This note has been prepared for American businessmen and their legal counsels who are already familiar with American acquisitions and desire to become acquainted with some of the differences when the target company (the acquisition target) is a French company. (Article relating to U.S. acquisitions).
Purchasing a non-public (privately held) French company can be achieved in the same classical manners as the purchase by a United States company by another United States company: The purchaser of either stock or assets.
Stock Acquisitions in France
In a French or American stock acquisition, the problems are generally similar:
- are the assets really worth the negotiated price?
- are there undisclosed or unknown liabilities (tax, labor, etc)?
- how will indemnities be assured, if the representations and warranties are incorrect?
- can key employees be retained?
- will cost effective non-compete protection be available?
- who will locally manage the acquired company?
- how to avoid traps of preexisting inter-group corporate sweetheart contracts?
French labor law provides a useful example of how the standard American M&A check list may need to be modified. The French Labor Code creates off-balance sheet liabilities which should not be ignored in the negotiations. France is not an “employment-at-will” jurisdiction and sizable indemnity payments will be payable to French employees with whom the new American owner may wish to separate. This is true in the case of both stock and asset acquisitions! Once this “liability” is valued, it may impact the to be negotiated purchase price.
In the case of a stock acquisition, the French Corporation Law may also hold surprises. For example, in the off-chance that the purchaser cannot or does not intend to purchase 100% of the equity of the target French company, it is important to understand that one or more minority stocks or shareholders owning more than:
- 25% of the shares of a “SARL” company or
- 33% of the stock of a “SA” company
will have minority veto rights unknown in the United States. Thus, full control is not conferred on the holder of 51% of the stock or shares.
Asset Acquisitions in France
American purchasers are familiar with the Bulk Transfer Act (Article 6 of the Uniform Commercial Code) which requires the purchaser of substantially all of the assets of certain types of businesses to notify creditors of the proposed sale, if the purchaser wishes to avoid becoming liable for certain liabilities of the seller of the assets.
In France, this issue is addressed in a different manner. If the selling company intends to transfer substantially all of its assets (equipment, leasehold rights, inventory, clients [good will] and industrial property rights) or those of a division, the purchase price will need to be placed in escrow for at least 3 1/2 months from the date that transaction is disclosed in a legal publications (including the “BALO”).
Once notice is given, general creditors have a short time and the tax authorities have a longer period to place claims against the escrowed amount. The tax authorities have even been know to assert significant claims even though the seller is entitled to tax rebates. Clearly, if the unsubstantiated claims of the creditors exceed the purchase price, the deal may not close on time or close at all.
It is important to note that in the event of an asset acquisition, the by law purchaser of the assets remains the employer of the company even though only assets were purchased. Thus, the asset purchase is faced with the significant cost of try to terminate the employment contracts of each employee, if termination is part of the business plan.
The relevant provision L.1224-1 in the Labor Code provides as follows:
|If a change occurs in the legal situation of the employer, including through succession, sale, merger, transformation of business assets or entrepreneurial society, all current contracts of employment on the day of the change remain between the new employer and the company’s staff.|
Thus, in calculating the value of the assets to be purchased, this “Social Liability” should be factored in. In addition, prior to entering into a purchase and sale agreement, it is important to discuss this issue with French counsel.
The above list of points is far from exhaustive. But it should encouraged an American companies contemplating a French acquisition to seek French-American counsel for both accounting and legal questions before entering into negotiations as to purchase price and the structure of a potential acquisition.
Author: Jonathon Wise Polier
Avocat aux Barreaux de Paris et de New York
Attorney-at-Law (Paris & New)