Private Equity Comparative Guide

1 Legal framework

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

France is one of the most attractive jurisdictions for private equity transactions in the world. In 2024, 56% of funds raised abroad were invested directly into France (36% of which originated from Europe), thanks to the country's sophisticated financial expertise and relevant and efficient solutions for foreign investors.

This success is partly due to the fact that France offers a protective and flexible framework for investors, aligned with international standards.

The French legal system is generally based on written laws, which are primarily compiled in several codes. For private investors, the most relevant laws and regulations are as follows:

• The Civil Code contains all standard regulations applicable to private contractual relationships and private companies.
• The Commercial Code comprises corporation and company laws.
• The Financial and Monetary Code covers all areas relating to financial vehicles and transactions.
• The Taxation Code covers all tax matters.
• The Labour Code governs employment and social matters.

These codes are supplemented by accessible case law of the country's highest commercial courts, whose professional judges provide guidelines on the interpretation and application of laws and regulations.

French lawyers also consider the recommendations of:

• the Association Nationale des Sociétés par Actions; and
• the Statutory Auditors National Association.

As a first step prior to signing a binding agreement, practitioners should focus on the specific regulations applicable to:

• foreign direct investment (FDI) authorisation;
• competition clearance (merger control); and
• employment law regulations – especially the information/consultation of employee representation bodies and/or individual consultation of employees of the target.

Other instruments may also be relevant depending on the sector of activity of the target and the engagement of qualified lawyers is recommended.

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

France has become one the most active and attractive jurisdictions for investors in certain sectors. In recent years, investments have significantly increased in areas such as:

• healthcare (biotechnology, medical research and laboratories, water clarification and treatment, high-tech, AI and software solutions);
• defence and aerospace; and
• energy (especially nuclear).

This is due to the high-level expertise that French companies and entrepreneurs have developed in these sectors, thanks to supportive government policies and private fundraising initiatives. These include, in particular:

• French public investment solutions, especially those offered by Bpifrance;
• the France 2030 investment project initiated by the French administration; and
• specific advantages attached to research tax credits.

The French private equity industry is particularly mature and (compared with other countries around the world) most managers of French companies already have established relationships with investment funds as shareholders, which makes reporting and strategic decision-making processes much easier.

In recent years, France has become a gateway to the European market and many Asian and American investors have acquired majority stakes in French companies with the objective of making add-on acquisitions around Europe and strengthening their presence in the continent.

Finally, the French administration has amended many laws and regulations to make them more investor friendly and to make France even more attractive – for instance, by:

• simplifying the process for establishing companies and investment vehicles;
• streamlining the structuring of governance; and
• introducing several initiatives to promote innovation for small and medium-sized companies.

2 Regulatory framework

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

French lawyers working on cross-border transactions usually focus on two regulatory constraints before signing a binding purchase or investment agreement:

• the foreign direct investment (FDI) process, which is carried out by specialised lawyers before the Ministry of Economy and Finance; and
• competition clearance (merger control), which is also carried out by specialised lawyers before the Competition Authority.

Other regulatory constraints specifically linked to the sector of activity of the target may also be relevant – for instance, the Autorité de Contrôle Prudentiel et de Résolution must authorise some foreign investments in the banking, financial and insurance sectors.

We thus recommend the engagement of lawyers who specialise in regulatory matters and have experience in the relevant sector before signing a binding agreement.

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

In practice, there are two regulations of key relevance to foreign investors before making an investment in France.

FDI authorisation: Articles L151-3 and R151-1 and following of the Monetary Code set out the conditions which a foreign investment must meet to obtain authorisation from the French administration.

Essentially, three conditions apply for FDI clearance:

• The investor must be a 'foreign investor' within the meaning of Article L151-3 of the Monetary Code (we usually refer to the ultimate beneficial owner of the contemplated investment, which means that it usually includes foreign entities investing indirectly in a French business).
• The contemplated transaction must involve:
• • the acquisition of a controlling stake in the target;
  • the acquisition of a business as a going concern or a full branch of business; or
  • an increase in equity participation in a company beyond specific thresholds.
• The target must operate in 'strategic' sectors listed in Article R151-3 of the Financial and Monetary Code, such as:
• • military business (including those mixing civil and military activities);
  • business carried out for the benefit of the Ministry of Defence; or
  • the production of technical equipment or devices enabling the interception of correspondence or the protection of public health.

In recent months there has been a significant increase in FDI involving M&A and private equity transactions in France, which may be due to a rise in foreign investments in strategic sectors such as:

• aerospace;
• defence;
• health and research; and
• energy.

