A good way to enter the French market: the acquisition of a French company
Le April 10, 2014 Par Benoît LAFOURCADE
Starting a business in France or Europe can be long and time consuming.
The acquisition of a French company can be a good solution for the immediate benefit of an operating business in France and Europe.
However, the acquisition process must follow a strict route to avoid risks and disappointment. It is vital to do the following:
1. Instruct a French qualified lawyer
First step is the instruction of a local French corporate lawyer, who will help you building a successful acquisition strategy. If possible, instruct a law firm with corporate, labor law and tax experts. The law firm may have in-house financial analysts (helping with the analysis of business plans, targets valuation, liaison with business brokers, etc.).
A niche French law firm (with a reduced team of experienced lawyers) may be an excellent option, in particular as it is a good solution to reduce costs while ensuring a good level of service.
If no French target is yet identified, your French lawyer can work efficiently with a business broker.
Business brokers are instructed to find a suitable business, that fits parameters, including location, industry and size. Involving both a lawyer and a business broker is a very efficient strategy to acquire a French company. The lawyer will negotiate broker fees (usually retainer + success fee) and help with defining the above parameters, coordinating the whole transaction process.
2. Audit the target
In most cases, the seller will set up a data room with, in theory, appropriate documentation (such as legal, financial and environmental documents). French Lawyers and financial experts will review documentation and write an audit report.
All disclosed information is a « disclosure to the representations and warranties » under the acquisition agreement, thus reducing the buyer’s right to indemnification in case of a breach of representation and warranties.
It is, therefore, very important to complete an exhaustive due diligence and list all disclosed documents.
On the buyer side, the lawyers should make sure that all substantial and material information is provided, and get a similar representation in the acquisition documentation.
The audit should not only be financial / legal — but also strategic — in order to have a good view of the market and main competitors, as well as identifying potential development margins.
3. Secure the transaction with appropriate documentation
When the due diligence is completed and interest confirmed by the buyer, the acquisition process will typically imply the following actions:
Employee consultation: The French labour code provides for an « information and consultation » procedure which must be completed with the target’s work council before the terms of the transaction are agreed between the parties. The buyer should make sure that this consultation is done regularly, failure to perform this being not only a criminal offence but also substantial to avoid strikes or employee legal actions. In that respect, if the due diligences point out social tension, it might be relevant to involve at the early stage an HR consultant (such as a work psychologist) to guarantee a smooth transaction.
Letter of intent (LOI): Summarizing the main points of the transaction and structuring negotiations. The language used in French LOI is critical to avoid the risk of re-qualification into a final binding agreement (as understood by French courts) and to include the necessary provisions that will guarantee its performance. (the remedy of specific performance does not exist in France, the rights of a litigant being limited to the collection of damages).
The acquisition agreement: Usually written in French (for tax filings purposes) and English, it would typically address the following issues:
(a) Consideration, potentially with price adjustment clauses (part of the consideration paid will be calculated on the basis of closing financial statements available after closing).
(b) Deferred payments clauses (earn-outs). Drafting such clauses in France requires attention, with various implied terms (included in the French commercial code or French civil code) which may interfere with it.
(c) Guarantees (mainly asked by the seller in order to guarantee payment)
(d) Representations and warranties: implied warranties are limited in France and such contractual warranties are necessary to guarantee assets in a saleable condition and no material hidden defects. The clause will refer to the risks identified during the due diligence.
(e) Covenants i.e. undertakings by the seller dealing with (mainly) the business conduct during the interim period and non-compete covenants (after closing). Again, writing such clause must be made with attention to be valid under French law (reasonable limitations are necessary).
(f) Indemnification, i.e. a provision pursuant to which the buyer will be indemnified for liabilities, losses, costs incurred as a result of a breach of any representation, warranty or covenant of the seller. In practice, there will be some financial statements which will serve as the « reference » for indemnification (the seller indemnifying basically for all new liabilities – in relation to tax, environment or other – that are not accounted for in the closing financial statements). On the buyer’s side, it is important to negotiate a guarantee for payment of indemnification.
(g) Closing: this clause will list all the conditions precedent to be fulfilled before the transaction is closed. It might include third parties consents, material adverse change clauses, governmental approvals, etc.
(h) Governing law and dispute resolution
These are the basics to ensure a safe acquisition of a French target. Of course, other ways are possible, especially if an asset deal is foreseen and not a share deal. Moreover, it might be relevant to set up an ad hoc vehicle – the purpose of which will be the acquisition of the target. In any case, the creation of a good upfront deal structure involving both tax and corporate lawyers is crucial.
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