Acquisition Finance 2024 Comparisons

The M&A market, affected by the post COVID-19 effects and the chain of reactions following the Russia-Ukraine war on the markets, experienced a dramatic fall in terms of transaction volume in 2023, in line with the forecasts produced by the end of 2022.

Indeed, the M&A market started to tighten mid-2022 to finally record a 46% decrease of total transaction value involving a French counterparty at the end of 2022. Such downturn continued in 2023 (not more than EUR9.5 billion was invested during the first semester of 2023, compared to EUR12.8 billion during the same period in 2022, invested in 1,296 companies compared to 1,467 companies in 2022). Eventually, French M&A activity collapsed to its lowest level in ten years (mainly due to the sharp rise of interest rates over a very short period of time, the rising inflation, the regulatory challenges and the economic and political instability). The total transaction value involving a French counterparty has decreased by 20% to EUR125,6 billion – the lowest transaction value since 2013.

Nevertheless, and despite such financial and economic context, the number of M&A transactions of a value between EUR1 billion and EUR5 billion slightly increased in 2023, from 31 to 35, but for an average amount lower than what was observed in 2022 due to a decline in deal valuation. Jumbo deals of over EUR5 billion were non-existent on the French M&A market. The highest transaction in terms of value was the sale of 100% of Bolloré Logistics (a leading transport and logistics company in France) to CMA CGM for a purchase price of EUR4,850 billion.

Private equity was not spared by such a slowdown and 2023 saw fewer transactions closed than 2022 (620 in 2023 against 789 in 2022). It also performed unevenly depending on the segment. The large cap segment was hit harder, where the small and mid-cap segments remained relatively active, with a focus on strategic sectors (such as technology and health care).

Although for a while, following the beginning of the Russia-Ukraine war, syndications were frozen, preventing banks from underwriting and lending money for financing M&A transactions, the access to bank financing was better than expected in 2023 although the increase in their cost of risk led the banks to be increasingly selective as to their investments.

The outstanding amount of market debt for French non-financial companies at the end of 2023 amounted to EUR699 billion, which represents a slight increase over the past 12 months. On the contrary, companies favoured bank loans, with an outstanding amount of over EUR1.390 billion in December 2023 (compared to EUR1.331 billion in December 2022), corresponding to a 2% growth “driven by the dynamism of the investment component” as highlighted by the Banque de France. After a growing and significant increase in 2023, the interest rate on bank loans became stable by the end of 2023 (4.79% in December, after 4.80% in November and 4.77% in October), while, as underlined by the Banque de France, the interest rate of debt securities decreased more significantly (3.32% in December, after 3.93% in November). As of January 2024, interest rates on new loans to non-financial companies continues to slightly decrease to 4.73% where that of securities debt financing “increases slightly... but remains below the average cost of bank debt”.

An upturn in the M&A market is expected in 2024 although the global economic, financial and political situation remains uncertain. Deal makers and investors will have to adapt their strategy, transform their business model and valuation method to mitigate risks and attract investors. Supported by a strong banking sector in France, French banks continue to have a key position in the primary acquisition financing market although financing is more expensive. In addition, the dry powder amount (corresponding to amounts raised from investors and not yet invested) hit a record in 2023 and one could expect that private equity transactions, especially in strategic sectors, will bloom again rapidly.

In 2023, French banks were well represented on the French financial advisers’ M&A market, with BNP Paribas (EUR45.3 billion), Société Générale (EUR31.2 billion), and Crédit Agricole CIB (EUR29.8 billion) arriving respectively fifth, seventh and eighth in the top ten. JPMorgan (EUR57.5 billion), Goldman Sachs (EUR54.3 billion) and Rothschild & Co (EUR52.6 billion) are the top three of the top ten financial advisers’ list for 2023.

After two consecutive golden years of leveraged-buyout (LBO) transactions, between the sharp rise in interest rates and spreads, the mounting inflation and geopolitical crisis, the LBO market was hit hard in 2023 with a 66% decrease in transaction value and a 30% decrease in transaction volume. Between borrowing costs around 10% and a misalignment regarding the asset valuation between vendors and purchasers, the deal flow was very low and transactions were either abandoned (failure rate around 80% during the last quarter of 2023) or implemented over a much longer period of time. The two main funding sources commonly used by investment funds (high-yield bonds and term loan B) remained largely affected during the whole of 2023 and LBO financing capacity in the public debt market evaporated. 

The governing law will generally be chosen between French, English or US law, although the choice will necessarily depend on a number of factors pertaining to the transaction (domestic or cross-border transaction), the nationality of the parties at stake or the type of financing contemplated (bank loans, bonds, etc). US law will generally be the governing law in high-yield bond issuances and US Private Placement (USPP) transactions; more rarely in other types of financing. English law will almost always automatically be the governing law in the context of Term Loans B (TLB).

Nonetheless, if the parties choose to elect a foreign law to govern the finance documentation, they will have to keep in mind that any security interests granted over French assets will have to be governed by French law (with some documents having to be drafted in French; eg, the pledge agreements, when registration of the pledge is required).

Whether the chosen governing law is French or English law, standard agreements provided by the Loan Market Association (LMA) will usually be used as a starting point for loan financing and tailored throughout the negotiations to the specifics of the contemplated transaction. For instance, in LBO transactions, the Senior Multi-currency Term and Revolving Facilities Agreement for Leveraged Acquisition Finance Transactions template will be used as the basis for discussion, whereas the Multi-currency Term and Revolving Facilities Agreement will be used for investment-grade transactions, whether in the context of corporate loans or acquisition finance.