Competition clearance: The Competition Authority must authorise transactions which may constitute anti-competitive practices. The legal framework is mainly governed by:

• the Financial and Monetary Code at the French level; and
• European Council (EC) Regulation 139/2004 related to the control of concentrations between companies at the European level.

At the French level, a contemplated transaction will require competition clearance if two of the following conditions are satisfied:

• The total sales revenue (excluding value-added tax (VAT)) of the entities involved in the contemplated transaction (ie, the buyer's and seller's group companies on a consolidated basis) is greater than €150 million.
• The total sales revenue (excluding VAT) achieved in France by at least two of the entities involved in the transaction is greater than €50 million.
• The contemplated transaction does not fall within the scope of competition clearance at the EU level.

At the EU level, the European Commission is competent if:

• the contemplated transaction is carried out in the territory of several EU member states; and
• the global sales revenues of at least two of the entities involved in such transaction is greater than €250 million in the European Union.

As a derogation, the European Commission may sometimes decline its competence and refer to national competition authorities if it considers that the administrations of those EU member states are in a better position to assess the situation on the relevant market.

3 Structuring considerations

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

The French private equity sector is mature and has many similarities with the US and UK private equity markets. The process is similar and usually includes:

• the signing of a non-binding offer/letter of intent and a non-disclosure agreement;
• the completion of a due diligence process;
• the signing of a confirmatory offer and the grant of an exclusivity right for negotiation (in recent years there has been an increase in processes with several bidders involving M&A brokers);
• the signing of a binding agreement, usually requiring the satisfaction of conditions precedent; and
• the subscription of debts and the financing followed by closing of the transaction.

Foreign investors should bear in mind that a private investment in France does not require the services of a notary, unless it involves the transfer of a real estate asset.

Foreign investors should further bear in mind local specificities of French jurisdiction, especially linked to labour, social and tax constraints (in particular, good practice in relation to management packages). In cross-border transactions, we often draft a legal and tax structure memorandum that senior banks or lenders usually request.

The structure of a private equity transaction leads to the creation of a special purpose vehicle (Newco), dedicated to the acquisition of 100% of the shares of the target.

At closing, Newco subscribes debts (senior loans/bonds) and executes relevant contractual documentation, usually comprising:

• senior loan agreements or underwriting agreements;
• intercreditor agreements; and
• more general documents related to the security package in force (eg, pledge and lien documentation).

Newco also issues equity and quasi-equity instruments (eg, shares – ordinary or preferred – convertible bonds), usually including a rollover mechanism of the key managers of the target (mostly established through a contribution in kind in favour of Newco). Concomitantly, a shareholders' agreement is signed between the holders of securities of Newco.

At completion, and once the financing of Newco is achieved, the latter acquires 100% of the shares of the target and the transaction is deemed completed.

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

There are several options to purchase a business in France:

• through a share deal, whereby an investor acquires shares of a company;
• through an asset deal, whereby an investor acquires a business as a going concern or a branch of a business; or
• through an M&A process.

Private equity transactions are usually structured with the objective of completing a share deal and benefiting from leverage solutions resulting from the subscription of debts (loan or bonds) (standard leveraged buyout (LBO) transactions). This LBO structure has the main advantage of affording leveraging effects from a financial and tax perspective. From a legal perspective, Newco and the seller(s) usually sign a binding agreement including representations and warranties.

The structure of an LBO can trigger some difficulties from a financial and strategic standpoint if the level of debt is not correctly determined and turns out to be inappropriate considering the financial capacity of the target.

3.3 What funding structures are typically used for private equity transactions in your jurisdiction? What restrictions and requirements apply in this regard?

A French société par actions simplifiée (SAS) is the usual acquisition vehicle (Newco) which is created for the purpose of the transaction. The process for establishing these legal entities is straightforward and usually takes only a few days. No specific constraints are observed in practice apart from know-your-customer requests from banks, which can delay the process (especially where the creator or ultimate beneficial owner is a foreign entity).

3.4 What are the potential advantages and disadvantages of the available funding structures?

An SAS offers a flexible framework, which can be tailored to optimise:

• governance;
• the issue and transfer of securities; and
• the creation of contractual boards and committees with dedicated missions (eg, supervisory board, monitoring committees, executive board).

In addition, the sale of shares of an SAS is subject to lower tax duties (ie, 0.1% of the price) than the sale of quotas of a private company (ie, 3% of the price).

