Authority (FCA): Under French law, transactions meeting the following three conditions (other than transactions in retail businesses, where lower thresholds may apply) are subject to merger control:

• The transaction does not fall within the jurisdiction of the European Commission;
• The total global pre-tax turnover of all companies involved in the concentration exceeds '150 million; and
• The total pre-tax turnover generated in France by at least two of the companies involved in the concentration exceeds '50 million.

Where such conditions are met, an application for review must be filed with the FCA, which will assess the competition implications of the intended transaction and can either prohibit or authorise (with or without conditions) the operation.

Minister for the economy and finance: Under French law, some foreign investments are subject to the minister's compulsory prior approval.

Operations falling within the scope of prior authorisation are investments:

• by foreign investors in any sector deemed 'strategic' (eg., communication services, biotechnologies, cybersecurity); and
• involving either:
• • the acquisition, in whole or in part, of a business operated by a French company
  • the acquisition of direct or indirect control of a French company by an EU or non-EU investor' or
  • the crossing by a non-EU investor, directly or indirectly, of a 25% threshold (temporarily reduced to 10% until 31 December 2020, as explained in question 10.2) of the share capital of a French company.

The minister can either reject or approve (with or without conditions) the intended transaction.

2.2 What regulatory conditions typically apply to private equity transactions in your jurisdiction?

In France, private equity transactions are also subject to certain labour law requirements.

Prior to the conclusion of a binding agreement, the target's social and economic committee (CSE) (if any) must be informed and consulted on the intended transaction. In France, only companies with more than 50 employees are required to have a CSE. The CSE's opinion is not binding and therefore cannot impede the transaction. However, failure to comply with consultation obligations could delay the transaction and may expose the target's management to criminal sanctions. For instance, the Paris Court of Appeal recently confirmed the suspension of Suez's takeover by Veolia (CA Paris, P'le 6, 2^e ch., 19 nov. 2020, n' 20/06549), on the grounds of failure to comply with prior consultation obligations.

Additionally, if the intended transaction implies the transfer of 50% or more of the target's share capital, the Hamon Law requires small and medium-sized companies (ie, companies with fewer than 250 employees and an annual turnover of up to '50 million) to notify the intended transaction to all employees individually prior to completion. Such notification is intended to allow each employee to make an offer to purchase the relevant shares. Stakeholders are not entitled to perform the operation unless all employees have waived their right to make an offer. In case of non-compliance with such rules, stakeholders risk a penalty equal to 2% of the purchase price paid upon completion.

3 Structuring considerations

3.1 How are private equity transactions typically structured in your jurisdiction?

In most private equity deals, the investment fund set up a special purpose vehicle (Newco), created specifically for the purpose of effecting the intended transaction. Thus, all private equity investors are gathered under a single corporate body. In general, the funds required for purchasing the target are raised at the level of Newco.

When managers invest alongside the private equity fund, a second special purpose vehicle (Manco) is usually formed. The idea is to bring all key managers together, with the aim of ensuring a successful transition once the acquisition has been completed (especially in the context of a takeover by private equity investors).

The respective rights and obligations of Newco and Manco in relation to the target are set forth in a shareholders' agreement. As for the contractual relationship between sellers and special purpose vehicles, such parties are usually bound by execution of an acquisition agreement.

3.2 What are the potential advantages and disadvantages of the available transaction structures?

Newcos and Mancos are usually incorporated as a société par actions simplifiée (SAS), which is the most flexible corporate...