It should be noted that the LMA provides French law and French language templates only for the Multi-currency Term and Revolving Facilities Agreement (ie, investment-grade templates). However, the practice has long since adapted the English law-leveraged templates to French law and many LBO transactions are subject to finance documentation governed by French law, based on the LMA English law template.

In most instances, the main financing documentation (Facilities Agreement, Bond Terms and Conditions, Intercreditor Agreement) is drafted in English; however, given that the LMA has developed French template agreements, the use of such French versions is not unknown, although mainly in the context of investment-grade transactions where there is only a Facilities Agreement, without intercreditor arrangements and mostly without security documents. It should be fair to say that, even in such a context, the use of the French language may complicate the syndication of the financing concerned, hence the reluctance of the parties, particularly the lenders, to draft the documentation in French.

However, as previously mentioned, even in the context of finance documentation drafted in English, it will be necessary to prepare French versions of any French law-governed security document requiring registration for perfection purposes.

Subject to necessary assumptions and qualifications, legal opinions covering, on one hand, the capacity of the French obligors to enter into the finance documents to which they are a party and, on the other hand, the validity and enforceability in France of such finance documents, will usually be covered in legal opinions delivered by the respective counsels.

The capacity opinions may be extended to cover other items such as the absence of registration duties or the absence of immunity.

The practice in France is that the borrower’s counsel issues the capacity opinion while the lenders’ counsel issues the validity opinion. However, in certain circumstances, the practice may vary; eg, in bonds transactions, it is not unknown for both borrower’s and lenders’ counsel to give capacity and validity opinions. Also, opining on the choice of law may be found in either capacity or validity opinions, depending on the circumstances.

Senior loans are the cornerstone of any acquisition financing by way of loans (as opposed to by way of bonds). They can be used alone or coupled with junior financing.

When used alone, senior loans are commonly seen on investment-grade (or low leveraged) transactions where they will be the only financing considered for the transaction. They can be made available on a secured or non-secured basis, depending on the situation of the borrower.

Senior loans will generally comprise several bullet and/or amortising term facilities and one revolving credit facility. The purpose of the term facilities usually consists in the financing (or refinancing) of the acquisition price, the refinancing of existing indebtedness (including in the target) and the financing of future capital expenditures (CapEx). They may also include the possibility of incremental facilities, which may turn out to be very useful for financing significant build-up transactions.

This type of financing is usually seen on LBO transactions as a means to increase leverage. Because of the banking monopoly, whereby only licensed credit institutions or financing companies can grant loans in France and because mezzanine funds are generally not licensed in France, funding of the mezzanine tranche will typically be structured as a private bond issuance.

Related to the mezzanine financing to the extent that it involves the same players (mezzanine funds) and is structured in the same way (through private bonds issuances) is unitranche financing, which has met with growing success in France on the mid-cap market over recent years. Less onerous than mezzanine financing because it is less risky for the investor due to the fact that it is not subordinated to a senior debt, unitranche financing is easier to implement and manage for the sponsors.

Mezzanine and unitranche financing globally present the same characteristics:

• a five- to eight-year bullet maturity;
• a mix of cash and payment-in-kind (PIK) interest; and
• potentially, an equity kicker.

As far as PIK interest is concerned, the French rule known as “anatocisme” imposes a capitalisation of interest at minimum on a yearly basis.

Bridge loans in the context of acquisition financing can be used to respond to a variety of situations, generally presenting the same characteristic in common: the timing of the final source of financing not being compatible with the timing of the acquisition.

Reasons for final sources of financing needing to be bridged can be multiple: divestment in one or several asset(s), an equity capital market (ECM) transaction (when the borrower is a listed company and intends to raise equity on the market to finance, in whole or in part, the acquisition), the issuance on the debt capital markets (DCM) of one or several bonds, in particular when the borrower intends to finance the acquisition through a high-yield bond issue, etc.

Bridge loans may also be used in contexts where the borrower needs to preserve a very high level of confidentiality on the contemplated acquisition (eg, in the context of a public offer). In that case, the borrower will negotiate a bridge loan with one single bank, on the understanding that the bridge loan will be refinanced quickly after the transaction has become public.

Bridge loans are generally provided by banks (as opposed to funds) and take the form of a senior loan, which the banks will have the right to syndicate after a certain period if the bridge loan has not been refinanced by that time. Typically, the bank(s) providing the bridge loan will negotiate a role in the transaction designed to refinance the bridge (as arrangers or otherwise) as a reward for providing the bridge loan.

Bonds may be used in two different situations.

When the lender is not licensed to grant loans to a French borrower pursuant to the French banking monopoly: indeed, bonds are excluded from the French banking monopoly. This situation concerns mainly mezzanine and unitranche financing, where the bonds are subscribed through a private placement and are not admitted to trade on a public market.

When the borrower intends to finance the acquisition by raising funds on the debt capital markets, including, as the case may be, through the issuance of high-yield bonds: however, recent years have shown that if non-investment grade corporates continue to favour high-yield bonds, LBO funds tend to opt more and more for loans as a source of financing, in particular TLB, a product which banks have developed as a means to compete with the high-yield bonds market. With a bullet maturity, light covenants and pricing conditions comparable to (if not better than) high-yield bonds, despite their floating rates, TLBs are perceived as a very attractive alternative to high-yield bonds’ issuances. In particular, sponsors appreciate the flexibility offered by TLBs in terms of prepayment (a TLB can be prepaid without penalty, when high-yield bonds generally provide for a three-year non-call period), as well as the private aspect thereof, which allows limited financial communication.

Private placements raised from institutional investors (as opposed to mezzanine or unitranche financing raised from mezzanine funds) have become a common feature in the French financing market. The typical profile of a private placement issuer is an ETI (entreprise de taille intermédiaire); ie, a medium-sized corporate.

