Healthcare M&A 2024 Comparisons

A slight slowdown in the French healthcare M&A market has been noted over the past eight to ten months, following a period of strong private equity/private debt activity over the last few years. The COVID-19 pandemic provided an opportunity for market players wishing to consolidate their position to draw up their plans and initiate or intensify discussions with financial partners.

Many sectors are experiencing a slight decrease in activity due to rising interest rates, the war in Ukraine and the Hamas attacks in Israel. In the healthcare sector in particular, the slowdown is also due to:

• the decisions of the French Conseil d’Etat on the veterinary sector;
• the expectation of the results and interpretation of the conciliation process organised by the French Ministry of Agriculture, which took place after these decisions;
• professional associations mobilising against the financialisation of this sector;
• evolving regulations (the application decrees for the Ordinance dated 8 February 2023 are particularly awaited); and
• valuations in the sector, which have risen steeply over recent years.

However, the healthcare professionals sector remains dynamic and attractive, as it is continues to be resilient, counter-cyclical and strongly supported by the French social security system.

The volume of transactions, especially massive build-ups, has slowed down a bit but has continued, albeit less visibly. Deal flow has held up, given the potential for consolidation in France. What has changed is that there seems to be more investment by specialised funds with a desire to implement qualitative action plans, giving meaning to their investment (eg, the development of CSR policies or the implementation of anti-cybercrime solutions).

Start-up companies are incorporated in France. Companies of healthcare professionals must be registered with their respective professional bodies. It takes one to two months to set up this type of company, depending on the professional association’s comments on the incorporation documents. There is no initial capital requirement; EUR1 is sufficient.

For healthcare professional entrepreneurs, a limited liability company called a société d’exercice liberal par actions simplifiée (SELAS) is recommended. This type of company allows the creation of preferred shares, the inclusion of non-practising third parties and the distinction between financial and voting rights.

Early-stage financing is mostly provided by friends and family, and business angels. It is mainly documented through an investment protocol, the documentation of the issuance of shares or complex securities, and a shareholders’ agreement.

Government-sponsored funds and venture capital funds usually wait for a strong proof of concept before investing, except sometimes for highly specialised funds. Early-stage financing usually comes from friends and family and business angels. Government subsidies usually require an activity that is already profitable. Foreign venture capital firms do not actively provide financing in France, mainly because it is a highly regulated and complex sector, and foreign investments must generally be previously authorised by the French Ministry of Finance.

Standards apply to structuring, but not necessarily to documentation. However, venture capital funds usually invest on the basis of their own standard documentation.

Start-ups remain in the same jurisdiction and generally under the same form as they advance in their development, provided said form gives the shareholders sufficient freedom to organise the corporate governance and the transfer of shares/liquidity clauses as they see fit.

Investors in start-up companies looking for a liquidity event usually negotiate an exit provision in the shareholders’ agreement, which provides for the sale of existing shares and/or a listing on a securities exchange. In recent years, dual-track processes have been less frequent, with investors choosing one path or the other.

The initial public offering can offer new money to the company by raising additional funding, and can enable shareholders to sell a portion of their shares at the same time. In practice, the sale of existing shares during the IPO is not included in the base deal (ie, 100% of the initial deal size) but is limited to the extension clause or the over-allotment option (ie, between 100% and 115% of the initial deal size).

French companies in the healthcare sector always pursue a listing in their home country exchange, mainly on Euronext Growth Paris, which is an active securities exchange for small and mid-cap companies. Successful healthtech companies sometimes apply for a dual listing on Nasdaq in the United States, after a first listing in France.

In the event of a significant sale of shares, the M&A transaction might trigger mandatory tender offer rules or minority squeeze-out rules. If the company is listed on a foreign exchange that is located within the European Union, a combination of the home country law and the exchange country law will apply, as organised by the Tender Offer Directive, and both mandatory tender offer rules and minority squeeze-out rules will apply to the issuer. If the company is listed on a foreign exchange that is not located within the European Union, the rules will have to be analysed on a case-by-case basis to determine whether equivalent rules will be applicable.

If the sale of the company is chosen as a liquidity event, the sale process could be run as an auction or in a bilateral negotiation with a chosen buyer, depending on the target’s enterprise value. The higher the target's enterprise value, the greater the likelihood of a bid process.