In small-cap transactions in Fance, the target is often organised as a société à responsabilité limité (SARL). On 18 December 2024, the French Court of Cassation ruled that:

• an SARL can be validly converted into an SAS right before selling the shares of the target; and
• the related tax duties will be those applicable to the sale of the shares of an SAS and not those applicable to the sale of quotas of an SARL.

3.5 What specific issues should be borne in mind when structuring cross-border private equity transactions?

In cross-border private equity transactions, particular attention should be paid to the foreign direct investment (FDI) process (please see question 2.2), as the absence of prior FDI authorisation would compromise the validity of the contemplated transaction.

In addition, we highly recommend the preparation of a legal and tax structure memorandum, which includes a tax analysis of the financial relations between the acquired business and the foreign investors (considering possible withholding taxes and to avoid double taxation).

3.6 What specific issues should be borne in mind when a private equity transaction involves multiple investors?

In a transaction involving multiple investors, those investors may have conflicting interests. A successful transaction always relies on agreements affording appropriate and balanced solutions to all investors (ie, majority investors, minority investors, financial investors, individual investors, managers).

The negotiation of the shareholders' agreement is instrumental to:

• avoid (or at least anticipate) litigation and/or deadlock situations; and
• provide appropriate solutions to settle such issues in advance.

We highly recommend avoiding standard documentation or usual templates for shareholders' agreements in favour of a tailored shareholders' agreement, given that each investment has it owns specificities and expectations.

4 Investment process

4.1 How does the investment process typically unfold? What are the key milestones?

In French private equity transactions, the investment process unfolds in a flexible way, which does not require the assistance of a notary (unless the transfer of a real estate asset is involved). Moreover, the price for the sale of shares need not be paid into an escrow account (unless the contractual arrangements between the parties provide otherwise). We would still recommend that the funds flow mechanism be planned in advance for the sake of clarity.

The investment process in private equity transactions in France usually takes place as follows:

• signing of the documentation related to the subscription of the equity/quasi-equity financing of Newco;
• signing of the documentation related to the acquisition process;
• signing of the finance documents and security package (pledge and liens);
• sharing of the documents requested by the lenders under the financial conditions precedent; and
• execution of the funds flow with:
• • the grant of the loan; and
  • payment of the price by Newco to the sellers.

The main aim of the transaction is that all these steps be performed within a short timeframe so that the sellers can receive payment on the same date, which is not always an easy task in cross-border transactions. We usually suggest a pre-funding of Newco with a specific 'return of funds letter' to secure all parties.

4.2 What level of due diligence does the private equity firm typically conduct into the target?

Considering that many acquisition processes involve many bidders and have become increasingly competitive, investors usually give instructions to conduct a limited due diligence process relating to financial, accounting, legal, tax and social matters. We also receive some instructions to focus on certain sensitive topics, especially when the target operates in the high-tech or software industries (eg, particular attention is paid to intellectual property).

The due diligence process has three objectives:

• confirming the offer, with the aim of completing the transaction;
• negotiating the representations and warranties; and
• regularising (as a pre-completion or post-completion action) any inconsistencies or non-compliance to avoid any future risk of the acquired business.

4.3 What disclosure requirements and restrictions may apply throughout the investment process, for both the private equity firm and the target?

During the negotiation process, we recommend that the parties sign a non-disclosure agreement which:

• clearly defines the information to be considered confidential;
• describes how the receiving party can use the confidential information and for what purpose; and
• provides the terms for the restitution or destruction of such confidential information if the negotiation fails.

We sometimes execute a 'clean team agreement' whereby only a limited circle of persons have access to confidential information, especially:

• in sensitive sectors; or
• where the exchange of information between competitors may conflict with competition regulations.

In M&A transactions between competitors, we often draft a penalty clause in case of breach of the non-disclosure agreement and we would strongly recommend the screening of confidential information prior to sharing.

4.4 What advisers and other stakeholders are involved in the investment process?

The acquisition and investment process usually involves:

• law firms on the buy side and sell side, and the lenders' lawyers;
• accounting firms;
• financial advisers/M&A brokers; and
• statutory auditors, who can be given specific missions to comply with applicable laws (eg, especially for the issue of preferred shares, bonds or contributions in kind).

Most importantly, key managers and investors should maintain direct and continuous communication during the negotiation process to avoid any misunderstandings and potential disputes after completion of the transaction.

5 Investment terms

5.1 What closing mechanisms are typically used for private equity transactions in your jurisdiction (eg, locked box; closing accounts) and what factors influence the choice of mechanism?

