Recent Trends

The recent trends in private equity transactions and M&A deals more generally in France in 2024 are outlined below.

An upturn in deal value

After a significant downturn in 2023, the M&A market in France reached USD82 billion in the first half of 2024, representing a 26% increase compared to the value recorded during the same period last year.

An increase in domestic and inbound deals

In the first quarter of 2024, French domestic transactions increased by 24% compared to the value recorded during the same period last year, reaching USD10.9 billion, while inbound transactions more than doubled, reaching USD6.5 billion. Consequently, with USD17.4 billion in transactions involving a French target, France becomes the seventh most targeted country in the world in 2024.

A maintained increase in outbound deals

French companies continued their trend to acquire businesses abroad. Outbound deals have seen the largest increase this year, rising by 114% compared to the first quarter of 2023 and reaching USD18.9 billion, the highest level recorded since 2018. This trend is being driven by the search for growth opportunities and the desire to gain access to new markets.

A focus on strategic sectors

Private equity firms and strategic acquirers are increasingly focused on investing in strategic sectors, such as healthcare, technology, and consumer goods. These sectors are seen as being more resilient to economic downturns and offer the potential for long-term growth.

2024 Outlook

Overall, the outlook for private equity transactions and M&A deals in France in 2024 is optimistic considering the latest figures. The focus on strategic sectors is also encouraging, as it suggests that investors are looking for businesses with long-term growth potential. Nevertheless, several factors should be considered to adopt a more cautious approach, including the persistence of high interest rates and the potential impact of political uncertainty stemming from France’s recent snap election on investor sentiment.

French companies are entering the M&A market with the aim of reorganising their asset portfolios and positioning themselves for economic recovery and profound change in the industrial environment.

The transactions that are currently supporting the M&A market consist of companies acquiring differentiating assets, providing short-term competitiveness and transforming their business model in depth.

These are complementary investments consisting of the acquisition of specific abilities. French companies want to focus on strengthening their digital and technological capabilities, in the context of increasing digitalisation of the business.

Innovative start-ups, offering buyers new technologies, are interesting cross-sector targets. Indeed, they enable companies to broaden their product or service offerings, to increase their production capacity and strengthen their resilience. They are now, therefore, first-choice targets.

This means that digital and technological assets have enabled valuation growth for the companies that own them.

One of the major changes that the regulations governing M&A transactions have undergone over the last four years concerns the control of foreign investments in France. Indeed, an investment made by a foreign natural or legal person may, if it meets certain criteria of sector and ownership of the target, be subject to prior authorisation by the Minister of the Economy and Finance.

Several protectionist measures have broadened the scope of application of this control mechanism. Thus, a decree and an order dated 31 December 2019 supplementing the PACTE law have strengthened this control mechanism.

This control is also reinforced at the European level with the adoption in March 2019 of the regulation on the screening of foreign investments. 

Extension of Investment’s Control

The sectors that are subject to such control have continued to grow and mainly concern so-called sensitive activities. The decree gives concrete expression to this notion by specifying the following sectors: aerospace and data hosting, the press, food safety, quantum technologies, energy storage, biotechnologies, etc.

A decree and an order dated 28 December 2023 once again strengthen the control system as it is extended to takeovers of French branches of foreign entities and the list of sensitive activities is updated to notably include the processing and extraction of critical raw materials.

Similarly, the thresholds for triggering the control system have been lowered to 10% for publicly traded companies, initially introduced as a temporary measure, are now permanent.

Taking This Control into Account in M&A Transactions

As the decree dated 31 December 2019 introduced the concept of “chain of control”, the presence of a foreign investor is sufficient to trigger control even if the direct investor is actually a French-owned entity.

This is an important consideration for all transactions in which a foreign entity is present, which is peculiar to transactions in which investment funds intervene.

The role of legal due diligence has now increased and this investment control must be integrated into the negotiation process between the different actors of the transaction.

In France, the French Anti-Corruption Agency (Agence Française Anticorruption or AFA) has been regulating the practice of M&A transactions to fight corruption since the law of 9 December 2016. The agency publishes annual guidance to good conduct but no large-scale change in French law can yet be observed in this matter.

