by Jean-Jacques Caussain, Avocat a la Cour de Paris, Cabinet Clifford Chance
Unlike the takeover of listed companies, the acquisition of private companies is not governed in France by any specific regulation. The techniques involved have been elaborated over the years by practitioners, based on the provisions of the Civil code and company law, and taking into account the various applicable regulations.
A purchaser planning to acquire a private company in France is advised to observe certain fundamental rules which will be of guidance throughout the various stages of an acquisition. These could be considered as the ten Golden Rules a purchaser should follow.
1. It is necessary to obtain sufficient information about the target company.
It is possible to obtain quite a lot of information on the target company without even approaching the vendor. Certain information is publicly available, such as an extract from the Commercial and Companies Register, a copy of the articles of association (statuts), a copy of the balance sheet and other filed accounts for both a societe anonyme (SA) and a societe a responsibilite limitee (SARL), minutes of extraordinary general meetings, and list of shareholders when the company is an SARL.
It is also possible to obtain information concerning charges over the company's assets, properties, patents, or trademarks. This information can be obtained through searches in the relevant register or with the body responsible for keeping the register e.g., the Commercial and Companies Register or the National Institute for Intellectual Property (INPI).
Additional information will, of course, have to be obtained directly from the vendors before an agreement on the terms of the acquisition can be reached. This information will include details of the stock, detailed accounts including management accounts which are not published, list of shareholders for SA's, copies of contracts, leases, commercial concession agreements, insurance policies and service contracts. The auditors are likely to become involved at this stage and conduct a financial investigation in order to give a complete picture of the company.
It is now becoming the practice for the legal adviser to the purchaser to submit a list of preliminary enquiries to the vendor and also to carry out a legal audit. In fact, acquisitions are more often than not preceded by an audit and investigation. The results of these are used to verify and confirm various legal aspects of the company and the accuracy and reliability of the accounts in order to give to the purchaser some reassurance as to the value of the company.
2. Negotiations must be conducted with care.
It is essential to deal with a person who is authorised to represent the vendors in negotiations and who, when the time comes, has the power to sign the contractual documents. It may also be a requirement for the vendors and their representatives to maintain confidentiality throughout the negotiations and to abstain from entering into negotiations with another purchaser during a given period of time. It would be normal for the vendor to impose the same obligation of confidentiality on the purchaser.
For as long as the vendors and purchasers have not reached an agreement and a contract has not been signed, each party remains free to negotiate, whatever the state of the negotiations, without being committed. A word of warning is appropriate however. Should a breakdown of negotiations occur without any good reason, the party who claims to have suffered a loss may bring a civil action before a French court for damages against the party it considers to be responsible for the breakdown of the negotiations. For instance, a purchaser who maintains he has suffered a loss may claim repayment of the legal and audit costs he has incurred in the proposed acquisition.
3. It is advisable to ascertain how the control of the company is exercised.
In reality, a take-over means the acquisition of sufficient shares to confer a majority in shareholders' meetings. The thresholds differ for an SARL and an SA.
In an SARL, a simple majority, namely shares representing more than half of the capital, is sufficient for the adoption of resolutions to approve the accounts and to allocate profits and losses, as well as to appoint and dismiss the manager (gerant). Extraordinary resolutions, which are necessary, for example, for amendments of the statuts, and in particular, resolutions to increase or reduce the capital, require a larger majority, namely 75 percent of the shares representing the share capital.
The agreement to transfer shares to third parties must be given by a two-fold majority: 75 percent of the shares representing the share capital, and more than half of the number of the shareholders.
For an SA, the majority is not necessarily obtained from the percentage of the shares held, but from the voting rights of the shareholders present or represented at shareholders' general meetings. The majority is more than half of the voting rights for ordinary meetings and two-thirds for extraordinary meetings. However, care should be taken as certain shares may not, in fact, have voting rights such as non-voting preference shares (actions a dividende prioritaire sans droit de vote) and investment certificates (certificats d'investissement).