French closing mechanisms are based on the negotiations between parties and should take into account the specificities of the contemplated transaction.

Certain events and constraints should be taken into account when opting for either a locked-box mechanism or completion accounts – especially:

• the availability of reference accounts in which the buyer can have reasonable comfort (financial due diligence should focus on such accounts);
• the cash and debt generation until closing and which party is expected to receive the amount of such net debt position; and
• whether a rollover is anticipated and the price can be adjusted after completion of such rollover.

One main advantage of the locked-box mechanism is the clarity of the price, considering that all parties have:

• a clear view of the final price; and
• good knowledge of the permitted or non-permitted leakage.

The buyer takes the economic and financial risks from the locked-box date as no price adjustment is expected to be done with regard to the working capital and/or the net debt position at closing. This mechanism is often retained in LBO transactions as it offers visibility and certainty on the price, which is much appreciated for the purpose of external financing. If some non-permitted leakage is revealed, we usually settle the issue through the inclusion of appropriate representations and warranties in the documentation (usually capped at the transfer price).

In addition, the position of the buyer (and its lenders) is often secured by monitoring the cash position until closing. Senior lenders often ask for the delivery of specific financial statements at closing to release senior loans. Moreover, the locked-box mechanism is particularly appreciated where the transaction includes a rollover made by way of contributions in kind, as the mechanism offers certainty on the price. It is always difficult to adjust the valuation of the shares of a target when:

• a statutory auditor has certified the valuation of shares; and
• the contribution in kind has been completed and filed with Companies House (unless complex solutions are proposed, which will not necessarily be appropriate in small and mid-cap transactions).

Finally, the locked-box mechanism offers simplicity, as none of the parties need prepare completion accounts after closing (in this respect, the transition of the business can be complicated and the necessary timing and resources to prepare closing accounts will not always be available).

The completion accounts mechanism has the advantage of compensating the seller with the generation of cash until closing occurs. This provides further protection if a buyer is not comfortable with the reference accounts and needs to further investigate the net debt position before closing. The completion accounts mechanism can protect both the seller and the buyer, depending on the specificities of the target and its business.

From experience, M&A and LBO transactions in France are often structured with a locked-box mechanism, for the reasons outlined above. We often encounter an intermediate solution, whereby the parties apply a locked-box mechanism but with:

• a list of 'permitted leakage' which gives the seller(s) the right to receive some cash through the payment of a dividend before closing; and
• specific warranties or pre-closing justifications evidencing that the net debt position or working capital is at least equal to a certain amount at closing.

5.2 Are break fees permitted in your jurisdiction? If so, under what conditions will they generally be payable? What restrictions or other considerations should be addressed in formulating break fees?

From experience, break fees (as well as reverse break fees) are more common in cross-border transactions than French domestic transactions, because Anglo-Saxon and Asian investors are more familiar with them.

Clauses on break fees (or reverse break fees) aim to:

• ensure completion of the transaction; and
• dissuade the other party from non-performance of its obligations.

These clauses should be drafted carefully by an experienced lawyer, as they may be considered as a 'penalty clause' by a French judge, who can (under Article 1231-5 of the Civil Code) revise the amount of the fees to be paid by the breaching party to the other party.

In France, break fees can be considered as:

• a right to exit, but subject to prior payment of the fees (the party has in practice two options: completing the transaction or paying the fees);
• a penalty clause within the meaning of Article 1231-5 of Civil Code: in that respect, the breaching party must:
• • perform its obligations in such a manner as to complete the transaction; or
  • should it fail to do so, pay the fees; and
• compensation for the exclusivity right for negotiation, which has been granted by a seller to the bidder.

We strongly encourage investors to:

• assess the objective of the break clause in practice;
• determine the amount of the fees to be paid according to the objectives of such clause; and
• engage experienced lawyers to draft the relevant clause, considering that the judge can challenge its validity and the amount of fees to be paid on a case-by-case basis.

5.3 How is risk typically allocated between the parties?

Break fees (or reverse break fees) are usually negotiated and retained where:

• the transaction involves competitors; and
• failure to complete the transaction would cause significant damages to the other party due to the information shared during the due diligence process.

To avoid and mitigate the associated risk, we often recommend that the parties not disclose strategic information until:

• a definitive binding agreement has been signed; and
• the parties are certain that the transaction should complete.

When possible, we suggest entering into a 'clean team agreement', whereby only a limited circle of people have access to strategic and confidential information, in order to minimise the damage that may result if the transaction does not complete.

