Contributed By Bredin Prat
After a remarkable year in 2017, French M&A activity in 2018 recorded its lowest level in terms of aggregate value since 2014. The number of material transactions reached 875, which is lower than the number seen in the preceding two years. Compared to 2017, while five deals over EUR5 billion were announced, France did not attract jumbo deals in 2018 and all M&A transactions targeting French companies announced in 2018 were valued below EUR3.5 billion.
The only sector that has not been affected by this decline is private equity. Indeed, private equity transactions reached their highest annual value since the financial crisis at EUR24.2 billion. This amount represents 44.44% of the aggregate value of the deals announced in 2018 in France.
Examples of large cap deals include the acquisition by Merck & Co of Antelliq for EUR3.25 billion or the EUR2.6 billion bid made by Total SA for Direct Energie SA.
French non-financial companies issued nearly EUR65 billion worth of bonds in the course of 2018, an increase of 16% compared to 2017 despite the fact that 2018 marked a turning point for the corporate Eurobond market, the amount of which decreased for the first time since 2011. Similarly, with over EUR90 billion borrowed by way of loans by French companies in 2018, the French loan market has increased by 5.5% in 2018 compared to 2017. In 2019, the level of financing granted to French non-financial companies continues to increase, whereas the European trend globally remained on a decreasing trend, which started on September 2018.
However, in all these segments, acquisition finance contributed in only a limited way to these results. Indeed, despite a few significant transactions, M&A financing accounted for only 20% of the total amount of loans raised in 2018. Indeed, following the M&A activity trend, a similar decrease in activity was observed in all segments of the acquisition finance market.
Supported by a strong banking sector in France, French banks continue to lead the primary acquisition financing market, in particular in big cap transactions.
In 2018, the French financial adviser M&A market was once again largely dominated by US banks with JP Morgan arriving first (USD60.80 billion) followed by Lazard (USD48.16 billion), Morgan Stanley (USD39.19 billion) and Rothschild & Co (USD37.42 billion). Nonetheless, three French banks were also included in the top ten financial advisers' list for 2018: BNP Paribas (USD25.48 billion), Crédit Agricole CIB (USD18.70 billion) and Société Générale (USD14.07 billion).
As previously mentioned, in a relatively slow French M&A Environment, LBO funds have had a very strong year in 2018. The decrease in the number of transactions was compensated by an increase in the purchase price of the targets. These high levels of prices, reflecting the fact that LBO funds are willing to take more and more risks, can be explain by various factors, including a high amount of “dry powder” (corresponding to amounts raised from investors and not yet invested) and the entry of new players on the M&A market, such as pension funds who are now more frequently investing directly on transactions.
This state of the market creates a very challenging environment for corporates, which cannot compete at the same level of leverages.
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 bonds' issuances and USPP transactions, more rarely in other types of financing.
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 law or English law, standard agreements provided by the Loan Market Association (LMA) will usually be used as a starting point for loan financings and tailored throughout the negotiations to the specifics of the transaction contemplated. For instance, in leveraged buy-out 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 a lot of LBO transactions are subject to a 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, Inter-creditor 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 inter-creditor arrangements and most of the time 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 Facilities, hence the reluctance of the parties, particularly the lenders, to draft the documentation in French.
However, as mentioned earlier, even in the context of a 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 borrower’s counsel issues the capacity opinion while lenders’ counsel issues the validity opinion. However, in certain circumstances, the practice may vary; for example, in bonds transactions, it is not unknown for both borrower’s and lenders’ counsels 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 cornerstones 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 consist in the financing (or refinancing) of the acquisition price, the refinancing of existing indebtedness (including in the target) and the financing of future 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 due to the fact that mezzanine funds are generally not licensed in France, funding of the mezzanine tranche will most of the time 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 a mezzanine financing, because 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 to manage for the sponsors.