The statuts may also contain a provision limiting the number of votes per shareholder or, alternatively, may grant double voting rights in respect of shares held by the same shareholder for a determined period (minimum two years). In addition, certain securities, e.g., convertible bonds or bonds exchangeable for shares (obligations convertibles ou echangeables en actions), securities carrying subscription rights for shares (bons de souscription autonomes) could result in the dilution of shareholders' participation in the capital.
4. The purchase price must be determined or determinable.
There are several ways of determining the price when assessing the worth of a company. The price may be based on the company's net asset value such as results from the balance sheet and accounts (net assets or shareholders' funds), following the revaluation of certain assets and taking into account the goodwill.
The price may also be determined by reference to the return on capital, as analysed from the accounts of previous years adjusted to take account of future performance. It may also be determined by a combination of both methods.
Under French law, in order for a sale to be enforceable, the price must be determined either by the parties to the agreement or by an independent expert, or, if a part of the price is to be paid on a fixed date, determined according to precisely specified criteria or an agreed formula based on future results. Where the price is not determined or determinable, the sale may be rescinded.
It is possible to provide for the price to be index-linked. However, it is important to choose the appropriate index, since French law provides that the index chosen must have a direct link with the subject matter of the agreement or with the activity of one of the parties. Under no circumstances may it be based on the statutory minimum wage (salaire minimum inter-professionnel de croissance) or on the French general index of prices and salaries.
As a rule, the price is payable in cash, but it may be paid partly in cash, with the balance payable in several instalments.
The price may also be paid in kind, for instance, when the acquiring company issues new shares or bonds which it then offers to the vendors in exchange for the shares that it acquires.
5. The financing of the acquisition must be organised in compliance with the law.
The acquisition may be financed by the purchaser's own financial resources or may require recourse to bank financing. In the latter case, it is obviously advisable to study the loan terms in detail (term, principal sum, payment, guarantees required, etc.).
It is also possible to have the vendors agree to accept payment in instalments, although in most cases the latter would demand certain guarantees (pledging of the shares which have been sold or bank guarantees).
When the company has cash resources, and if a distributable profit appears in the balance sheet, the distribution of such resources in the form of dividends immediately after the acquisition is permitted.
It is also possible for a foreign investor to set up a wholly-owned subsidiary in France (SA or SARL) which will borrow money for the purpose of acquiring the target company and thus take advantage of the tax integration regime. Under this tax regime, any French company liable to corporation tax may elect (such election to apply for at least five years) to be incorporated into the results of a group formed by itself and the target company, which must also be liable to corporation tax, and in which it holds at least 95 percent of the share capital.
This tax consolidation will thus allow the newly formed company to set off the interest paid on the borrowing for the purpose of the acquisition against the pre-tax profits of the target company. Such a scheme is now very often used in LBO transactions.
The question of financial assistance is also often raised: can the target company itself make a loan or cash payment to the purchaser for the payment of the purchase price, or grant a charge over its own assets or a guarantee in favour of the purchaser in order to finance the acquisition of its own shares? Unfortunately, such a mechanism is difficult to put into place due to a specific provision of company law which prohibits the financial assistance by an SA in the acquisition of its own shares (art. 217-9, Law of 24 July 1966). In addition, certain criminal sanctions could be found to apply for both acquisitions of SA's and SARLs if it was considered that such an operation amounted to a misuse of the company's assets (abus de biens sociaux) by the directors or managers.
6. The duties and taxes to be paid must be calculated.
Firstly, it should be noted that under current French law, the transfer of all or a substantial part of the shares of a company no longer entails a liability to stamp duty as substantial as in the past. Formerly, the fiscal authorities were able to treat the transaction as a transfer of the underlying assets of the business and goodwill (fonds de commerce) and claim the corresponding stamp duty (16.6 percent at the time).