For regulatory reasons, practitioners practising within a practising company must retain the majority of the voting rights and share capital of said company. Venture capital funds often choose to sell their entire stake in case of a liquidity event, but in all cases the majority of capital and voting rights must be retained by practitioners practising within the practising company.

Transactions in France are done as a sale of the entire company for cash or in a stock-for-stock transaction, depending on what the current shareholders want. Generally, shareholders who continue to practise within the practising company after the buyer has acquired it receive a portion of the purchase price via the buyer's shares, in order to maintain their interest in the practising company’s results and to align the parties' interests.

Representations and warranties are very common, as are bank guarantees or escrow. Representations and warranties insurance is less frequently used.

Spin-offs still occur in the healthcare industry in France, with the largest French pharma group (Sanofi) announcing its intention to spin-off its large over-the-counter business in 2024. However, such transactions are less frequent than before, as pharmaceutical and medtech groups have generally already specialised over the past decade.

Generally speaking, domestic and intra-EU spin-offs can be treated as tax free to the extent the spun-off activity can be characterised as a complete and autonomous branch of activity, and the transaction involves no cash consideration.

It is possible to spin-off and thereafter contribute or merge a branch of activity in the frame of a business combination. Generally speaking, transactions involving share-for-share exchanges or contributions of assets in exchange for shares are standard, tax-neutral transactions, whereas business combinations or spin-offs involving the disposal of a branch of activity for cash will be taxable.

It typically takes at least nine months from the initial planning to the completion of a spin-off, due to all the legal, finance/accounting, IT systems, regulatory and employment law requirements. No tax ruling is required if no tax loss carry-forward needs to transfer, although a tax ruling may still be advisable in a number of scenarios, to secure tax neutrality.

It is customary for bidders to acquire a stake in a public company prior to launching a tender offer for such target. The first reporting threshold is 5% of the share capital or voting rights for issuers listed on Euronext Paris, unless the by-laws provide for additional reporting thresholds starting at 0.5%. Investors must report to both the French securities regulator and the target company, and such filings are made public by the regulator. Reporting thresholds may vary for issuers listed on Euronext Growth Paris or Euronext Access+ Paris, and are to be made to the target company only (except for the thresholds triggering the mandatory tender offer and the minority squeeze-out mechanisms).

The 10%, 15%, 20% and 25% reporting thresholds require the investor to disclose its intentions with respect to the company over the next six months.

French securities law provides for a “put up or shut up” rule only in the event of significant rumours of a tender offer.

The mandatory offer threshold is 30% of the share capital and/or voting rights for issuers listed on Euronext Paris, and 50% for issuers listed on Euronext Growth Paris and Euronext Access+ Paris.

The acquisition of a public company can be implemented through a merger but this is quite rare, as a merger requires the approval of the shareholders’ general meeting and usually the approval of a prospectus by the French securities regulator. Most of the time, the acquirer will secure the transaction through the acquisition of share blocks or the execution of irrevocable commitments with significant shareholders, and will then file a public tender offer to acquire the remaining shares.

Public company acquisitions in the healthcare industry are more typically structured as cash transactions. A minimum price is applicable when filing a tender offer if the mandatory tender offer threshold has been triggered or the bidder intends to implement a minority squeeze-out.

Tender offers are irrevocable and are subject to only a very few conditions precedent set out by applicable regulations – mainly a legal success threshold of 50% (or higher for voluntary success thresholds, but usually not more than 66.66%, which is the majority required to effect a domestic merger) and EU antitrust clearance (non-EU antitrust clearance is even more limited).

It is customary to enter into a tender offer agreement or a merger agreement in connection with a takeover or business combination, which will usually provide for very limited and standard representations and warranties. Except in specific situations, the transaction is always subject to the prior approval of the board and the consultation of the works council representing the target’s employees, with such works council issuing a favourable opinion, a non-favourable opinion or an abstention decision in connection with the transaction. The opinion of the works council has no legal consequences on the implementation of the transaction; it is only necessary to consult and inform the works council.

French securities law provides for a legal success threshold of 50% of the share capital or voting rights. Below this threshold, the tender offer is null and void. The bidder can also set out a voluntary success threshold, usually between 50% and 66.66%, subject to the French securities regulator authorising such increased threshold.

Any majority shareholder or group of shareholders holding more than 90% of the share capital and voting rights of a listed company following the completion of a tender offer can implement a minority squeeze-out under the supervision of the French securities regulator. A minimum price requirement applies in this situation, including for the tender offer price. Minority shareholders can also ask the French securities regulator to force the majority shareholders holding more than 90% of the share capital and voting rights to file an exit tender offer.