5.4 What representations and warranties will typically be made and what are the consequences of breach? Is warranty and indemnity insurance commonly used?

Representations and warranties are often formalised and retained in French M&A and private equity transactions. These can primarily be divided into:

• representations, including fundamental representations and business representations; and
• terms for indemnification, such as:
• • definition of 'damage' or 'loss' – including tax aspects of the damage;
  • exclusion of liability (eg, fair disclosure, purchaser's knowledge qualifier, obligation to mitigate);
  • liability cap;
  • de minimis threshold;
  • deductibles;
  • third-party claim procedures; and
  • guarantees for the payment of indemnification.

In addition, we sometimes add protection for the buyer with a specific indemnity – usually:

• in industrial M&A transactions; or
• where a specific tax or social or business issue is raised during the due diligence process.

Breach results in the payment of sums by the seller to the purchaser or to the target itself:

• usually considered as a price reduction (often more tax efficient); and
• sometimes as indemnification (usually less tax efficient).

Indemnity insurance is becoming more common in large and mid-cap transactions, especially where the seller(s) have other projects in mind and need 100% of their proceeds to make other investments. From experience, indemnity insurance is seldom proposed in small-cap transactions.

6 Management considerations

6.1 How are management incentive schemes typically structured in your jurisdiction? What are the potential advantages and disadvantages of these different structures?

There is no general rule for an investor to propose management incentives to key managers. We recommend that such management incentives be:

• formalised through tailored documentation; and
• structured on a case-by-case basis.

Appropriate management incentives are a vital issue raised in M&A and private equity transactions and management packages often constitute one of the key factors for the success of an investment. In leveraged buyout (LBO) transactions, we generally retain equity-based incentives, whereby key managers have access to a greater part of the proceeds at the time of exit (liquidity process) in case of overperformance of the target.

A mix of ordinary shares and preferred shares with a ratchet mechanism is often proposed to key managers making significant investments in companies, ensuring at the same time both that:

• they bear equal risks as 'investors'; and
• the subscription of such shares (and the future proceeds resulting therefrom) are not linked to their employment or management duties (for tax and social reasons).

For the second or third circle of management, free shares or equity warrants (known as 'BSPCEs') are usually granted to them, as well as sometimes employee bonuses – especially through retention plans to promote the transition of the acquired business.

A full discussion of the different types of management packages and their respective advantages and disadvantages is beyond the scope of this Q&A. Investors should bear in mind that the best such instruments are often a mix which:

• gives a real incentive to key managers to take risks as investors and to participate in the strategy and development of the business;
• takes into account the specific situations of the beneficiaries (first-circle managers cannot be treated in the same way as second-circle managers; founders are sometimes treated distinctly; future key managers should be encouraged, as they will create value after exit during discussion with future bidders);
• complies with the long-term interests of the target; and
• affords legal and tax certainty in relation to its (future) treatment at the time of exit (eg, capital gain versus salary treatment, social charges).

6.2 What are the tax implications of these different structures? What strategies are available to mitigate tax exposure?

The tax implications will depend on:

• the structure of the investment; and
• the diverse constraints that investors may face, especially in cross-border transactions.

We highly recommend that a tailored assessment of the situation be conducted with the assistance of tax experts who specialise in private equity transactions. This assessment may focus in particular on tax treaties between France and other countries – France has signed such agreements with most countries around the world to avoid double taxation.

6.3 What rights are typically granted and what restrictions typically apply to manager shareholders?

As equity-based incentive plans are usually proposed to key managers (usually first-circle managers), the latter are considered 'shareholders' of Newco (the company purchasing the target). As shareholders, they have:

• political rights (eg, the right to vote, to access key information and to be involved in the strategy of the acquired business); and
• financial rights (eg, the right to payment of dividends – which are rarely paid in LBO transactions given the terms of intercreditor agreements; the right to the proceeds resulting from the transfer of their shares).

In practice, key managers (eg, chief executive officer, founders) usually have more extensive political rights than second-circle managers, who have limited access to key information. To facilitate governance and decision-making at the level of Newco, we often establish a special vehicle – called 'ManCo' or 'DirCo' – for key managers who are shareholders of Newco, in such a way that they are indirectly shareholders of Newco.

The shareholders' agreement of Newco (and, if relevant, ManCo or DirCo) is instrumental in private equity transaction and sets out, in a balanced manner, the terms for:

• governance and decision making; and
• the transfer of shares by the managers – usually a lock-up period applies, with some commitments to sell or to purchase (put and call options) their shares under specific situations (eg, leaver event, death, incapacity).