Mezzanine and unitranche financing globally present the same characteristics:
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 (in the context of a public offer, for example). 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 time 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 kind of 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 Term Loan B (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, private placements are, in our experience, used either to refinance, in whole or in part, an acquisition loan or to raise funds in advance with a view to finance 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.
Inter-creditor agreements are commonly used for leveraged French acquisition financing transactions and contractually organise payments and claims priorities between the senior creditors (including the hedging counterparties), second-lien and/or mezzanine lenders (if any), equity-holders and intragroup lenders.
The inter-creditor 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 subordinated lender shall reverse the payment so received in favour of the senior lenders.
The inter-creditor agreement will also 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 sometimes 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, as already mentioned above, junior debt or unitranche financing is generally provided through bonds' issues. From a contractual standpoint, the same principles apply in the inter-creditor agreement, whether the financing takes the form of a bank or a bond deal or a mix of both.
However, the contractual subordination arrangement organised under the inter-creditor 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 inter-creditor agreement would normally not provide them with.
The recent Loi Pacte (Law No 2019-486 dated 22 May 2019, which aims, amongst others, to transpose the Insolvency Directive), provides that creditor committees will be replaced by creditor classes, inspired by Chapter 11 of the United States Bankruptcy Code. As a result, creditors affected by the plan will be 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. This, however, still needs to be implemented by the French government via ordinance and is therefore not yet effective.
The inter-creditor 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 inter-creditor agreement allow to remedy this situation contractually.
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 a period of five years) with the registrar (greffe) of the relevant commercial court in France in order 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 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 by the bank account-holder.
There are two types of pledge over inventory:
• civil law pledge over inventory (gage de biens meubles)
a) 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);
b) 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 a period of five years) on a special register maintained by the registrar (greffe) of the commercial court where the pledgor is incorporated.
• commercial law pledge over inventory (gage des stocks)
This pledge can only be granted in favour of statutory determined beneficiaries (licensed credit institutions, financing companies or foreign credit institutions benefiting from a European passport).
Additionally, this pledge will only be enforceable against third parties upon registration (and renewal after a period of five years) with the registrar (greffe) of the relevant commercial court in France.
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):
a) when notified of the pledge; or
b) upon execution of the pledge agreement if the debtor is a party thereto;
• 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.
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:
a) it can be granted over professional receivables only;
b) 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
c) it must secure a financing granted to the pledger/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:
• civil law assignment (more rarely used) which will be perfected and enforceable in the same way as the bank account pledge.
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 a period of 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.
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 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.
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;
• fixed assets (machinery and equipment, goodwill, IP rights, etc).
To be enforceable, the pledge over a business must 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. Pledges over machinery and equipment must also be registered with the tax authorities and with the registrar (greffe) of the relevant commercial court within 15 days of the execution date of the pledge agreement. This registration must also be renewed after a period of ten years for the pledge over a business and after a period of five years for a pledge over machinery and equipment. As mentioned above, if the pledged assets include IP rights, additional registration must be made with the national trade marks and patent authority.
As mentioned in 5.1 Types of Security Commonly Used above, certain security interests require to be perfected, 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 financial securities account or for the bordereau Dailly for a Dailly law pledge or assignment.
Up-stream security interest, which should be looked at simultaneously with up-stream guarantees, as the same rules apply to both, are restricted under French law by the fact that the granting of any such up-stream security should fall within the corporate interest (intérêt social) of the grantor. Acting outside the corporate interest of the company may lead for the manager to misuse of 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 up-stream 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) which 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 mentioned above.
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 to this prohibition is a criminal offence punishable by a fine for the manager/director who has violated the rule and carried out such 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:
The financial assistance prohibition can also apply when the following situations occur immediately or shortly after the acquisition:
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 5.4 Financial Assistance above) 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:
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:
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 turn out to 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:
See developments above in paragraphs 5.3 Restrictions on Upstream Security to 5.5 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 in order 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.