When launching a tender offer, the bidder is required to have “certain funds” when the presenting bank files the tender offer documents with the French securities regulator in the name and on behalf of the bidder. The presenting bank is required to guarantee due payment of up to 100% of the outstanding shares based on the offer price. To comply with this requirement, the presenting bank will require the bidder to deposit the total offer price on a secured account two days before the first filing. The bidder can use all kinds of financing, including credit financing, but the tender offer cannot be conditional upon obtaining such financing.

It is customary for bidders to be granted break-up fee provisions in the tender offer agreement before launching the tender offer when there is a risk of a competing offer being launched. However, case law provides that the amount of the break-up fee cannot be such that it would prevent the target’s board fully deciding whether to recommend the tender offer in the interest of the target, its shareholders and employees. A break-up fee provision that would not comply with this principle could be challenged in a dispute. The bidders will also usually secure the tendering of shares held by majority shareholders under tender offer commitments and the vote of board decisions or shareholders’ resolutions in certain circumstances (contemplated merger following the tender offer, etc).

If a bidder owns more than 50% of the voting rights but less than 100% of a target as a result of a tender offer, it will be able to vote on all ordinary decisions at shareholders’ meetings, including the appointment or dismissal of board members. It can also easily own most of the seats at board meetings.

However, if the bidder owns less than 66.66% of the share capital, it will not be able to vote on share capital increases and other securities issuances on its own, as such threshold is the required majority for extraordinary decisions at shareholders’ meetings.

If the transaction is structured as a sole tender offer, and not as a tender offer following a stakebuilding through the acquisition of a signification portion of the share capital of the target company, the bidder will always try and secure the success of the transaction through irrevocable commitments from principal shareholders to tender their shares. French securities law provides for an “out” in the event of a competing, higher offer being launched, specifying that the principal shareholders remain bound by their irrevocable commitments if the initial bidder launches a higher revised tender offer.

Tender offers are subject to the approval of the French securities regulator (Autorité des Marchés Financiers, or AMF) after an instruction period of one to three months, depending on how the tender offer was structured (preannouncement of the tender offer before the first filing, appointment of an independent expert, consultation of the works council, etc). The AMF is not authorised to challenge the offer price in the context of voluntary tender offers. However, in connection with mandatory tender offers and/or minority squeeze-outs, the offer price must meet minimum price requirements, which will be checked and challenged by the AMF.

The expected timeline of the tender offer is set out by the bidder in the tender offer documents, but the definitive timeline of the tender offer is established by the AMF and published within two days following its approval of the tender offer. If the bidder wishes to increase the offer price and waive certain offer conditions, and in the event a competing offer is launched, the AMF will extend the timeline of the tender offer accordingly. The AMF will also suspend the tender offer if its approval or refusal thereof is legally challenged by the bidder, the target company or the shareholders.

Specific regulatory provisions apply when setting up and starting to operate a new company in the healthcare industry in France. The professional association of practitioners (doctors, dentists, veterinarians or pharmacists) must be involved; depending on the comments of the professional association involved, it takes one or two months to incorporate a new company. In the pharmaceutical field, the National Agency for the Safety of Medicines and Health Products (Agence nationale de sécurité du médicament et des produits de santé, or ANSM) must be involved. It takes a few months and a significant amount of work to obtain the right to set up a pharmaceutical company (manufacturing or distributing pharmaceutical specialties).

The AMF is the securities market regulator in France. The professional associations of practitioners are also competent in the healthcare industry. Several documents relating to the transaction must be sent to the relevant professional association, which then sends any comments and requests for modification if it considers that the practitioners' independence is not guaranteed.

There are regulations governing foreign investment in France, which apply if several cumulative criteria are met concerning:

• the quality of the investor;
• the terms and conditions of the investment; and
• the sensitivity of the activity being invested in – in the healthcare sector, sensitive activities include:
1. activities relating to the means of dealing with the illicit use of pathogenic or toxic agents, or preventing the health consequences of such use;
2. activities relating to infrastructure, goods or services that are essential to guaranteeing the protection of public health; and
3. biotechnologies.

If all three criteria are met, an application for authorisation will be required. The procedure suspends the operation until the requested authority has given its opinion.

