Established almost 30 years ago, AYACHE is a leading independent French business law firm which has developed a recognised and prominent expertise in private equity and mergers and acquisitions transactions and, more generally, corporate finance and financial engineering. The Firm advises and represents French and foreign clients in a wide range of legal areas and provides efficient and personalised services tailored to the specific needs of its clients, who mainly comprise groups and companies operating in the industrial sector, investment banks, financial institutions and private equity funds.
Private M&A deals: the price is not everything! Supreme Court orders a transfer of shares despite a dispute over the priceFrance | 05 May 2021
In a recent case, following the majority shareholder's exercise of a call option, a minority shareholder refused to transfer their shares and argued that such transfer could not be enforced by the court as the transfer price of the shares had not been agreed and had to be determined by an expert. The Supreme Court has ordered the minority shareholder to transfer their shares despite the dispute over their price.
In the context of the worldwide economic crisis due to the COVID-19 pandemic, France has reinforced its protection of French companies from foreign investments by extending existing measures and slowing down or vetoing negotiations if deemed necessary. This article discusses cases which show the government's impartiality when it comes to protecting France's sensitive sectors regardless of the country from which the foreign investor comes and the relationship that France has with such country.
In acquisitions of group companies, the agreements entered into by the parties are often subject to termination clauses. If the conditions of a termination clause are met, the beneficiary of such clause can choose between terminating the agreement and waiving its termination right in order to obtain the contract's performance. A recent case before the Paris Court of Appeal provides an example of the issues that may arise when a termination clause is insufficiently accurate.
In April 2020 the Financial Markets Regulator (AMF) heavily penalised a hedge fund for omitting to disclose its objectives regarding a takeover bid after it had purchased large amounts of equity swaps in shares of the company subject to the takeover. This decision confirms that the mere fact that equity swaps can give the equity swap holder access to shares of a company that is the subject of a takeover bid is enough for them to fall within the scope of the takeover bid legislation.
Closing is the ultimate stage in an M&A transaction where all parties meet to seal – and celebrate – their agreement; however, it can be a traumatic process due to the time spent in meeting rooms signing and initialising contracts. Lawyers and clients have long hoped for change in this regard. During the COVID-19 lockdown, signs of a change emerged in the form of electronic signatures, as contracts could not be signed in person and scheduled closings were either dematerialised or delayed.
In the context of the worldwide economic crisis caused by the COVID-19 pandemic, the EU authorities issued guidelines to reinforce the protection of strategic sectors and vulnerable companies from foreign investment. However, the measures taken by France are not as far reaching as in other EU countries, as the French authorities chose to extend the measures to biotechnologies and take precautionary temporary measures with respect to listed companies.
Following the introduction of EU Regulation 2019/452 and the Action Plan for Business Growth and Transformation law, a new decree and ministerial order were published and will enter into effect on 1 April 2020. This new set of regulations takes into account the complexity of the existing structures of investment in private M&A transactions and allows a better understanding of the context of a contemplated transaction by the French administration.
A recent Supreme Court decision validates the substitution mechanisms in the context of M&A transactions. The mechanism is particularly helpful in M&A transactions where a sponsor signs the initial agreements and, once a structure has been agreed, substitutes a special purpose vehicle to carry out the transaction. However, M&A practitioners should remain vigilant when drafting substitution clauses to ensure that they clearly state the parties' intentions as to the full release (or not) of the original party.
The Action Plan for Business Growth and Transformation was recently adopted. This ambitious law introduces (among other things) a new arsenal for the French state to monitor foreign investment in sensitive industries. It has also brought with it several answers, clarifications and improvements to existing rules applicable to the preferred shares and free share allocation plans regimes, which will undoubtedly be useful to investors and companies undertaking private M&A transactions.
The recently adopted Action Plan for Business Growth and Transformation contains new rules that will be of interest to parties that undertake private M&A transactions, particularly those involving foreign investment. Further, it clarifies the measures that the minister of economy can take should an investor pursue an investment without prior authorisation or fail to comply with the conditions set out by the minister in such prior authorisation.
The Supreme Court recently ruled that the granting of a call option over an asset which is subject to a pre-emption right violates such pre-emption right. In this specific case, the call option had been exercised when the pre-emption right was no longer applicable. However, the court held that the transfer had breached the pre-emption right as it had resulted from the exercise of a call option agreement that had been entered into when the pre-emption right was still applicable.
The rules and procedures for protecting the interests of French companies when it comes to foreign investments have been amended by Decree 2018/1057, which came into effect on 1 January 2019. The new decree has extended the control of foreign investments to new sectors and enabled targets to take an active part in the process by giving them the right to directly ask the Ministry of Economy and Finance whether the foreseen investment is subject to a prior authorisation.
In the context of the acquisition of group companies, the parties will carefully select what to insert in the bylaws of the company, whereas in separate private agreements, which are confidential, the parties may include further, more detailed information. If the advantage of such private agreements is their confidentiality, the drawback is their lack of enforceability against third parties. The Supreme Court recently held that a sale made in violation of a shareholders' agreement was void by application of the bylaws.
Over the past 10 years, the French M&A market has seen the rise of a powerful new player: the French state. A newly introduced bill would expand the state's ability to oppose the sale or transfer of assets by certain strategic companies in which it holds shares. The changes, which are of particular interest to the M&A community, are part of an omnibus reform of French corporations law known as the Action Plan for Business Growth and Transformation.