Regarding ESG compliance issues, France is in line with the global, including European, line following the resolution adopted by the European parliament in March 2021 promising legislation for due diligence in ESG matters. It is also a question of underlining the role that audit committees must play in monitoring the attention investors pay to ESG standards and to the risk of non-compliance with these issues. Many funds are now specialised in socially responsible investments and are still growing, as players in the French financial community become more aware of issues regarding these non-financial criteria.

Private equity transactions may also undergo review by the following regulatory authorities: 

• the French Competition Authority; and/or
• the Minister of the Economy and Finance.

French Competition Authority (FCA)

Transactions outside the retail industry and meeting the following three conditions are subject to a merger control procedure by the French Competition Authority:

• the total global pre-tax turnover of all the companies, groups of legal persons or individuals who are parties to the merger is greater than EUR150 million; 
• the total pre-tax turnover generated in France by at least two of the companies, groups of legal persons or individuals concerned is greater than EUR50 million; and
• the transaction is not within the EU’s jurisdiction (the above-mentioned thresholds being EUR5 billion and EUR250 million, respectively). 

If the aforementioned conditions are met, the intended transaction must be notified to the FCA, which will conduct a prospective analysis of the deal’s impact on competition. Following such review, the FCA can approve (with or without conditions) or block the transaction.

On 26 March 2021, the European Commission published guidance on the circumstances under which it would accept requests from national competition authorities within the EU to investigate mergers that do not meet EU or even national jurisdictional tests (in particular, in order to prevent so-called killer acquisitions). The effect of such guidance is likely to generate, in the near future, a notification process – even in the absence of sufficient turnover to meet mandatory filing requirements. 

Minister of the Economy and Finance

If the private equity fund is incorporated in a foreign jurisdiction and therefore qualifies as a foreign investor, the transaction may be subject to prior approval by the French Minister of the Economy and Finance. 

The minister’s compulsory authorisation is required if:

• the target is a French company operating in a business sector deemed strategic (such as national defence, public health, cybersecurity, biotechnologies, etc); and
• the intended transaction implies:
1. the acquisition by a foreign investor of a direct or indirect controlling stake in a French entity;
2. the acquisition by a foreign investor of all or part of a branch of activity of a French company; or
3. the acquisition, directly or indirectly, by a non-EU investor (acting alone or in concert with others) of more than 25% of the voting rights of a French company. 

Completion of the intended transaction can be either approved (with or without conditions) or rejected by the Minister of the Economy and Finance.

The scope and depth of due diligence reviews are determined on a case-by-case basis and therefore vary from deal to deal. In particular, the level of legal due diligence depends on factors such as the scale of the intended transaction, the kind of business run by the target company, the estimated risk level, etc. 

In order to identify the potential negative impacts of the transaction on the target’s business, buyers are advised to perform due diligence investigations covering as many areas as possible (these may, for instance, include corporate documentation, financial statements, commercial contracts, ongoing litigation, taxation, insurance, etc). 

During the due diligence process, confidential documents are usually exchanged through a virtual data room and the parties involved are often required to sign confidentiality agreements. 

Vendor due diligence is typically used in the context of a competitive auction process, in order to simplify and accelerate the transaction. More specifically, bidders may rely on the vendor due diligence report when drafting their initial offers.

In general, vendor due diligence reports are deemed to be reliable, because they are elaborated by an independent third party and not by the seller itself. However, arranging further buy-side due diligence in order to confirm the results presented in the sell-side due diligence report is always good practice and is quite customary. 

In France, most acquisitions by private equity funds are negotiated confidentially. If the negotiations between the seller and the buyer succeed, both parties may then enter into a share sale and purchase agreement (SPA), which is the most typical acquisition scheme in France. 

The terms of the SPA may vary slightly, depending on whether the target is sold by means of an auction process or through one-on-one negotiations. In the first case, one can expect the SPA to be more seller-friendly, since in a competitive process, the seller has greater negotiation power. 

Private equity funds often invest through a special-purpose vehicle (SPV), which is an entity created for the purpose of carrying out a specific transaction. 

Most SPVs are incorporated as a simplified joint-stock company (société par actions simplifiée or SAS). This corporate form is preferred by private equity investors for various reasons: 

• an SAS can be formed with a single shareholder and the capital requirements are very low (an SAS can be incorporated with an initial share capital of EUR1); 
• with no strict regulations, the SAS allows for great flexibility in terms of corporate governance, which is particularly appealing for private equity investors; and
• the shareholders’ liability is limited to the amount of their contributions. 