6.4 What leaver provisions typically apply to manager shareholders and how are 'good' and 'bad' leavers typically defined?

Based on recent tax regulations, we try to avoid the establishment of a link between the status of shareholder and the management/employment duties of the manager. To this end, we have noted that:

• the number of bad leaver (discounted price) and good leaver (fair market value with a 'friendly' price calculation) clauses has decreased in recent months; and
• French investors often refer to general leaver events, avoiding a link with the functions provided by the manager.

Where good and bad leaver provisions are retained (along with neutral leaver sometimes), we define:

• 'good leavers' as those whose duties are terminated due to:
• • incapacity or invalidity;
  • death; or
  • the approval of the investor or controlling shareholder; and
• bad leavers as those whose duties are terminated due to:
• • dismissal before a certain period (usually deemed necessary for a smooth transition of the business); or
  • breach of certain covenants (eg, non-compete clause, exclusivity).

In defining a 'bad leaver' we avoid reference to the grounds for termination of an employment contract (eg, dismissal for serious misconduct), since the Court of Cassation has often ruled that a bad leaver clause may, in some cases, be considered an abusive sanction under French labour law – in particular, if it leads to an unjustified deprivation of economic rights (eg, free shares) of an employee due to their exit from the company.

It will all depend on:

• the context of the clause;
• the wording of the clause; and
• the nature of the termination of duties.

7 Governance and oversight

7.1 What are the typical governance arrangements of private equity portfolio companies?

The special purpose acquisition vehicle ('Newco') is typically created in the form of a société par actions simplifiée (SAS), which offers a flexible contractual framework in terms of governance and decision making.

The typical governance arrangements for private equity portfolio companies in France consist of:

• the appointment of a chair who has all powers to act on behalf of the group companies, subject to some limitations of powers (provided in the mandate services agreement and/or articles of association of the group companies); and
• general managers, who assist the chair in their functions. These legal representatives can be subject to the same restrictions of powers as those applied to the chair or any other kind of limitations of powers.

In addition, we often create specific boards or committees dedicated to monitoring or supervising the management bodies of the company (eg, supervisory board or committee, monitoring board). The powers and missions granted to such boards or committees are governed by the articles of association of the group companies/Newco, which usually provide that the key managers must obtain prior approval for key or strategic decisions.

In practice, in private equity transactions, such boards are composed of members representing:

• the investors or the controlling shareholder; and
• the key managers of the portfolio company.

The shareholders' agreement typically governs the composition of such boards and the internal decision-making process, anticipating deadlock situations by providing for appropriate solutions in such cases.

7.2 What considerations should a private equity firm take into account when putting forward nominees to the board of the portfolio company?

Private equity firms should not involve themselves in the daily business of portfolio companies and should only deliberate on key decisions and overall strategy. If the private equity firm is overly involved in the business (eg, by requiring prior approval of too many management decisions considered to constitute daily business), there is a high risk that it (or its members) will be considered as 'de facto' managers and be exposed to managers' liabilities.

We strongly recommend that the list of management decisions for which prior approval is required be reviewed by experienced lawyers in the light of French case law.

7.3 Can the private equity firm and/or its nominated directors typically veto significant corporate decisions of the portfolio company?

Yes. In practice, the powers of the private equity firm (and, indirectly, its nominated directors) will depend on:

• the kind of transaction; and
• particularly, whether the investor has acquired a majority stake. If so, the private equity firm (and its nominated directors) will have more extensive powers.

The SAS corporate form allows for the adoption of a very flexible framework for decision making. Again, particular attention should be paid to the risk of the the private equity firm or its nominated directors being considered as 'de facto managers'.

7.4 What other tools and strategies are available to the private equity firm to monitor and influence the performance of the portfolio company?

The SAS allows for the implementation of as many tools as are needed to protect the controlling shareholder and/or minority shareholders.

This protection first comes from appropriate reporting (especially on key performance indicators), which the key managers can request on a regular basis.

The articles of association of the SAS and/or the shareholders' agreement can allow the shareholders to request access to certain key information (accounts and some financial/accounting data). If this access is denied or if the information provided is unclear or reveals some faults or abnormalities, the articles of association can empower the relevant shareholders to request an investigation by an independent third party with a specific mission.

If the articles of association of the SAS or the shareholders' agreement does not provide such rights, Article L225-231 of the Commercial Code states that shareholders holding more than 5% of the share capital can request such a management investigation if they can prove significant doubts as to the quality of management of the company.