In the context of acquisition finance, experience shows that private placements are used either to refinance, in whole or in part, an acquisition loan or to raise funds in advance with a view to financing an expansion strategy. However, private placements are rarely used as primary financing for a dedicated acquisition.

With a maturity of seven to nine years, private placements are a means by which corporates can extend the average duration of their indebtedness.

Asset-based financing is not commonly used in France for direct acquisition financing. However, once an acquisition is completed, asset-based financing might be envisaged at the level of the target group, with a view to implementing a debt push-down and reducing the acquisition debt at the level of the holding company.

The most commonly seen types of asset-based financing in this context are receivables-based financing, such as factoring transactions (with or without recourse), or securitisation financing.

Intercreditor agreements are commonly used for leveraged French acquisition financing transactions and contractually organised payments and claims’ priorities between the senior creditors (including the hedging counterparties), second-lien and/or mezzanine lenders (if any), equity-holders and intra-group lenders.

The intercreditor agreement organises allocation of payment of the principal, interests, fees of the senior creditors in priority over any lower-ranking creditor and establishes prohibitions and exceptions on other payments or distributions. This entails that if any payment is made to a subordinated lender in breach of any agreed contractual provisions, that the subordinated lender shall reverse the payment so received in favour of the senior lenders.

The intercreditor agreement will rank the security interests granted in the transaction and the allocation of payments between the various ranking beneficiaries of the security interests, in the event of the realisation of these security interests.

It has been debated whether the contractual subordination of certain debts could be viewed as undermining the French principle of equality among the creditors. Since this equality principle can be considered a matter of public policy (ordre public), some have questioned the full enforceability of these subordination agreements against third parties (particularly in the context of bankruptcy), or even their effectiveness between the parties to the subordination agreement.

However, the French Supreme Court (Cour de Cassation) has, in the past, recognised the enforceability of these subordination agreements against the liquidator and against the liquidation proceedings opened against the debtor.

Inclusion of bonds in acquisition finance is a classic standard, given that junior debt or unitranche financing is generally provided through the issue of bonds. From a contractual standpoint, the same principles apply in the intercreditor agreement, whether the financing takes the form of a bank or bond deal or a mix of both.

However, the contractual subordination arrangement organised under the intercreditor agreement may be complicated in the case of bankruptcy proceedings of the borrower. Indeed, under French law, in the case of bankruptcy of a debtor, creditors are grouped in committees, depending on the nature of their claim (bonds or loans) but without distinction between the senior and subordinated creditors within each committee. A number of decisions adopted in the context of restructuring plans (including debt write-offs) require the consent of both committees. As a result, in a situation where junior lenders hold bonds issued by the borrower and are the only bondholders (or the majority ones) in the bankruptcy context, they will control the decision of the bondholders’ committee and may block a restructuring plan involving a write-off of their bonds, a situation which, obviously, gives them very strong leverage in the negotiations, which the intercreditor agreement would normally not provide them with.

Since Ordinance No 2021-1193 dated 15 September 2021, which entered into force on 1 October 2021, creditors affected by the plan are grouped into different classes reflecting a sufficient community of interests, based on an objective basis, taking into account, in particular, the priority of the claims and the existing subordination arrangements.

The intercreditor agreement contractually provides for a pari passu ranking between the claims of the hedging banks and those of the senior lenders. This is particularly crucial given that difficulties can arise if, on the date French security interests are granted, hedging contracts have not yet been entered into (which is frequently the case, as borrowers generally negotiate a delay of several months to put in place the hedging of the financing). Considering that French law requires that the secured creditors be individually identified in the pledge agreement at the time the security is granted, the pledge which will later be granted to the hedging banks (ie, at the time of entering into the hedging arrangements) will automatically rank lower than the one granted to the senior lenders. The pari passu ranking provisions of the intercreditor agreement allow for the remedy of this situation contractually.

Ordinance No 2021-1192 dated 15 September 2021 and entered into force on 1 January 2022 (the “Ordinance‟) has modernised guarantees and pledge over movable assets and created new legal instruments such as an assignment of receivables by way of security distinct from the Dailly law pledge. Three Decrees supplementing such reform have been published as follows:

• Decree No 2021-1887, dated 29 December 2021, relating to the register regarding security over movable assets and ancillary transactions, which entered into force on 1 January 2023 (save for the rules applying to maritime mortgages and vessel sequestration, which entered into force on 1 January 2022) (the “Decree 2021-1887‟);
• Decree No 2021-1888, dated 29 December 2021, relating to the rules regarding enforcement of securities from a civil procedure standpoint, which entered into force on 1 January 2022; and
• Decree No 2021-1889, dated 29 December 2021, which co-ordinates changes made by the Ordinance in various codes (such as the French monetary and financial code or the French building and housing code), which entered into force on 1 January 2022.

In addition, four ministerial rulings were published on 23 October 2023 (and entered into force on 28 October 2023) regarding legal technicalities of the registration, renewal of registration and radiation of some security interests.

Shares

The form of share pledge will depend on the corporate type of the company the shares of which are subject to the pledge.