In general, the acquisition documentation is signed by the SPV (which is a subsidiary of the private equity fund), rather than by the private equity fund itself. 

Private equity deals are financed either with cash, debt or a combination of both. The large majority of deals negotiated during the first half of 2022 were at least partly financed with debt.

The structure of the debt can be particularly complex, although its purpose is almost always to finance the acquisition and refinance existing debt. In general, it may consist of:

• senior debt, often granted for a term of five to seven years, comprising several tranches with distinct maturities;
• junior debt, the repayment of which is subordinated to the repayment of the senior debt; and
• mezzanine debt, often granted by specialised investment funds and structured in the form of securities giving access to the target’s capital.

To contractually ensure the existence of funds from a privately funded buyer, an equity commitment letter is often used.

Private equity investors usually take both minority and majority positions. However, there has been a real increase in transactions in which investment funds take minority positions. These transactions are no longer the exclusive privilege of small companies, but also concern large medium-sized companies. Similarly, some large investment funds are more willing to take minority positions in order to gain access to more satisfying opportunities, in the context of a managers’ buyout or the acquisition of a minority stake in a family business.

With the development of public investment funds, such as the European Investment Bank at the European level or the Public Investment Bank at the French level, it is essential to note that co-investment strategies are increasingly common.

The implementation of such strategies can be explained by the desire not to neglect any growth potential. For example, co-investment is often used to invest in start-ups or in developing companies. These co-investment strategies are implemented in particular with venture capital funds, in the context of projects that target innovation-oriented companies in the science, information and communication technology, infrastructure and renewable energy sectors.

Family offices often invest alongside private equity or venture capital firms on smaller deals, as some of the family members of such family offices are also sometimes limited partners of the private equity fund.

Locked-box and completion accounts are by far the most common forms of consideration structure in France.

The earn-out clause is also quite popular in the French jurisdiction. Although this clause is inserted in a minority of all private equity transactions, this clause appears in a good proportion of deals overall.

It goes without saying that the COVID-19 crisis has accelerated the resurgence of the earn-out and completion accounts mechanisms, as buyers wish to share the risks related to their acquisition with the sellers. 

Regarding the earn-out clause, the COVID-19 crisis is not the only explanation for its progression: the sellers may also see it as an opportunity to reap the benefits of developments or support that will continue after the deal.

Nonetheless, it is evident that the earn-out clause is more prevalent in transactions under EUR100 million. Above these amounts, the parties involved tend to prefer a price that is definitively fixed at the time of closing (usually, by using a locked-box mechanism) without any subsequent contingencies.

When a locked-box mechanism is used, there is typically no interest on the leakage and the adjustment is made on a euro basis.

Both the locked-box mechanism and the completion accounts mechanism can lead to an adjustment of the purchase price post-closing, in the event of leakage (in the first case) or if the target’s assets and liabilities have changed (in the second case). But litigations are far more common with the use of the completion accounts mechanism.

In the event of persistent disagreement between the buyer and the seller concerning the purchase price adjustment, it is standard practice to include an expert determination clause in the share purchase agreement, as a resolution mechanism. Pursuant to this, either the buyer or the seller may request the commercial courts to appoint an independent expert. 

Following the expert’s appointment by the judge, the expert will determine the amount of the price adjustment, which will be binding on both parties (except where a serious error has been committed).

Conditions Precedent Commonly Used

Most private equity deals are conditional upon the fulfilment or waiver of certain conditions precedent. 

Such conditions precedent generally include: 

• obtainment of regulatory approvals (in particular, foreign investment and antitrust approvals); 
• obtainment of funding (if any); 
• obtainment of third-party consents (if key contracts containing change-of-control provisions were identified during the due diligence process); and
• the absence of any material adverse change (MAC) between signing and closing (if the share purchase agreement contains a MAC clause). 

It should be noted that although the use of MAC clauses has increased due to the COVID-19 pandemic, they are not a predominant feature in French private equity deals.

“Hamon” Law

In addition, the so-called Hamon law has imposed several other conditions that must be met before the takeover of any company employing employees can be carried out. 

