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04 March 2015
On July 31 2014 the French M&A community welcomed the publication of an order that significantly amended Article 1843(4) of the Civil Code relating to the determination of the transfer price of securities by an independent expert in case of disagreement between the seller and the buyer.
Under French law, in the context of a transfer of securities, the determination of the transfer price by an independent expert can be governed by two different regimes set out under Article 1592 (applicable to all sales, not only sales of securities) and Article 1843(4) (applicable to the transfer of securities only) of the Civil Code.
Under the former Article 1843(4), the parties could be certain that the price would be determined by the expert and the transfer would be completed, but the expert could depart from the valuation guidelines set out by the parties. In contrast, under Article 1592 the expert is bound by the parties' valuation guidelines, but if the expert cannot set a price, the transfer may not occur.
Several court decisions issued in the past few years led to confusion among M&A practitioners as to the respective scope of the two articles and the role of the independent expert appointed by the parties or the court in the context of a transfer of securities. In particular, private equity lawyers had become anxious about the validity of the price formula inserted in good and bad leaver arrangements agreed between sponsors and managers. Thus, the reform of Article 1843(4) was highly anticipated by M&A practitioners.
The order redefines the scope of Article 1843(4) and the role of the independent expert acting under this article.
The initial purpose of Article 1843(4) was to protect the interests of a seller which is forced to transfer its securities by mandatory provisions when the parties fail to reach an agreement on the price (in particular, when a company has a legal obligation to purchase the shares of one of its shareholders), by ensuring that the price of the securities is properly determined by an independent expert.
However, in recent years the French courts extended the scope of application of Article 1843(4). In particular, in 2012 the Supreme Court held that a party could appoint an independent expert pursuant to Article 1843(4) in the context of securities transfers resulting from exclusion provisions in a company's articles of association and from a call option in a shareholders' agreement. As a result, private equity practitioners feared new disputes between sponsors and their managers.
Article 1843(4), as amended by the order, now expressly applies to transfers of securities:
In each case, the price shall be set by an independent expert only if the parties fail to reach agreement on the price.
It is still unclear whether Article 1843(4) will now apply to mandatory transfers of securities if there is no express reference to Article 1843(4) in the relevant legislation.
Further to the order, a judge can no longer decide to apply Article 1843-4 to contractual transfers such as those set out in:
Article 1592 of the Civil Code should apply to such situations.
However, it is still unclear whether parties could provide that in case of disagreement, the price of the securities will be determined by an independent expert under Article 1843(4) and not Article 1592, in order to ensure that the price will be determined and the transfer completed.
Before the order came into force, the independent expert under Article 1843(4) was free to apply (or not) the valuation guidelines or methods agreed by the parties in the articles of association or in a separate agreement. The independent expert was thus entitled to depart significantly from the guidelines agreed in advance, even where such guidelines were clear and raised no interpretation difficulties, and to set a much higher price than that which would have resulted from the application of the agreement between the parties. As a result, private equity lawyers became particularly uneasy where a manager was penalised with a lower transfer price in situations where he or she left on bad terms. Sponsors feared that managers could try to challenge the transfer price to their advantage on the grounds of Article 1843(4).
These fears have now been alleviated. Article 1843(4) now states that the expert must apply any valuation guidelines or methods agreed between the parties (ie, set out in the company's articles of association or in any other agreement).
Therefore, the role of the expert is now the same under Articles 1843(4) and 1592.
Although the order has clarified the respective scopes of Articles 1843(4) and 1592 of the Civil Code, some uncertainties still remain and will need to be clarified by case law. Therefore, in M&A transactions legal practitioners will need to choose carefully which valuation regime should apply to their agreements, depending on the context of the contemplated transfer of securities.
For further information please contact Alain Levy or Gwenaëlle de Kerviler at AyacheSalama by telephone (+33 1 58 05 38 05) or email (firstname.lastname@example.org or email@example.com). The AyacheSalama website can be accessed at www.ayachesalama.com.
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