• A pledge over shares if the company is registered as a limited liability company (ie, a société à responsabilité limitée), a partnership (ie, a société en nom collectif) or a private company (ie, a société civile). A pledge over shares must be evidenced in writing in a notarised deed or a private deed. The written agreement must mention the secured debt and the number of pledged shares. This agreement will then have to be registered (and further renewed after five years) with the registrar (greffe) of the relevant commercial court in France to be enforceable against third parties.
• A pledge over a financial securities account if the company is registered as a limited liability company (ie, a société anonyme or a société par actions simplifiée), which will include in its scope the securities account where the pledged shares are registered and a special-proceeds bank account opened in the name of the debtor where the dividends paid on the pledged shares will be credited. The Ordinance has provided clarifications on this special-proceeds bank account. Since 1 January 2022, it is now possible for the parties to expressly exclude the dividends and other cash proceeds from the scope of the pledge. In addition, the cash proceeds can be credited at any time on the special-proceeds bank account and will be deemed to be included in the scope of the pledge as from the date of signature of the statement of pledge (see below), no matter the date on which such bank account is effectively opened. In case of failure to credit any cash proceeds on such bank account on the date on which the pledge is enforced, such cash proceeds will be considered as excluded from the scope of the pledge.

The financial securities account pledge is perfected by the mere signing by the pledgor of a statement of pledge. On the basis of the statement of pledge, the pledge is then registered in the share register of the issuing company and in the shareholder’s account of the pledgor. Usually, acknowledgements of pledge will be requested to be signed by the financial securities account holder (the issuing company or a third party which holds the share register on its behalf) and, as the case may be, by the bank account holder.

Inventory

Two types of pledge over inventory co-existed under French law before the Ordinance; ie, the civil law pledge over inventory (gage de biens meubles) and the commercial law pledge over inventory (gage des stocks). The Ordinance has repealed the commercial pledge over inventory. Any tangible assets (including inventory) shall now be pledged through an ordinary civil law pledge.

Civil law pledge over inventory (gage de biens meubles) may be:

• possessory – possession of and control over the pledged inventory is effectively transferred to the beneficiary of the pledge or, in the event of a pledge with escrow, to a third-party holder appointed by the parties (tiers convenu – it being specified that this type of pledge structure can be very costly); or
• non-possessory – the pledged inventory is not transferred to the beneficiary of the pledge (therefore, the pledgor can maintain use of the inventory) and the pledge will need to be registered (and renewed after five years) on a special register maintained by the registrar (greffe) of the commercial court where the pledgor is incorporated.

The civil law pledge over inventory will only be enforceable against third parties upon registration (and renewal after five years) with the registrar (greffe) of the relevant commercial court in France.

The rules related to registration, applicable since 1 January 2023, when Decree 2021-1887 entered into force, are the same as before, save that such registration is made on a new registry called “registre des sûretés mobilières”, common to all moveable security interests (sûretés mobiilères).

Bank Accounts

A pledge over bank accounts falls under the category of pledges over receivables, and is established in respect of the credit balance of the bank account on the day of enforcement of the pledge (subject to the regularisation of current transactions, initiated but not yet reflected on the bank account).

The pledge over bank accounts will be established in writing and will be enforceable against:

• the debtor (which is the bank in the books of which the account is opened):
1. when notified of the pledge; or
2. upon execution of the pledge agreement if the debtor is a party thereto; and
• third parties: on the date of its execution.

A pledge over bank accounts does not have, per se, the effect of blocking the account. Unless the parties provide otherwise contractually, the pledged bank account will continue to operate normally and the grantor will be entitled to credit or debit the pledged bank account freely until enforcement of the pledge or until a blocking notice is received by the bank in the books of which the account has been opened.

Receivables

Security over receivables (other than bank accounts) may take various forms, depending on the circumstances.

• A pledge over receivables (nantissement de créances) will be perfected and enforceable in the same way as the bank account pledge. Upon notification of the pledge, valid payment of the pledged receivables by the debtor can only be made to the benefit of the secured creditor.
• A Dailly law pledge or assignment is a very efficient way of pledging or assigning as security receivables, but its use is subject to very strict conditions:
1. it can be granted over professional receivables only;
2. the beneficiary of the pledge or assignment must be a licensed French credit institution or French financing company, a passported foreign credit institution or a specific French alternative investment entity (in other words, funds cannot benefit from a Dailly pledge or assignment); and
3. it must secure a financing granted to the pledgor/assignor; it cannot secure a guarantee undertaking.

Perfection of such security will occur upon mere execution by the borrower of a bordereau stating mandatory information. It does not require that the debtor be notified of the pledge/assignment.

The assignment will become effective between the parties and enforceable against third parties on the date specified in the Dailly bordereau.

• A transfer of receivables by way of security (Cession de créances à titre de garantie), created by the Ordinance. The applicable rules regarding perfection and enforcement are the same as those applying to an assignment of receivables. Therefore, it is not a new regime of assignment of receivables. The Ordinance only indicates that such mechanism can be used as a security interest (which was not permitted before the Ordinance as French courts requalified it in a pledge of receivables). The conditions are as follows:
1. the transfer of receivables by way of security must be established in writing and will:
1. become effective between the parties and enforceable against third parties on the date of the agreement; and
2. be enforceable against the transferred debtor only if the transfer has been notified to it or it has acknowledged it, unless it has already agreed; and
2. to the extent the secured obligation is not due, any monies received by the transferee will be kept in accordance with the cash collateral (gage espèces) mechanism, consecrated by the Ordinance (see below).
• A cash collateral (gage espèces), which must be established in writing and is enforceable between the parties and against third parties by the remittance of the transferred amount. Unless otherwise agreed, the beneficiary may freely dispose of the amount so remitted.

IP Rights

IP rights (patents, software, trade marks, designs and models) can be subject to pledges.

In order to be perfected, such pledges have to be registered (and, for some of them, renewed after five years) with the national trade marks and patent authority (Institut national de la propriété industrielle) and published in the official bulletin of industrial properties (Bulletin officiel de la propriété industrielle). Secured creditors will usually require debtors to renew and exploit their IP rights to maintain their value.