Indeed, the company’s employees have to be informed before the transaction is carried out so that they are able to make an offer to the seller prior to the third party making an offer.

Similarly, the target’s working council has to be consulted sufficiently in advance of the transaction.

In so far as this information and consultation must be carried out before the sale takes place, it is not strictly speaking a condition precedent. The most commonly used formula is the signing of a put option, allowing the seller to exercise the option once the information/consultation obligations have been fulfilled.

This type of clause concerns, in principle, transactions of considerable size. The acceptance by the purchaser of such a clause clearly depends on the negotiating power of each party, but especially on the applicable regulatory provision concerned.

When the regulatory provision relates to competition law, and particularly to antitrust provisions, this clause is difficult to accept for the purchaser. Agreeing to it is dangerous as the remedies can be harsh and costly.

On the other hand, in the case of a provision pursuant to foreign investments in France, the negotiation of this type of clause seems to be easier. Indeed, prohibitions are very rare and remedies are easier to implement in this context. “Hell or high water” clauses are therefore less difficult to take on in this context.

In any case, this is a matter of bargaining power and the specific situation of the purchaser. If it is a private equity firm with no competing companies in the portfolio nor in the context of a build-up, a “hell or high water” clause is more likely to be accepted.

Although not specifically prohibited by French law, break fees in favour of the buyer or the seller are not commonly used in France. 

If stipulated, break fees will become due if either party decides to terminate a pending deal for a reason not attributable to the other party. 

That being said, it is important to bear in mind that there are no punitive or exemplary damages under French law. Therefore, if the amount of the break fees exceeds the value of the damage actually suffered by the claimant party, the amount of such termination fees can be reduced by a court decision. 

Acquisition agreements in France usually contain a right to terminate the transaction if the conditions precedent are not fulfilled or are waived before the contractually agreed long-stop date. Moreover, if a MAC clause is set forth in the acquisition agreement, the buyer is entitled to cancel the deal if the target’s business and operations suffer a material adverse change during the interim period (ie, between signing and closing). The duration of the long-stop date depends on the nature and number of condition precedents involved but is usually between three and six months.

The allocation of risk generally depends on the negotiation leverage of the parties involved in the transaction and therefore may vary from deal to deal.

From a legal standpoint, the risk related to the acquired target company is supported by the purchaser unless provided otherwise in the sale and purchase agreement.

Usually, the sale and purchase agreement provides a representations and warranties mechanism pursuant to which the seller can indemnify the purchaser if the target suffers a liability as a result of events prior to closing.

There is usually a limitation on the amount of the liability of the seller, such as:

• a cap (stated between 10% and 30% of the purchase price);
• a threshold or a franchise; and
• a de minimis.

In private equity deals, more risks are taken by the purchaser since the representations and warranties are usually more limited (and sometimes there are almost none, except for the fundamental ones, eg, capacity, titles to share, etc).

When selling off their stakes, private equity funds are generally reluctant to make representations and guarantees other than warranties of title and capacity.

In contrast, the representations and warranties given by the management team usually cover a broad range of topics. Such warranties may, for instance, include: 

• warranties regarding the target’s financial situation and financial statements; 
• warranties regarding the conduct of business; 
• operational warranties; and
• warranties regarding compliance with all the applicable laws and regulations.

As mentioned in 6.8 Allocation of Risk, representations and warranties are usually limited by a cap, a franchise/threshold, and a de minimis.

The liability of the seller can also be limited by the duration of the warranties, which is usually from 12 to 36 months.

Finally, it is worth noting that full disclosure of the data room is typically allowed against the warranties in open bid.

The other protections included in acquisition documentation mainly consist of an escrow agreement set between 25% and 50% of the cap.

The purchaser also often asks the seller to find a guarantor who may have to commit personal funds.

Also, in the biggest deals, the stakeholders may contract representation and warranty insurance.

In the French jurisdiction, the provisions that are most likely to lead to a dispute relating to private equity transactions are those that provide for completion accounts and earn-out mechanisms. They are a breeding ground for litigation, despite their good drafting. Nevertheless, and despite the adjustment discussed above, the private equity market remains a pro-seller market and locked-box mechanisms are becoming more common.

Similarly, warranties indemnification may give rise to litigation when implemented.

Public-to-private deals are uncommon in France.