Finally, the performance of the portfolio company can be influenced by tools such as:

• the management package and incentives offered to key managers; and
• the contribution of new money to finance add-on acquisitions and external growth.

Finally, the shareholders' agreement should include relevant clauses to promote the development of the business and enhance its performance.

8 Exit

8.1 What exit strategies are typically negotiated by private equity firms in your jurisdiction?

Private equity firms invest with the main objective of exiting the company after a few years (usually four to seven years) and making a profit on the sale of the business, along with the other shareholders.

In that respect, the liquidity process is perhaps the most important aspect of the shareholders' agreement on which investor should focus.

This liquidity process often starts with a rendezvous after a few years (typically four), during which the shareholders will meet and discuss:

• the opportunity to commence a liquidity process; and
• the terms of such process (eg, 'industrial' liquidity process; open-bid process).

If the shareholders do not reach agreement on the kind of process that they wish to initiate, the liquidity clause will typically apply and the liquidity process can commence according to the terms of that clause.

The liquidity clause usually sets out:

• the timing to initiate the liquidity process;
• the identity of the shareholder(s) allowed to initiate the process;
• the name or characteristics of the M&A broker to be engaged for this process;
• the obligations of key managers to participate in the due diligence process with the bidders and to maintain secrecy obligations throughout the process;
• the duration of the liquidity process and the kinds of bidders that can be approached;
• the terms under which a final decision will be made based on the offers received during the process; and
• the allocation of the costs attached to the liquidity process.

The liquidity process also reserves the right to opt for an initial public offering, although this is rare in the case of small and mid-cap transactions.

8.2 What specific legal and regulatory considerations (if any) must be borne in mind when pursuing each of these different strategies in your jurisdiction?

There are many critical legal and regulatory considerations, while investing in France on the small and mid-cap sectors, including (without limitations of course):

• Those relating to the creation and structuration of the investment vehicle, in respect of the AIFMD and Financial and Monetory Code regulations (as well as those considerations relating to tax matters, which can motivate one kind of structure instead of another one, especially in the real estate sectors)
• Foreign investment authorizations, and antitrust clearance, which can clearly have an impact on the timeline of the contemplated transaction;
• The liquidity process and the usual funds lifecyle, which can be instrumental to the decision of the investor while making acquisitions in France; and
• The KYC process, especially on cross-border transactions, which process is often more complicated than often expected;
• The structuration of the financing process and the security package attached.

On these particular aspects, we strongly recommend hiring the services of qualified professionals familiar with cross-border private equity transactions.

9 Tax considerations

9.1 What are the key tax considerations for private equity transactions in your jurisdiction?

Many tax considerations must be borne in mind when completing a private equity transaction in France.

The first step when deciding on a deal structure involves assessing the tax and legal constraints of the contemplated transaction and preparing a tax and legal structure memorandum accordingly. The tax assessment should focus on the direct and indirect taxes that may apply to the contemplated transaction at the level of:

• the target;
• the acquisition and/or investment vehicle(s) (eg, Newco/BidCo/ManCo/FinCo); and
• the shareholders.

In particular, the following should be considered:

• the deductibility of interest charges, considering that leveraged buyout (LBO) transactions imply some leverage and thus the deductibility of acquisition costs, which is subject to limitation rules in France;
• the benefits of the holding company tax regime and special treatment of dividend payments;
• the anti-abuse mechanism, including the need to provide economic and legal substance to investment vehicles;
• value-added tax (VAT) considerations, including the need to 'activate' holding companies providing services to the target;
• possible withholding taxes payable in the country in which the stakeholder or target is located;
• management incentive plans/management packages and how taxation will apply in the context of a liquidity process;
• capital gains tax, considering the tax residence of the stakeholders; and
• tax duties on the sale of shares, depending on:
• • the corporate form of the target; and
  • its possible characterisation as a real estate company.

9.2 What indirect tax risks and opportunities can arise from private equity transactions in your jurisdiction?

As indicated in question 9.1, a tailored assessment of the relevant tax and legal constraints is always required in private equity transactions. It is common practice to focus on the risks identified in question 9.1.

There are also many opportunities and advantages from a tax law perspective, such as:

• research tax credits;
• VAT recovery optimisation if the transaction is structured correctly; and
• corporate group advantages, including tax consolidation.

9.3 What preferred tax strategies are typically adopted in private equity transactions in your jurisdiction?

The tax structure of a private equity transaction is a key factor to be considered when making an investment in France. An incorrect tax assessment can delay or even compromise completion of the contemplated transaction.