Real Property

Security interest over land and buildings usually takes the form of a mortgage (hypothèque), which must be executed before a public notary and registered with the land registry office (Conservation des Hypothèques) within the jurisdiction in which the property is located in order to be enforceable against third parties.

Mortgages are not commonly used in acquisition finance as this type of security interest tends to be very costly in France (various costs including real estate registration duties). The registration remains effective for one year after expiry of the corresponding loan agreement.

Movable Assets

A pledge over a business (fonds de commerce) is a non-possessory security interest, including a large scope of assets, such as:

• trade name;
• leasehold rights; and
• fixed assets (machinery and equipment, goodwill, IP rights, etc).

Until 31 December 2022, to be enforceable, the pledge over a business had to be registered with the tax authorities and with the registrar (greffe) of the relevant commercial court within 30 days of the execution date of the pledge agreement. Since 1 January 2023, when Decree 2021-1887 entered into force, the enforceability is now only subject to a registration requirement, as Decree 2021-1887 has repealed the 30 days’ period for such registration.

This registration must also be renewed after ten years. As previously mentioned, if the pledged assets include IP rights, additional registration must be made with the national trade marks and patent authority.

It is to be noted that the Ordinance has repealed specific pledges over machinery and equipment, in line with the simplification goal of such reform. Machinery and equipment, when they are not an element of a broader business (fonds de commerce), are now to be pledged under the civil pledge over inventory (gage de biens meubles) mechanism, which allows the creation of similar security interests.

As mentioned in 5.1 Types of Security Commonly Used, certain security interests require to be perfected, by the execution by the grantor of a document the form of which is strictly regulated by law. This is the case, in particular, for the statement of pledge for a pledge over a financial securities account or for the bordereau Dailly for a Dailly law pledge or assignment.

See developments in 5.1 Types of Security Commonly Used for each type of security interest.

Upstream security interest, which should be looked at simultaneously with upstream guarantees, as the same rules apply to both, is restricted under French law by the fact that the granting of any such upstream security should fall within the corporate interest (intérêt social) of the grantor. Acting outside the corporate interest of the company may lead the manager to misuse corporate assets (abus de biens sociaux), which is a criminal offence (see below for a more detailed analysis). The corporate interest must be assessed individually for each company; the group interest is not sufficient in itself to justify the corporate interest of any given member thereof.

In light of such principles, the practice has established a limitation of upstream security (and guarantee) consisting in the fact that the secured amount (and therefore, the exposure of the guarantor) should be limited at any time to the amount borrowed under the secured financing made available to its parent company and on-lent to that company or its subsidiaries and still outstanding at the time of enforcement of the security.

Under French law, a joint-stock company, in the form of a société anonyme, a société par actions simplifiée or a société en commandite par actions is prohibited from lending money, giving guarantees or granting security interests over its assets with a view to the subscription for, or purchase of, its own shares by a third party.

This restriction on financial assistance also applies in the event of an acquisition of shares in the target which (directly or indirectly) holds shares in the company (its subsidiary) that has provided loans/securities. However, it is not clear whether this restriction applies to non-French subsidiaries of the target. Nevertheless, where a “French connection” exists between the companies, it is safer to consider that the non-French subsidiaries are subject to the prohibitions previously mentioned.

However, if the advance of funds or the loan/security interest is granted after the shares are acquired by the third party, this will not be considered as illicit, unless it can be demonstrated that the cause of the transaction is anterior to the shares’ acquisition.

Any infringement of this prohibition is a criminal offence punishable by a fine for the manager/director who has violated the rule and carried out that transaction on behalf of the company. Moreover, the advance of funds, loan, or security granted in violation of these provisions may be cancelled and held null and void by French courts, as contrary to a mandatory provision of the law.

However, the prohibition will not apply to:

• transactions carried out by credit institutions and finance companies in the normal course of their business; and
• transactions carried out for the purpose of acquisition of shares by the employees of the company, by employees of one of the company’s subsidiaries or by the employees of a company included in the scope of a group savings plan.

The financial assistance prohibition can apply when the following situations occur immediately or shortly after the acquisition:

• refinancing of the acquisition debt;
• merger of the acquisition vehicle and the target; and
• implementation of other forms of debt pushdown (however, the distribution of dividends by the target group which the acquisition vehicle will use to repay the initial acquisition indebtedness does not fall within the scope of financial assistance, even if the distribution of dividends is financed by a new indebtedness raised by the target, provided the target can justify that raising such indebtedness to pay a dividend falls within its corporate interest).

A French company which is a party to an acquisition finance transaction must always act in accordance with its corporate interest (intérêt social). Therefore, when granting guarantees or security interests, the company will constantly have to take into consideration financial assistance rules (see 5.5 Financial Assistance) and corporate benefit rules.

The security interests that may be granted in an acquisition finance transaction, as well as the extent of the obligations that these security interests may guarantee, will have to be determined with careful consideration made in respect of the corporate interest of the various members of the group involved in the transaction.

One of the main pitfalls that must absolutely be avoided to ensure that the corporate interest is complied with is the risk of abus de biens sociaux (misuse of the company’s assets).

To assess whether the company’s corporate interest is protected, French judges will analyse the decisions made in the name of the company by the directors or by the company itself and verify if they are prejudicial to the company. If the directors fail to act in the company’s corporate interest, they might be held liable as follows:

• civil liability for damages on the basis of their alleged mismanagement (faute de gestion); or
• criminal liability on the basis of misuse of corporate assets or credit. In this case, directors may be punishable by five years’ imprisonment and a EUR375,000 fine.

The French law concept of misuse of corporate assets strictly limits the possibility for directors of the target company and its subsidiaries to use the company’s assets to repay the holding company’s debt.