However, where the objects and/or activity of the company are substantially modified after the change of control, certain direct taxes may still be due if the authorities consider that there has been a deemed discontinuation of the business and the commencement of another.
Payment of stamp or registration duties on the transfer of shares will depend on the form of the company. In a SARL, any transfer of parts sociales must be evidenced by way of a deed which results in an amendment of the statuts and attracts a compulsory registration duty of 4.8 percent.
On the other hand, in the event of the purchase of shares in an SA, it is only necessary to have the vendor sign a share transfer form in favour of the beneficiary to effect the transfer of title. This document does not have to be registered and does not give rise to the payment of any duties. However, a stamp duty may be claimed by the tax authorities if the transfer of the shares was recorded in a deed or in a series of documents containing an agreement between vendor and purchaser on the object of the transaction and on the purchase price, i.e. on the number of shares assigned and on the consideration.
Such a deed, by its bilateral nature, gives rise to a liability to stamp duty at the rate of 1% percent of the purchase price, but with a maximum amount of tax of 20,000 F per transaction. This point must be taken into account when the agreements referred to below are drawn up (see 10 below).
Circumstances where the vendors are subject to capital gains tax may be worthy of note. For an individual person domiciled in France, income tax is due on capital gains realised, together with a social welfare "solidarity" tax giving a total of tax of 19.4 percent if the individual vendor has sold for more than a certain amount of securities or shares during the same calendar year (e.g., FF 336,700 for 1994).
If the transferor is a French company subject to corporation tax, and assuming the shares in the target company are recorded as "fixed assets" on the transferor's balance sheet, a distinction is to be made between short term and long term capital gains. If the capital gain is made within two years, corporation tax (at a rate of 33 1/3 percent) is due. If the shares transferred have been held for two years or more, the rate of capital gains is 19 percent, provided that the proceeds from the net capital gains are retained by the transferor company, and placed in a special reserve account. If the company later distributes profits from this reserve account, a complementary tax is due in order to bring the assessment up to the normal rate of corporation tax.
7. All necessary authorisations, consents and approvals must be obtained.
The take-over of a company does not necessarily concern only the purchaser and the vendor. More often than not, the completion of the transaction requires the involvement of third parties.
Firstly, there are the public authorities, and above all, the Ministry of Economy. If the purchaser is a foreign company or a company under foreign control, and if more than 33 percent of the capital is to be acquired, the acquisition of shares in the target company comes within the scope of the regulations relating to foreign investments in France. In this event, it is necessary to notify the French Treasury (Direction du Tresor) which is the relevant department of the Ministry of Economy, if the purchaser is from the EC, or to request authorisation if the purchaser is a non-EC investor. An EC investor is a resident of an EC country or an entity, the ultimate control of which is held as to at least 50 percent by individuals or state organisations, resident in an EC country.
Similarly, it is advisable to take into account the possible effect of regulations relating to monopolies and mergers. This problem only arises if the parties, as a result of the acquisition, together realise more than 25 percent of the sales, purchases, or other transactions on the national market for the products or services or for a substantial part of this market. It also applies if the combined businesses have a total turnover before tax of more than FF 7 billion, provided that at least two of the businesses which are parties to the merger each have a turnover of at least FF 2 billion. When such an acquisition comes within the scope of these regulations, it is possible to consult the Fair Trading Department of the Ministry of the Economy (Direction Generale de la concurrence et de la consommation) unless it is clear that the transaction will not affect free competition.
When the transfer of control comprises a public sector company being privatised, it is necessary to obtain the approval of the relevant authorities. A law has to be passed authorising the transfer for companies in which the French state directly holds more than half of the share capital, and also for those companies which were nationalised by a provision of a law. For other companies within the public sector, a transfer is either authorised by decree, or merely subject to a prior notification to the Minister of Economy, depending on the number of employees and the turnover of the business in question.
