International Business Acquisitions: A Deep Dive into the Legal Aspects of M&A in France

Corporate law
international acquisition

On May 3, 2023 By Benoît LAFOURCADE

I. Scrutinizing the Legal Fundamentals of M&A Transaction Completion

Mergers and Acquisitions (M&A) transactions necessitate the precise and thorough formulation of the Sale and Purchase Agreement (SPA). A cornerstone document in the process, the SPA represents the formal commitment between the buyer and seller, setting out the terms and conditions of the sale.

One of the pivotal aspects of the SPA are the seller’s warranties, essentially statements that the seller makes about the target company, which provide the buyer with contractual remedies if the statements turn out to be false. These warranties can cover a broad spectrum of areas such as the target company’s financial status, material contracts, real estate, intellectual property, and more.

Another essential feature of the SPA is the disclosure of the target company’s relevant information. The seller is obliged to disclose specific details about the company, which might influence the buyer’s decision to go ahead with the transaction. These disclosures are usually presented in a disclosure letter, and they qualify the warranties, meaning if the seller has disclosed an issue, the buyer typically can’t make a claim about it later.

Negotiations between the buyer and the seller often revolve around these warranties and disclosures. Buyers generally favor the repetition of warranties and indemnities at the completion of the deal to ensure that no significant changes have occurred since signing. They may also request a “walk away” provision, allowing them to withdraw from the deal if a material adverse event, negatively impacting the value or operations of the target company, happens between signing and completion.

On the other hand, sellers often argue for the ability to update the disclosure letter before completion to avoid potential liabilities under the repeated warranties. A common middle ground involves the issuance of warranties only at signing, supplemented by a “management of business within the ordinary course” warranty and, depending on the negotiation leverage, a “no material adverse change” warranty effective until completion.

Another key aspect of the SPA relates to the target company’s existing financial obligations. These may include loans, liens, and other forms of security against the company’s assets. Prior to completion, evidence of the release of these financial obligations, such as shares, pledges, security, guarantees, and indemnities, is typically required. This serves to assure the buyer that the target company’s assets are free from any encumbrances that could limit their use or value after the acquisition.

The SPA also involves the formulation of shareholder and board resolutions, which might include approving the transaction if the target’s articles of association require it and appointing new directors. These resolutions reflect the decision-making process within the target company and are critical to demonstrate the company’s agreement with the transaction’s terms.

Lastly, the SPA often requires various documents relating to the target’s existence and solvency, such as a recent copy of the target’s registry extract, up-to-date and certified articles of association of the target, and a copy of the target’s non-insolvency certificate. The intention here is to reassure the buyer about the target’s legal standing and financial health, thereby reducing the risk associated with the acquisition.

In summary, the completion of M&A transactions involves the careful negotiation of the SPA, securing the release of existing financial obligations, obtaining necessary approvals and resolutions, and verifying the target’s existence and solvency. Each of these steps requires a deep understanding of legal principles and a meticulous approach to ensure a successful transaction.

II. International Implications in M&A Transactions

When it comes to international mergers and acquisitions, additional factors come into play. In such cross-border transactions, whether the buyer or seller of a French company is from a foreign country, a multitude of additional aspects warrant consideration.

Language, Jurisdiction, and Legal Considerations

The first cluster of factors revolves around the language of the contract, the governing law, and the jurisdiction. The legal text, including the Sales and Purchase Agreement (SPA) and all other ancillary documents, should be in a language and governed by a legal framework acceptable to all parties. Determining the jurisdiction for dispute resolution is also of paramount importance, as the location could significantly influence the adjudication process.

Execution Formalities and Logistics

There are various execution formalities and logistics to be observed in cross-border transactions. For instance, foreign law documents may need to be complemented by a legal opinion from a local lawyer verifying their validity and enforceability. Additionally, certain documents may require translation or legalisation. This could include powers of attorney or legal opinions. Also, there may be a need for a power of attorney to authorise a signatory, particularly when directors cannot attend the signing meeting. Furthermore, if the SPA is signed outside France, the question arises whether board or shareholder meetings relating to the transaction still need to occur in France.