French case law has set out the conditions according to which a misuse of corporate assets is not characterised where a subsidiary company guarantees the debts of its parent company. In that case, three conditions must be strictly met:

• a bona fide group exists (involving structural ties and a common group strategy);
• the loan and the guarantee show a common interest for the group as a whole (and not only for the parent company); and
• there is a benefit for the subsidiary in entering the guarantee, and its commitment does not exceed its financial resources.

If the above-mentioned conditions are complied with, a misuse of corporate assets will then not be characterised.

However, because the satisfaction of the above conditions can, in practice, be difficult to demonstrate; the practice has, as indicated above, established a standard limitation of guarantee pursuant to which the secured amount (and therefore, the exposure of the guarantor) should be limited at any time to the amount borrowed under the secured financing made available to its parent company and on-lent to that company or its subsidiaries and still outstanding at the time of enforcement of the guarantee. This limitation of guarantee, which goes beyond the criteria detailed above and is set by French courts, is perceived by the French market as protecting guarantors against the risks of acting against the corporate interests of the company and of committing a misuse of corporate assets.

French law-governed security interests can only be enforced when part or all of the secured liabilities become due and payable; therefore, in the absence of a payment obligation that remains outstanding, it will not be possible to enforce a French security interest.

There are two types of personal guarantees commonly used in French acquisition finance transactions.

• Cautionnement – under this personal guarantee, the guarantor undertakes to the secured creditor to repay the borrower’s debt or fulfil the borrower’s obligations in the event the borrower fails to do so. In practice, lenders will prefer a joint and several guarantee (cautionnement solidaire) from the guarantor, rather than a simple cautionnement pursuant to which creditors have to extinguish their recourses against the borrower before they can call on the guarantee from the guarantor.
• Garantie autonome à première demande – under an autonomous on-demand guarantee (garantie autonome à première demande), the guarantor undertakes, in consideration of an obligation entered into by the borrower, to pay a sum of money upon first demand of the lender.

The guarantor’s undertaking will require a separate agreement that is independent and autonomous from any obligation of the borrower under the credit agreement.

See developments in 5.4 Restrictions on Upstream Security to 5.6 Other Restrictions.

While guarantee fees are not sufficient (or necessary) to evidence the corporate interest of the guarantor to provide a guarantee, it could be one of the elements to take into account to motivate the corporate interest.

French law does not provide for equitable subordination rights.

The concept of a claw-back period (période suspecte) exists under French law. The claw-back period starts on the date on which the debtor is deemed to have become insolvent. That date is determined by the bankruptcy judge and it can be backdated by up to 18 months from the judgment opening the insolvency proceedings. Any security interest granted by a debtor during that period to secure an already existing indebtedness shall be automatically declared null and void, on the basis that it violates the principle of equality between creditors.

In the context of the acquisition of companies, registration duties are due, subject to certain exemptions, and range from 0.1% for joint-stock companies (sociétés anonymes and sociétés par actions simplifiées) to 3% for companies such as sociétés à responsabilité limitée (another type of limited liability company), sociétés en nom collectif (partnerships) and sociétés civiles (private companies). For the shares of certain listed companies, a 0.3% financial transaction tax may instead be applicable.

Such registration duties are increased to 5% for non-listed companies predominantly invested in French real estate.

As far as financing documentation is concerned, there is no obligation to submit any of the finance documents (except, as previously mentioned, for certain security interest over land and buildings, the pledge over a business and the pledge over machinery and equipment) to stamp taxes or registration duties in order for such documents to become effective or, as far as security documents are concerned, for perfection purposes. Any party may, however, file the financing documents with the French tax authorities on a voluntary basis (in practice this is rarely done). In such a case, the registration will give rise to fixed duties (droits fixes), the amount of which is nominal. Registration duties may be due upon the enforcement, as the case may be, of the security (eg, sale of shares resulting from such enforcement).

Interest paid by French companies to non-residents is usually not subject to any withholding tax, except for interest paid outside France in certain non-co-operative jurisdictions (ie, states or territories that do not apply international standards with respect to exchanges of tax information and have not concluded with France and at least 12 other states or territories a convention on administrative assistance allowing the exchange of information necessary for the application of their respective tax laws, and the states or territories included in the list of non-co-operative jurisdictions established by the EU on the ground that they facilitate the creation of extraterritorial structures or devices intended to attract benefits that do not represent real economic activity), which is subject to a 75% withholding tax, unless the company proves that the main purpose and effect of the transaction are not to transfer income to the non-co-operative jurisdiction. Interest that is excluded from the deductible expenses pursuant to certain of the rules described hereafter may generate a deemed distribution and be subject to a withholding tax when the beneficiary is a non-resident (subject to tax treaties, as the case may be).

As far as finance documents are concerned, French law practice does not differ from the European equivalent in terms of withholding taxes. Facilities agreements systematically contain provisions that protect lenders against such withholding taxes by imposing a gross-up obligation on the borrower if a payment due to the lenders pursuant to the finance documentation becomes subject to a deduction or withholding on account of tax, provided the lender is a qualifying lender on the date on which the payment is due (unless its change of status is due to a change in the law having occurred after the date it became a lender) or, if the lender is a treaty lender, provided it has complied with any formalities necessary for the relevant obligor to pay without a tax deduction.

In addition, lenders located in a non-co-operative jurisdiction or to which payments are made on an account opened in a non-co-operative jurisdiction will not benefit from the gross-up provisions.