Certain economic restrictions apply to certain countries, such as Russia or Iran, as a result of sanctions adopted by the European Union against certain countries and some of their nationals and companies.

Filing requirements may be triggered for certain concentration operations, such as two previously independent companies merging, the creation of a joint venture, or the takeover of one company by another.

Only transactions exceeding a certain size are subject to review by the French Competition Authority, if the following three conditions are met:

• total worldwide sales of all the companies or groups of individuals or legal entities involved in the concentration operation, excluding taxes, exceed EUR150 million;
• total sales in France by at least two of the companies or groups of individuals or legal entities concerned, excluding taxes. exceed EUR50 million; and
• the transaction does not fall within the jurisdiction of the European Union.

When the transaction concerns the territory of several member states, and the sales of the companies involved are very substantial (in particular, when worldwide sales exceed EUR5 billion for all the parties to the transaction, and EUR250 million for at least two of the companies in the European Union), the European Commission has jurisdiction. However, it may decide to refer the matter to the French Competition Authority if it considers that it is better placed to examine it. This is the case when the effects of the transaction are mainly felt on French territory.

Depending on the number of employees of the company, works council are involved and consulted before the transaction is completed.

Except for foreign direct investment screening by the French Minister for Economy, there is no currency control or central bank approval for an M&A transaction in France.

Four decisions of the French Conseil d'Etat dated 10 July 2023 in the veterinary sector are very important, as they notably reinforced the notion of control of the practising company by the practitioners. They are taken into account by the various professional associations, not just the veterinarian association.

In addition, an Ordinance dated 8 February 2023 amends the provisions applicable to the joint practice of regulated professions through companies. Implementing decrees are still awaited.

Due diligence information can be shared by a public company under specific conditions: a letter of intent must have been received from the buyer and must be serious, and the contemplated transaction must be significant for the target (in terms of strategy or deal size). If inside information is shared to the buyer in this context, it will prevent them from buying or selling any shares before such information and the contemplated transaction are publicly disclosed, in accordance with the applicable market abuse regulations. Other bidders will be entitled to the same level of information from the target company, which will have to confirm in the tender offer documents or the press releases that other bidders have been treated equally.

Medical secrecy regulation prohibits any transmission of medical data to any non-medical professionals. Medical data must be totally anonymised before being used.

If neither the target nor the bidder is a listed company, there is no requirement to make the bid public. If the target company or the bidder is a listed company, a bid will be required to be made public if and when a binding undertaking has been reached (ie, at least a binding offer), which can still be subject to conditions precedent. For bids taking the form of tender offers, bidders will usually publicly disclose their intent to launch a tender offer as soon as they are ready to file the tender offer documents, or a few weeks ahead of such filing. Making one’s intent to launch a tender offer public is a binding commitment vis-à-vis the market and the AMF.

A prospectus is usually required if the target company is a listed company issuing new shares in connection with the takeover or business combination, but this obligation is subject to various exemptions (if the target company is listed on Euronext Growth, if the tender offer takes the form of an exchange offer, etc).

The production of financial statements by the bidder depends on the transaction structure and the type of transaction documents that are required (prospectus, exemption document, tender offer documents, etc).

Some documents related to the transaction (documents related to the transfer of shares, updated shareholders' agreement and by-laws of the practising company, practice agreement of the practitioners, etc) must be sent to the relevant professional association. Documents related to the transfer of shares are also registered with the tax authorities and give rise to the payment of registration fees.

Board members have fiduciary duties vis-à-vis the target company itself, as they need to decide what is in the interest of the company. In connection with a tender offer, board members need to consider the interest of most stakeholders: shareholders, other securities holders and employees. They do not need to consider the interest of the company’s creditors, although they are free to do so.

It is common for boards of directors to establish ad hoc committees in connection with a business combination if the target is a large cap company or a listed company. Doing so is required in connection with tender offers.

The board and the CEO are always actively involved in negotiations, unless a significant shareholder is selling its shares and the negotiations exclude the target company. The board and the CEO can also actively defend the company, subject to their actions not making the takeover impossible, unless the by-laws forbid the board and the management from taking anti-takeover defence measures.

A fairness opinion from an independent expert is required only in connection with a tender offer and under certain circumstances, mainly in the event of a mandatory tender offer or minority squeeze-out.

Business combinations with a special purpose acquisition company (SPAC) can also require a fairness opinion from a financial adviser.