Besides administrative authorisations, a number of other legal requirements need to be taken into account. First of all, the prior authorisation of the shareholders or of the board of the target company is necessary. If the company is an SARL, the agreement of the shareholders to the proposed transfer must be obtained in an extraordinary general meeting. For an SA, the prior approval of the board of directors might be necessary for the transfer of the shares, but only if there is a provision to this effect (clause d'agrement) in the statuts.
When the target company has a works committee (comite d'entreprise) which is normally elected in any business having at least 50 employees, it is compulsory for the president or manager to inform the works committee prior to completion and to consult it concerning the proposed change of control of the company.
Finally, it should be verified that the change in the company's control has no incidence on certain agreements with third parties. Such contracts may contain a clause, which is fairly standard in certain agreements (such as distributorship, franchise, loan and license agreements), whereby if a change arises in the control of one of the parties (such as in the shareholding or board of directors), the other party shall have the right to terminate the agreement. It is thus advisable to provide, as a condition precedent to the completion of the acquisition, for the prior consent of the third party to the proposed change in control, or the waiver of the right to invoke such a clause if the agreement is vital to the company.
8. Some undertakings are to be requested from the vendors.
Some of these undertakings may be given and performed before the acquisition, such as the sale of some of the assets and the redundancy of staff or management. These undertakings may be performed in conjunction with the purchaser before the acquisition, usually through the appointment of the latter's representatives on the company's board of directors or to certain management positions. Other undertakings might cover the obtaining of certain authorisations and an assurance not to negotiate with other possible purchasers. The acquisition of the company will be made conditional on the performance of such undertakings prior to the completion. It is at the time of signature of the preliminary agreement that commitments are generally made by the vendor, although it is at the time of the acquisition itself that most of the undertakings will come into effect and will have to be performed by the vendors.
On the day of completion of the acquisition, the share transfer forms relating to the shares (for an SA) or the deed of transfer of the shares (for an SARL) must be completed and handed over since these documents evidence the change of majority within the shareholders' general meeting.
If all of the shares contracted to be transferred are not transferred at completion, the vendors should grant a call option (promesse de vente) to the purchaser for the balance of the shares.
The purchaser will normally wish to protect himself against any reduction in the value of the company as from the date of the change in control, resulting from a reduction of assets or increase in liabilities arising, for example, from a tax reassessment or undisclosed legal proceedings, whose origins or cause were prior to the date of acquisition. In the absence of express agreement, a purchaser has little redress against the vendors for any undisclosed liabilities. It is therefore crucial that a written and a detailed warranty agreement be signed by the vendors. This should cover all items of the company's assets and liabilities. The warranty agreement (contrat de garantie) should be signed by the principal shareholders, and be granted for a term that is long enough to allow the purchaser to exercise his rights of recourse within any statutory periods of prescription, especially regarding fiscal matters.
In addition, it is advisable to obtain a non-competition undertaking from the vendors, in the absence of which any recourse by the purchaser would be extremely difficult. Under French law, a non-competition clause is only valid if it is limited geographically, or in time, and if it does not prevent the contracting party from carrying out an activity and earning his livelihood.
Obviously, the vendors must hand over on completion letters of resignation of the chairman (president directeur general), general manager (directeur general), the directors (administrateurs) or managers (gerants) of the company which the purchaser wants to resign from with immediate effect, and procure the appointment of those persons representing the purchaser by either a shareholders or board of directors general meeting, as the case may be, in order to complete the change of control of the company.
9. The purchaser must be prepared to give the vendors certain guarantees.
Firstly, the purchaser must guarantee payment of the whole of the purchase price if this is not paid in full at completion. In this case, the vendor would be perfectly justified in seeking from the purchaser bank guarantees (caution bancaire), a first demand guarantee (garantie a première demande), or more simply, a charge on the shares transferred (nantissement sur les titres sociaux).