As a general rule, interest paid by a French company subject to corporate income tax (CIT) is deductible for tax purposes, provided that:

• it is incurred in the direct interest of the company’s business and the debt service does not exceed its financial capabilities;
• it corresponds to actual and justified interest expenses;
• the debt is duly recorded in its balance sheet for accounting purposes;
• the financial terms and conditions of the debt are set at “arm’s length‟; and
• its deduction is not excluded by any specific provision of French tax law.

Among other rules, the French Finance Law for 2019 carried out an overall reform of the deduction of interest expense for companies subject to CIT. The reform implements a general limitation on interest deduction to comply with the Anti-Tax Avoidance Directive (ATAD) 1, under which the member states are required to set a minimum standard to determine a threshold for deductibility of interest by reference to taxable earnings before interest, tax, depreciation and amortisation (EBITDA). These new rules are applicable to fiscal years from 1 January 2019.

The new mechanism limits, for non-thinly capitalised companies, the deductibility of interest if and to the extent that the net borrowing costs of the taxpayer concerned exceed the higher of:

• 30% of its EBITDA (as specifically defined for the purpose of this provision); and
• EUR3 million.

A general safe-harbour rule allows certain taxpayers to deduct an additional 75% of the amount of net borrowing costs not allowed for deduction under the general limitation described above. For companies belonging to a consolidated group for financial accounting purposes, this safe harbour applies if the ratio between their net equity and their total assets is equal to or greater than the same ratio determined at the level of the consolidated group to which they belong for financial account purposes (it being specified that the ratio of the company is deemed to be equal to the ratio of the consolidated group if the ratio of the company is lower than the group’s ratio by a maximum of two percentage points).

The interest deduction threshold is reduced for thinly capitalised companies; ie, companies whose indebtedness towards related parties exceeds one-and-a-half times the company’s net equity. In that case, a fraction of the net interest expense (which is the net interest expense multiplied by the ratio of (x) the sum of (i) the indebtedness towards unrelated parties and (ii) one-and-a-half times the company’s net equity over (y) the total indebtedness of the taxpayer) is deductible within the limits of the “regular threshold” (ie, the higher of EUR3 million and 30% of the company’s EBITDA but reduced pro rata to the above ratio). The remaining fraction of the net interest expense (which is the net interest expense multiplied by the ratio of the indebtedness towards related parties exceeding one-and-a-half times the company’s net equity over the total indebtedness of the taxpayer) is deductible within the limits of the “reduced threshold”; ie, the higher of EUR1 million and 10% of the company’s EBITDA (again, reduced pro rata to this second ratio). A specific safe-harbour provision allows a thinly capitalised company not to be subject to these “reduced thresholds‟ if the debt-to-equity ratio of such a company is not higher, by more than two percentage points, than the debt-to-equity ratio of the consolidated group to which it belongs for financial accounting purposes.

The reform also provides for interest expense and unused interest capacity carry-forwards, under certain conditions. Specific rules apply for tax consolidated groups and for certain financial expenses relating to the financing of public infrastructure.

The French Finance Law for 2020 has implemented the anti-hybrid limitations resulting from ATAD 2 into French domestic law, and the former anti-hybrid limitations were abolished. These new measures aim to eliminate mismatches attributable to differences in the legal characterisation of certain types of payments, financial instruments or entities between the legal systems of two jurisdictions, and which would result in either:

• the deduction for tax purposes of an element of income in one jurisdiction without inclusion for tax purposes of the same element in another jurisdiction (“deduction without inclusion”);
• the deduction for tax purposes of the same element of income in various jurisdictions (“double deduction”); or
• the absence of inclusion of the same element of income in various jurisdictions (“non-inclusion”).

The French tax consequences of the new anti-hybrid regulation may be summarised as follows:

• in case of payment giving rise to a deduction without inclusion:
1. the payment is not deductible for French corporate income tax purposes (in practice when the debtor is established in France and the beneficiary outside France); or
2. the payment is subject in France to corporate income tax (in practice when the debtor is established outside France in a state allowing the deduction and the beneficiary in France); and
• in case of double deduction, the payment is not deductible for French corporate income tax purposes, unless it is subject to a “double inclusion” in respect of the same fiscal year or any fiscal year beginning within 24 months of the end of the fiscal year in respect of which the payment had initially been deducted (specific rules apply in case of double residency).

These new rules apply to fiscal years opened as from 1 January 2020, except for rules regarding hybrid reverse mismatches, which are applicable to fiscal years opened as from 1 January 2022. It should be noted that they are subject to various uncertainties, but the administrative guidelines have brought further clarification.

In addition to the foregoing general rules, notably:

• interest on loans from direct shareholders remains deductible only if:
1. the share capital of the borrowing company is fully paid-up; and
2. the interest rate does not exceed the average annual rate on certain loans granted by banks to French companies; interest on loans qualifying as “related-party loans” are only deductible within the limit of:
1. the rate defined above; or
2. when the lender and the borrower are “related” for tax purposes (defined by reference to a control criterion), the rate the company could have obtained from any unrelated financial institution in comparable circumstances; and
3. pursuant to the Amendement Charasse rule, notably when the shares of a target company are acquired from a seller that controls, directly or indirectly (or is placed under common control) the buying entity, and the latter is or becomes a member of the same tax consolidated group with the target, a fraction of the interest incurred by that tax group is not deductible (this limitation applies for a nine-year period).

In the context of acquisition finance, the aforementioned rules may limit the advantages of financing an acquisition through debt rather than equity by reducing the tax effect associated with a leveraged acquisition. In addition, the increased tax liability that can result from the non-deductibility of certain financial expenses can impact the acquirer’s cash flows and therefore its ability to service its debt.

As a general principle, financial relationships between France and foreign countries are not restricted, but can be subject to strict conditions/limitations.