In France, shareholders acting either alone or in concert with others are required to disclose their stakes in publicly traded companies when exceeding or falling below one of the following thresholds (whether in capital or voting rights): 5%, 10%, 15%, 20%, 25%, 30%; 33.33%, 50%, 75%, 90% and 95%.

The French Commercial Code also requires the shareholder, when crossing certain thresholds of shareholding (10%, 15%, 20% and 25% of the capital and voting rights) in a publicly listed company, to declare the objectives they plan to pursue during the next six months.

If one of the aforesaid thresholds has been reached, the relevant investor must file a report with the French Financial Markets Authority (Autorité des Marchés Financiers or AMF) – with a copy to the issuer – within four trading days. 

Failure to comply with this disclosure requirement may lead to a suspension of the voting rights attached to the shares exceeding the threshold that should have been disclosed, for a period of up to two years.

Under French law, there are two situations in which the obligation to make a mandatory offer for 100% of the shares of a publicly listed company can arise: 

• when a person or entity, acting alone or in concert with any other party, exceeds 30% of the voting rights or the share capital of the target company; or
• if a shareholder who already holds between 30% and 50% of the target’s share capital or voting rights increases its stake by 1% or more within 12 consecutive months.

In either case, the mandatory offer price must be at least equal to the highest price paid by the bidder for securities of the target during the 12 months preceding the obligation to file such mandatory offer. 

It should be noted that exemptions and dispensations from the obligation to file a mandatory offer may be granted by the AMF in certain limited circumstances, including the following: 

• subscription to a capital increase of a company in financial difficulty, subject to the approval of the shareholders’ general meeting; 
• merger or asset contribution subject to the approval of the shareholders’ general meeting; and
• the holding of the majority of the company’s voting rights by the requesting party or by a third party, acting alone or in concert, etc. 

If the required mandatory offer is not filed, voting rights exceeding the 30% threshold will be suspended.

In France, cash (rather than stock) is by far the most common consideration for financing an M&A transaction. Indeed, offering cash instead of shares enables the buyer to avoid dilution of its own shareholders. Thus, controlling stakes at the level of the buying company remain unchanged. 

Takeover bids may be subject to certain conditions precedent. In general, the conditions precedent accepted by the AMF are the following: 

• the obtainment of antitrust approvals; 
• if the offer includes stock as consideration, authorisation of the issuance of new shares of the offeror by its shareholders’ meeting;
• reaching a certain threshold of target shareholder participation (in capital ownership or voting rights); and
• the success of two tender offers conditional upon each other. 

However, conditions precedent relating to the obtainment of financing by the bidder are not accepted. 

Squeeze-Out Mechanisms

A squeeze-out procedure can be launched every time a given shareholder, acting alone or in concert with others, reaches no less than 90% of the target’s voting rights. 

If the 90% threshold is reached following the closing of a tender offer, the squeeze-out procedure can be implemented immediately, provided that the offer prospectus expressly mentions the bidder’s intention to proceed with a squeeze-out.

Commitments to tender shares from actual shareholders depend on the way the takeover is structured. Takeovers involving the participation of the shareholders of the target (and especially friendly takeovers) are usually structured in two different ways:

• a block of shares sold by the shareholders of the target to the bidder with an immediate transfer of ownership and then the launch of a tender offer by the bidder; or
• a tender commitment – in this case, the bidder undertakes to launch a public offer for the target at a price agreed on with one or more shareholders, who will then tender their shares at such price.

The choice is important in the bidding process, and is made on a case-by-case basis.

In the case of a simple sale of a significant block, the risk of a competing bid by another candidate will be reduced or even eliminated if the bidder has acquired the majority of the capital.

On the other hand, the purchaser will have to obtain any necessary antitrust clearances prior to the acquisition of the block which may delay the public offer process.

Moreover, in the case of a minority block acquisition, the acquirer will run the risk of holding a non-controlling interest if few shares are tendered to the public offer. In the event of an acquisition giving the shareholder a stake of more than 30% of the capital or voting rights, the bidder will be in a mandatory public offer situation, with price control by the AMF.

In the case of a commitment to tender, the bidder only acquires ownership of the reference shareholders’ shares at the time of settlement of the takeover bid. Thus, the bidder acquires these shares at the same time as the shares tendered by the other shareholders. If the bidder does not reach the 50% condition threshold set by French law or the condition threshold freely set by the bidder, the bidder will not acquire any shares and will not find itself a minority shareholder of the target.