If all of the shares have not been acquired at the time of the take-over, the vendors may, if it was their intention to transfer all of the shares, seek an undertaking from the purchaser to acquire the balance of the shares by way of a put option (promesse d'achat).
If the vendors have given guarantees (cautionnements) to third parties in respect of the target company, they will naturally wish to be released from theses. The purchaser may then be willing to take them over subject to the consent of the beneficiary of such guarantees. Similarly, if the vendors have granted loans to the company, they will be expecting these to be repaid or to have the purchaser take over.
If it is agreed that certain representatives of the vendors should remain in office, it could be that they will wish to negotiate employment contracts or secure positions of management or directorships.
Finally, a vendor will often demand that a purchaser does not exercise his right to hold him liable to meet claims as director or as manager so long as such waiver does not contradict the warranty agreement.
Agreements must be drafted with care. It hardly needs to be said that the agreements entered into for the acquisition of the shares be adequately detailed and drawn up with care.
Great attention must be given to the drafting of letters of intent or heads of agreement. Under French law, once there is agreement on the subject matter of the contract (e.g., the shares) and the price, there is a binding contractual relationship between the parties.
It is not sufficient to stipulate that the letter of intent or heads of agreement is "subject to contract" in order not to be bound, since these words do not have the same significance as in England.
The form of these documents could also be dictated by the necessary involvement of certain third parties and by fiscal considerations.
In view of any requirements which might have to be met for obtaining prior approvals and for performing certain formalities prior to completion, the agreements will contain certain conditions precedent (conditions suspensives), such as the approval of the Direction du Tresor in accordance with the regulations relating to foreign investments in France, referrals to the Direction Generale de la Concurrence et de la consommation, obtaining approvals in the event of a scheme of privatisation, shareholders' agreement to the transfer, prior consultation with the comite d'entreprise or the obtaining of a satisfactory auditor's report from an independent firm.
The agreements must be signed subject to the condition precedent of the obtaining of such authorisations or the performance of certain formalities prior to completion. Care must be taken in the drafting of such conditions precedent. If the satisfaction of a condition precedent is totally within the control of the party in whose favour it is give (condition potestative) it could be held unenforceable, e.g., it is common practice in common law jurisdictions for a purchaser to make a sale of shares "subject to the authorisation of the board of the purchaser." Such condition could, under French law, be held as void since its performance would depend on circumstances within the control of one of the parties.
Only when these conditions have been satisfied will the transfer of shares take place, accompanied by the changes in the board, and/or in the management, and the execution of the different undertakings by the vendors (signature of the warranty agreement, of the non-competition undertaking, etc.) and by the purchaser (waiver of any claim of liability against the directors/managers, the undertaking to pay the balance of the purchase price, etc.) and thus resulting in the change of control.
Considerations of a fiscal nature may also influence the form of the agreements. For the transfer of shares in an SARL, it is usual to enter into a bilateral agreement containing conditions precedent, the setting out of the number of shares to be transferred, the price, clauses which determine the degree of co-operation between purchaser and vendors during the interim period up to the date of completion, and which generally sets out all the terms and conditions of the transfer of shares.
As regards the purchase of shares in an SA, it was common practice in France for the parties to enter into unilateral cross options (call and put options) in order to avoid the duties payable on the registration of a single document setting out the terms of the agreement. This practice had the advantage of binding each of the parties and yet avoided any fiscal risk of the two options constituting together a deed of sale and therefore subject to registration duties formerly payable at the rate of 4.8 percent.
Another solution consists in having a bilateral agreement signed outside France. For such a scheme to be safe, the place of signature of the agreements must be proved, for example for signing the documents before a Notary Public and the agreements must contain a foreign element, e.g., one of the parties must be a national of a country outside France, in order to avoid the registration duties of documents.
Even though the application of these ten "Golden Rules" covers the principal aspects of the acquisition of an unlisted company, it should always be remembered that the manner in which these rules are applied will depend on the particular characteristics of each individual transaction.