Indeed, when it comes to certain sectors relating to national defence or likely to involve public policy and activities essential to the safeguard of France’s interests, French law requires that foreign investments in France be subject to a prior authorisation procedure (procédure IEF).

A foreign investment in France may be subject to the procédure IEF, depending on the nationality of the investor and the contemplated sector of activity of the target. If the required conditions are met, the contemplated investment must receive prior authorisation from the French Ministry of Economy.

The French Ministry of Economy will have the option to:

• authorise the investment as presented;
• authorise the investment under conditions that ensure the preservation of France’s interests; or
• refuse the investment based on certain grounds.

In any event, when the transaction amounts to more than EUR15 million, a statistical declaration must be filed with the Banque de France 20 days after the closing of the transaction.

EU investors may benefit from lesser restrictions than non-EU investors.

Restriction of foreign investments in France can have a significant impact on acquisition financings, as the same restrictions and/or prior authorisations apply in case of exercise of any security interest granted on the shares of the target company or on its business.

Specific Regulatory Rules

Acquisitions of French-listed companies are regulated and supervised by the French Financial Markets Authority (Autorité des Marchés Financiers) (AMF). The AMF General Regulation lays down the rules relating to a voluntary or mandatory public tender offer which, if not complied with, can result in the AMF rejecting the offer.

The AMF General Regulation seeks to ensure that tender offers comply with the following general principles governing takeover bids:

• free interplay of offers and counter-offers;
• equal treatment of, and access to, information for all securities-holders concerned in the offer;
• market transparency and integrity; and
• fairness in transactions and in competition among the offerors.

If the target company has its registered office in France and is admitted to trading on a French-regulated market, the AMF General Regulation will govern all aspects of the offer relating to the securities issued by the target company. Indeed, the AMF is involved throughout the whole process of filing the offer, as follows:

• it examines and determines the conformity of the draft offer and, ultimately, approves or rejects the filing of the offer. The statement of conformity encompasses the approval (visa) of the draft prospectus filed in relation to the offer;
• it sets out the offer timetable; and
• it publishes the outcome of the tender offer.

If the target company’s securities are listed on a regulated market outside the European Economic Area (EEA), the AMF General Regulation will not regulate the offer (even if the target company’s registered office is located in France).

Methods of Acquisition

The offer must be filed (by way of an offer letter) with the AMF by one or more banks on behalf of the offeror. Consideration for the offer can be in cash, shares, or a combination of the two. By acting as presenting bank, the bank filing the offer on behalf of the offeror is, by law, guaranteeing to the market the outcome of the offer and it undertakes to pay and/or deliver the consideration offered to the selling shareholders if the offeror fails to do so.

Once the offer letter has been filed, the AMF publishes a filing notice. Upon filing of the offer, the bidder should also publish a draft offer document which will be reviewed by the AMF before clearance of the offer.

The listed target is also required to publish a memorandum in response to the offer document (this is done simultaneously with the filing of the offer or at a later stage depending on the nature of the offer and the circumstances of the offer).

The acquisition of a French-listed target can be implemented either through:

• a voluntary tender offer; in principle, the price of a voluntary tender offer will be set freely by the offeror, but some restrictions to this rule exist; or
• a mandatory tender offer.

The filing of a public offer is mandatory when:

• individuals or legal entities come to hold (alone or in concert, directly or indirectly) 30% or more of the share capital or voting rights of the target (for companies listed on Euronext Paris); such threshold is set at 50% for companies listed on Euronext Growth; in addition, this offer may sometimes and under conditions extend to subsidiaries of the French target company if they are listed either on a regulated market within the EEA or an equivalent foreign market; and
• the offeror already holds (alone or in concert, directly or indirectly) between 30‒50% of the share capital or voting rights of the listed target, and increases that holding by 1% or more in less than 12 consecutive months.

Mandatory tender offer prices cannot be lower than the highest price paid by the offeror for securities of the target during the 12-month period preceding the event that triggers the mandatory offer.

Funding

Certainty of funding is required at the time the offer letter (and the draft offer prospectus) is filed with the AMF. When filing the offer letter, the presenting bank guarantees that the commitments made by the offeror in the offer are irrevocable. Prior to giving the guarantee, the sponsoring financial institution will usually seek to have the offeror deposit with it the necessary funds to cover the guarantee, or require an on-demand guarantee from another financial institution or an equity commitment letter from reputable financial sponsors. A description of how the offer is being financed/the source(s) of financing that will be put in place must be included in the offer document. The offeror generally provides a description of the main terms of the debt facilities or other instruments entered into in order to finance the offer and, as the case may be, refinance the existing debt or working capital facilities of the target company.

Squeeze-Out Procedures

An offeror could acquire minority shareholdings on a compulsory basis if the shares held by minority shareholders represent less than 10% of the share capital and voting rights held in the target company for any takeover of companies listed on Euronext Paris or Euronext Growth.

When an offer is filed with the AMF, the offeror must specify whether it intends to implement a squeeze-out procedure if the above-mentioned threshold is reached at the close of the offer. The squeeze-out procedure will have to be implemented within the three months following the close of the offer.

The indemnity paid to the expropriated shareholders must be at least equal to the offer price of the preceding offer and must be in cash.

The effects of the situation in Ukraine following its invasion by Russia led to a massive M&A market breakdown in 2023 but the market participants have hope that 2024 will be a new era for the M&A market. Dealmakers will have to adapt their strategy to enhance businesses and thus improve the asset valuation as well as mitigate risks. In addition, the significant dry powder amount, coupled with the expectation that borrowing rates should slightly decrease or remain steady, militate in favour of an upswing in M&A activity in 2024.