On the other hand, the AMF requires that the undertakings to tender be revocable in the event of a competing bid. Thus, the bidder must accept the risk that the shareholders who have given the commitment to tender may sell their shares to a competitor in the event of a better bid.

Private equity funds often give key managers the opportunity to take part in a transaction by investing alongside them in the target. 

To this end, an SPV gathering all key managers (“ManCo”) is often created. The stake of ManCo in the target company usually ranges from 5% to 15%, depending on the characteristics of the deal. In an MBO (management buyout) situation, the management obviously has the majority of the capital.

The indirect participation of managers in the target is generally preferred over direct participation, mainly because the former scheme is more practical in terms of corporate governance.

In general, management participation in private equity transactions is structured through a management package, which may take the form of ordinary shares, sweet equity and/or fixed-rate instruments. 

The idea is to align the interests of the management with those of private equity investors. To this end, managing shareholders benefit from higher returns on their investment.

Tax Implications

In practice, incentive schemes may vary according to tax considerations. For instance, in order to avoid tax liability, managers should acquire their shares or equity-linked instruments (warrant, preferred shares, etc) at a purchase price equal to the shares’ fair market value. Nevertheless, France’s highest administrative court issued three decisions on 13 July 2021 (confirmed on 17 November 2021) that changed this approach since even if the shares or equity-linked instruments have been acquired at fair market value, the capital gain in relation to such shares/instruments can be qualified as salaries and wages if it can be proven that the benefit of those shares/instruments is essentially linked to the status of the employee or officer of the beneficiary.

Consequently, in the case of requalification from the tax administration, the capital gain realised on the sale of these shares/instruments would be taxed in the category of salaries and wages (progressive tax up to 45% instead of a flat tax of 30% on the capital gain).

These decisions have been and will be commented on, and the consequences of these decisions are still being analysed by tax specialists, but all the commentators agree that these decisions are creating legal and tax insecurity on incentive schemes.

In private equity transactions involving management participation, good and bad leaver provisions are usually set out in the shareholders’ agreement.

In general, a manager is deemed to be a “good leaver” if they leave the company for one of the following reasons: 

• death; 
• physical or mental incapacity; or
• departure approved by the investors. 

In this case their shares will be transferred back to the portfolio company or the private equity investors, as the case may be, at fair market value. 

On the contrary, if the relevant manager is deemed a “bad leaver”, their shares will be transferred at a price lower than the fair market value. In general, a manager is considered a “bad leaver” if they leave the company:

• for any reason other than death, physical or mental incapacity, or upon authorisation by private equity investors; or
• in the case of gross negligence, wilful misconduct, breach of the shareholders’ agreement or, in certain cases, under-performance. 

In both cases, managers are required to sell their shares back to the company or the private equity investors. To this end, each manager must grant a call option to the private equity fund.

Following the case law of 13 July 2021 (see 8.2 Management Participation), market practice tends to abandon the distinction between good and bad leavers and the correlative discount in order to minimise the link between the employment agreement and the investment (and minimise the risk of reclassification of the capital gain as salaries and wages).

Manager shareholders often play a dual role, as they are both shareholders and employees or service providers of the portfolio company. Given this situation, manager shareholders are subject to certain obligations deriving directly from their status. Such obligations usually include non-solicitation, non-competition and confidentiality obligations, which are set out in both the shareholders’ agreement and the employment contract (or service agreement) signed by the relevant manager.

Under French law, the non-competition undertaking must be proportionate to the legitimate interests involved. To this end, these commitments are limited in time and space and to strictly defined activities. Moreover, if the manager who undertakes such a commitment is an employee, the non-competition undertaking must be stipulated in the employment contract and must be remunerated.

In the case of a majority LBO, the manager shareholders of a company do not have specific rights that would allow them to influence certain decisions that would commit the company or the structure of the company itself. Nor, for the majority of deals, do they have specific rights to influence the capital ownership or the exit of the investor. Indeed, the main purpose of managers taking a stake in a company is to give employees an interest in the company’s results.

Moreover, certain important decisions need to be approved by the investors.