Investors should first assess the tax environment of the transaction, including possible constraints linked to tax advantages that managers may benefit from (which are often conditioned to holding periods and/or specific reinvestment modalities). For instance, taxation of the managers' proceeds may have a significant effect on their capacity to perform their rollover in the context of the transaction along with the investor.

It is common practice in France for LBO transactions to be structured through the creation of a Newco, which acquires 100% of the share capital of the target. The Newco is normally financed by equity and, if applicable, quasi-equity instruments, as well as external financial debts. This structure offers the advantage of both financial and tax leverage, considering:

• the possible deductibility of acquisition charges (subject to legal limitations in France);
• possible tax consolidation between Newco and the target (under specific conditions);
• the establishment of incentive plans, which are a key value driver (provided that relevant management package instruments are proposed); and
• VAT recovery (under specific conditions).

The engagement of tax experts is highly recommended to advise on all related aspects.

10 Trends and predictions

10.1 How would you describe the current private equity landscape and prevailing trends in your jurisdiction? What are regarded as the key opportunities and main challenges for the coming 12 months?

The French private equity landscape has clearly been affected by the international political and economic climate and is currently characterised by a mix of resilience and adaptation to economic and political uncertainties.

Some sectors – for example, services, textiles and automobiles – have been more significantly impacted than others which are in much better shape and present significant investment opportunities, such as:

• healthcare;
• biotechnology;
• laboratories;
• high-tech;
• AI; and
• software.

In late 2024, there were favourable signs of recovery in the private equity industry, driven by improved financial conditions including lower interest rates and greater political visibility. However, the usual process of private equity transactions has generally become much longer in recent months and liquidity processes are becoming more complicated.

This year will be full of challenges for the private equity sector. We anticipate that many opportunities will arise for private investors considering:

• that company valuations have tended to stabilise compared with last year; and
• the possible return of liquidity for private investors.

10.2 Are any developments anticipated in the next 12 months, including any proposed legislative reforms in the legal or tax framework?

The international political and economic climate will necessarily present some business opportunities, even though it will also raise some uncertainties and financial difficulties in certain sectors. In recent months, we have observed an increase in cross-border transactions in Europe and many foreign investors (eg, Canadian and Asian investors) are strengthening their business relations with Europe in general and France in particular.

We have also noted that market opportunities have emerged in the context of the current international political climate, especially in the defence and aerospace sectors. Many funds have deployed significant budgets to invest in these areas and have also set up dedicated funds to support the defence industry in the coming years.

11 Tips and traps

11.1 What are your tips to maximise the opportunities that private equity presents in your jurisdiction, for both investors and targets, and what potential issues or limitations would you highlight?

France is a dynamic market for private equity funds, with a strong base of profitable small and medium-sized companies. Many of them face transfer and succession needs, for which leveraging private equity transactions can offer appropriate solutions.

Tax advantages including those offered to investors (eg, carried interests) and entrepreneurs (eg, research tax credits) may promote the establishment of investment funds in France and more generally increase expenditure on research and development, especially in innovative sectors such as:

• medical research;
• water treatment technologies;
• software; and
• AI.

In that respect, private equity investors should focus on strategic themes such as:

• AI integration processes;
• sustainability;
• the circular economy; and
• defence and aerospace.

Private equity investors should:

• be prepared for more competitive processes; and
• be aware of French market practices and standards to ensure that they make attractive offers and can be awarded exclusivity – especially in respect to:
• • price mechanisms;
  • management packages; and
  • representations and warranties; and
• assess the opportunity to obtain national or EU grants or co-investment for portfolio companies (eg, EU recovery funds in the green and digital sectors, Bpifrance grants and co-investment solutions).

We strongly recommend engaging specialised lawyers and financial advisers in France, especially since France has a strong relationship-driven business culture with very specific M&A and private equity processes. An attractive price is not the only aspect that sellers will assess; other factors – such as long-term projects, management incentives and environmental and social governance – will help to make an offer attractive in a competitive process.

In today's uncertain and tumultuous climate, we anticipate some difficulties such as:

• regulatory constraints (EU protection against foreign investors to foster the development of technologies in Europe); and
• an increase in tariffs that may slow down global economic growth and reduce exports from Europe.

Foreign investors coming to Europe may anticipate a significant increase in foreign direct investment constraints, which in practice will clearly delay the acquisition process (usually a minimum of two months compared with domestic processes).

Finally, the private equity market is becoming increasingly competitive, especially for attractive and quality assets, which elevates entry multiples and intensifies the pressure on investment projects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.