A recent Supreme Court decision has confirmed previous case law and explicitly recalled the importance that should be given to the drafting of provisions governing the duration of shareholders' agreements. The court highlighted the fact that shareholders' agreements concluded for as long as the signatories remain shareholders are considered concluded for an indefinite period and may be terminated by any party thereto at any time.
Ordinance 2017-1674 of December 8 2017 introduced into French law the legal framework for the use of a blockchain in order to record the ownership and transfer of unlisted securities. This groundbreaking reform is an essential step towards the modernisation of the existing rules governing the transfer of unlisted securities. Blockchain technology will considerably facilitate and secure the transfer of securities and will undoubtedly have an impact on private M&A deals.
Following the introduction of Ordinance 2016-1635 and Decree 2017-1094, non-listed companies which previously were not required to disclose the identity of their shareholders and maintained confidentiality through shareholders' agreements must now disclose their beneficial owners not only when a company is set up, but also on a continuous basis. However, the definition of a 'beneficial owner' remains unclear.
The foreign investment rules provided under the Monetary and Financial Code were recently amended. M&A practitioners have welcomed the reform of the foreign investment rules, as it reduces the paperwork for foreign investments not falling within the scope of the prior authorisation regime. In addition, this reform has removed a cumbersome administrative procedure considered redundant.
The Macron Law and its implementation decree constituted breakthrough legislation for intercompany loans as they provide new exemptions to the French banking monopoly. The reform allows companies to overcome the difficulties faced when trying to secure a loan from banks and credit institutions. However, the newly authorised intercompany loans remain subject to several conditions that may significantly narrow the impact of this reform.
New rules on signing authorities were recently introduced in Article 1161 of the revised Civil Code in order to prevent direct and indirect conflicts of interest. However, the application of Article 1161 has become a source of concern for M&A practitioners and the impact of the new rules of representation of multiple parties in M&A agreements is a complex issue subject to ongoing legal debate.
In leveraged buyout transactions, institutional investors that retain the management team in order to continue to run the business often set up put and call options over the managers' shares, which are generally exercisable over any managers exiting the target. These put and call options often include good and bad leaver mechanisms. The Supreme Court recently affirmed the validity of bad leaver provisions, including price discounting mechanisms in the context of an employee's departure.
The Supreme Court recently ruled that the court of appeals had rightfully, and in accordance with its sovereign power of interpretation, decided that the purchaser was entitled to make a claim under the warranties ‒ even though he had not complied with some of the contractual provisions ‒ and that the amount to be paid by the seller should be reduced to account for the loss of chance.
French contract law will soon face a disruption with serious consequences for corporate finance practice following the issuance of Order 2016-131. The introduction of new principles to the Civil Code will significantly alter the way that negotiations and deals are structured. Among other things, the revised Civil Code will include new confidentiality and disclosure duties, as well as provisions on preferential treatment and specific performance of contracts.
Put and call options commonly refer to unilateral undertakings to sell or purchase securities pursuant to predetermined terms and conditions, but the actual enforcement of such options has long been questioned by tribunals and even Supreme Court jurisprudence. To address this issue, the legislature has replaced the binding force of contracts at the centre of transactions and proposed to strengthen the enforceability of put and call options.
A share purchase agreement usually provides for seller warranties whereby the seller undertakes to indemnify the purchaser against the potential loss of value suffered by the target. A recent decision clarifies that parties to an agreement should expressly clarify their intentions regarding the possibility or prohibition of the assignment of the seller's warranties to a third party in the event of subsequent transfers of the target's shares.
The Hamon Law imposed a far-reaching obligation on small and medium-sized enterprises to provide information to their employees regarding the transfer of majority shareholdings and businesses. However, two recent developments – a Constitutional Court ruling and the recently passed Macron Law – have somewhat alleviated the burdens imposed on prospective sellers by the Hamon Law.
The Supreme Court recently confirmed that, in the context of a share purchase, the beneficiary of seller's warranties is entitled to make a claim under such warranties even if, prior to the transaction, it was aware of facts affecting the warranted assets. The case concerned a purchaser's claim to be indemnified under the warranties for the malfunction of software commercialised by the target.
The Court of Cassation recently held that a parent company cannot be held liable for failing to provide a subsidiary with equity commensurate to cope with transferred liabilities in a spin-off, with a few narrow exceptions. The decision provides a framework for a parent company approaching a spin-off, as the court held that the parent will not be held responsible for an unforeseen increase in liabilities unless a specific threshold is reached.
The Supreme Court recently confirmed that seller's warranties granted under a securities sale and purchase agreement do not deprive a purchaser of the right to seek remedy pursuant to statutory warranties. This decision confirms earlier rulings and its publication affirms the coexistence in security transfers of contractual and statutory warranties.
The French M&A community has welcomed the publication of an order significantly amending 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. However, some uncertainties still remain and will need to be clarified by case law.
The Hamon Law has introduced a new obligation for small and medium-sized companies to provide information to employees in case of a contemplated sale of shares or of an ongoing business. The law aims to promote and encourage the acquisition of businesses by their employees, in order to avoid the failure of healthy businesses due to the lack of a buyer.