As an exception to the above, however, some managers may be offered certain rights as a party to an investment agreement. The content of these rights depends mainly on the negotiating capacity and the final weight that the management team is expected to carry in the company following the investment. This can go as far as veto rights on certain issues involving the company, anti-dilution protection or influence on the exit of the private equity fund.

Corporate Governance

In order to monitor the performance of a portfolio company, private equity investors usually negotiate the following corporate governance arrangements, which are generally set out in the shareholders’ agreement: 

• appointment of representatives in the supervisory committee;
• veto rights on strategic decisions; and 
• information and audit rights. 

Nomination of supervisory committee members

Most private equity investors are granted the right to appoint a certain number of members of the supervisory committee. Such members represent the interests of the private equity fund at the level of the committee, the main role of which is to monitor business performance and vote in strategic decisions. 

Veto rights on strategic decisions

Besides the right to appoint members of the supervisory committee, private equity investors are usually granted veto rights over extraordinary management decisions affecting the organisation, structure or performance of the portfolio company, which may include: 

• amending the company’s by-laws; 
• issuing additional shares or transferring shares; 
• adopting financial budgets; 
• incurring new debt above a certain threshold; 
• hiring or dismissing directors and key employees; 
• investing above a certain amount;
• setting up new subsidiaries or entering into a new line of business; and
• pursuing a merger, an acquisition or a carve-out; etc.

The list of strategic decisions is usually set out in the shareholders’ agreement and is sometimes reiterated in the company’s by-laws. 

Information and audit rights

Information and audit rights are also commonly requested by private equity investors. Consequently, the management of the portfolio company has a reporting obligation towards investors and must provide financial reports to the private equity fund every month or at the end of every quarter. 

Furthermore, as part of their audit rights, private equity investors are entitled to conduct on-site investigations and can therefore audit the company’s books and records, either alone or assisted by legal advisers.

In general, private equity investors do not wish to interfere with the daily management of the portfolio company, in order to limit their liability in this regard. Hence, private equity investors prefer to perform a supervisory role.

However, under certain conditions, private equity funds, in their capacity as shareholders, may be held liable in the context of their activity, and the principle of limited liability may be put aside.

Thus, when shareholders are found to have committed a personal error that cannot be linked to the management of the company and which has caused damage to others, it is established case law that the personal liability of the shareholder will be engaged.

Above all, shareholders will be personally liable if they are qualified as de facto managers. Thus, when a shareholder interferes in the management of the partnership in a manner that leads to a loss for the company, this interference will engage the personal liability of the shareholder.

This is why counsels of private equity funds have to draft the shareholders’ agreement so carefully. Indeed, the rights that are granted to the fund have to remain information, reporting or veto rights on strategic issues. If the rights granted to the fund go further and grant it decision-making power, the fund may be held liable as a de facto manager.

Most private equity funds expect to sell their investment and therefore exit the target company four to seven years after the deal’s completion date, since the senior debt is granted for such a duration.

In the French jurisdiction, the most common forms of private equity exit include secondary buyouts, IPOs and trade sales. In numerous cases, the exit of the LBO can intervene by merging the holding company and the operating company before the launch of the IPO.

The so-called drag-along clause is often used in private equity transactions. It is possibly even one of the most fundamental clauses.

Sometimes, the drag right is in the hands of the sole majority shareholder. Sometimes the threshold varies if there are several majority shareholders. It mainly depends on the negotiating power of each majority shareholder.

The so-called tag-along clause is also frequently included in private equity transactions. It can be drafted in two different ways:

• first, it can be a full tag-along right, allowing shareholders to transfer all of their shares to the purchaser for control of the company; or
• second, it may be a proportional tag-along right, the purpose of which is to allow the beneficiaries to transfer, together with a transferring shareholder, a proportional share of their holding.

This clause can typically be applied to institutional investors or to managers.

The lock-up agreement is a period during which the shareholders of a company undertake to hold the company’s shares for a given period following an IPO. This period is usually quite short and rarely exceeds nine months, although some clauses make the lock-up last for a year.

IPOs are typically subject to a lock-up arrangement of 180 calendar days.

This commitment is often made to reassure investors.

Shareholders’ agreements can also be concluded after the IPO, in particular, for the management or to give a priority right in the event of a share transfer.