There are no legal prohibitions to debt buy-backs by borrowers under French law. Contractual restrictions or prohibitions may, however, be provided for in the legal documentation which will prohibit or restrict debt buy-backs by borrowers or any member of their group.
Debt repurchased by the borrower itself will immediately be extinguished as the borrower will cumulate the status of both debtor and creditor.
Debt repurchased by the financial sponsor or another member of the borrower's group becomes a related party debt, which can trigger thin-capitalisation issues.
When the debt bought back takes the form of bonds, the following specificities must be noted:
In the context of acquisition of companies, registration duties 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).
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 mentioned above, for 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.
Interest paid by French companies to non-residents is usually not subject to any withholding tax, except for interest paid outside France in a non-co-operative jurisdiction (that is, a state or territory that does not apply international standards with respect to exchanges of tax information and has 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) 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 above-mentioned rules is taxed as deemed distributions and 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 which protect lenders against such withholding taxes by imposing a gross-up obligation on the borrower in the event that 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 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 make the payment without 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 CIT is deductible for tax purposes, provided that (i) it is incurred in the direct interest of the company’s business, (ii) it corresponds to actual and justified interest expenses and (iii) its deduction is not excluded by any specific provision of French tax law.
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 ATAD 1, under which Member States are required as 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 for fiscal years open as 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 concerned taxpayer exceed the higher of (i) 30% of its EBITDA and (ii) three million euros. A safe-harbour rule applies for companies which belong to a consolidated group for financial accounting purposes: taxpayers are allowed to deduct an additional 75% of the amount of net borrowing costs not allowed for deduction under the general limitation described above, provided that the ratio between their 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.
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 (being 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 3 million euros and 30% of the company’s EBITDA but reduced pro rata to the above ratio). The remaining fraction of the net interest expense (being 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 1 million euros 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 than the debt-to-equity ratio of the consolidated group to which it belongs for financial account purposes.
The reform also provides for interest expense and unused interest capacity carry-forwards, under certain conditions.
In addition to the foregoing general rules:
a) the share capital of the borrowing company is fully paid-up and;
b) 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 (i) the rate defined above or (ii) the rate the company could have obtained from any unrelated financial institution.
In the context of acquisition finance, the above thin-capitalisation 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 amount of the investment, the nationality of the investor or 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 (i) authorise the investment as presented, (ii) authorise the investment under conditions that ensure the preservation of France’s interests, or (iii) refusing the investment under certain conditions.
For investments which do not fall within the scope of the procédure IEF, they will be subject to a mere declaration filed with the French Ministry of Economy.
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 will apply on 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 tenders comply with the following general principles governing takeover bids:
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:
If the target company’s securities are listed on a regulated market outside the European Economic Area (EEA), the AMF General Regulation will not apply (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 statement presenting the main characteristics of the offer and opens an ''offer period'' of ten trading days, during which the AMF will determine conformity of the offer with applicable laws and regulations.
The listed target must then respond with a memorandum in response to the offer document within five, 15 or 20 (depending on the specific circumstances of the offer) trading days from the publication of the declaration of conformity. This memorandum is public, and is reviewed by the AMF. Further to its review, the AMF can clear the offer and will make public the final version of the memorandum in response.
The acquisition of a French listed target can be implemented either through:
The filing of a public offer is mandatory when:
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.
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 bidder in the offer are true and irrevocable. A description of how the offer is being financed and the source(s) of financing that will be put in place must be included in the offer document and confirmed by the offeror's financial adviser or another appropriate third party. It discloses details of the debt facilities or other instruments entered into in order to finance the offer and refinance the existing debt or working capital facilities of the target company.
An offeror can acquire minority shareholdings on a compulsory basis if the offeror owns at least 90% 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 a buy-out offer is filed with the AMF, the offeror must specify whether:
The indemnity paid to the expropriated shareholders must be at least equal to the offer price of the preceding offer and is in most cases strictly equal to the offer price. The expropriated shareholders must be offered a cash payment.