Foreign Investment and Regulatory Approvals

Lastly, cross-border transactions may necessitate regulatory approvals or consents. For example, if a company being sold operates in a sensitive sector – such as defense, certain technologies, or specific goods – approval from the Minister of Economy may be required. This process involves preparing an application containing information about the investor, the target, and the investment itself. The consequences of not obtaining the necessary approvals can be severe, including administrative, criminal, and civil sanctions.

In conclusion, international M&A transactions introduce a new layer of complexity. Parties need to navigate language barriers, comply with execution formalities, and ensure they obtain the necessary approvals. These additional considerations underscore the importance of due diligence and expert legal guidance in cross-border M&A transactions.

III. Governing Law and Dispute Management in M&A Transactions

When an M&A transaction involves a French entity, the Sales and Purchase Agreement (SPA) can be governed by foreign law, although there are exceptions. EU law precludes parties from circumventing “mandatory rules” of the country where the case will be heard or where all relevant elements were located at the time of the choice.

Even though courts generally respect the parties’ choice of foreign governing law, they may insist on having all documents translated by a court-certified translator, which could incur significant expenses. Furthermore, courts may request parties to elucidate the relevant requirements of the chosen foreign law. If a satisfactory conclusion is not reached, French law will be applied. Therefore, to expedite the process, it is often more efficient for courts to decide cases based on the local law they are familiar with. However, mandatory provisions of French law will always apply, like obligations to consult the social and economic committee and formalities related to share transfers.

A dispute resolution clause is commonly included in an SPA. Parties are usually required to negotiate in good faith for a specified period to try to amicably resolve their differences before resorting to judicial resolution or arbitration. If the dispute cannot be resolved, it typically goes to the French courts for resolution unless there are compelling reasons to choose arbitration. Depending on the parties involved, the relevant courts for dispute resolution are usually the Civil Court (Tribunal Judiciaire) or the Commercial Court (Tribunal de Commerce). In some instances, especially when the parties involved are French and non-French, international arbitration may be considered for its perceived neutrality and enforcement advantages.

IV. Foreign Investment in Protected French Industries

Generally, foreign investment in France is unrestricted. However, when it comes to sensitive sectors, such as those involving certain goods and technologies with both civil and military applications, activities operated by companies holding national defense secrets, or companies holding contracts for research and equipment supply with the Ministry of Defence, it may necessitate prior approval from the Minister of Economy.

The list of these sensitive sectors is regularly updated, with a recent order adding the research and development of renewable power generation technologies as a sensitive sector. An application for approval should include details about the investor, the target, and the nature of the investment. If an entity in the investor’s chain of control is registered in a non-EU country, additional documentation as required by the European Commission within the screening mechanism set-up by the EU Regulation is necessary.

Failing to obtain the necessary authorisation or breaching conditions can result in severe consequences, including administrative sanctions, criminal sanctions, and civil sanctions where the transaction could be declared null and void. Therefore, it is advisable to consult with the Treasury Department of the Ministry of Economy prior to filing an application for approval to facilitate the process and possibly reduce the review period.

In summary, M&A transactions, particularly those involving cross-border elements, require meticulous attention to detail and a thorough understanding of both domestic and international legal frameworks. The considerations and complexities outlined in these points underscore the importance of involving legal experts in the M&A process. By doing so, parties can navigate the intricate and often challenging path to a successful merger or acquisition.

V. Managing Regulatory Requirements for Cross-Border Transactions

Cross-border M&A transactions involving French companies, especially those with non-French buyers or sellers, demand particular attention to regulatory requirements. These requirements are crucial to ensure compliance and avoid potential legal pitfalls. Key regulatory aspects to consider include:

  1. Language, Governing Law, and Jurisdiction: The SPA and ancillary documents should clearly define the language to be used, the applicable governing law, and the jurisdiction. Properly addressing these aspects in the agreement will help avoid potential misunderstandings and disputes.
  2. Execution Formalities and Logistics: In cross-border transactions, it is essential to comply with specific formalities and logistics. These may include:
    • Verification of foreign law documents’ validity and enforceability with a legal opinion from a local lawyer.
    • Translation or legalization of foreign law documents, such as powers of attorney or legal opinions, if required.
    • Issuing a power of attorney to authorize a signatory, particularly when directors cannot attend the meeting where the SPA is signed.
    • Ensuring that board or shareholder meetings related to the transaction take place in France if the SPA is executed outside the country.
  3. Foreign Investment Approval: Transactions involving investments in protected sectors may require prior approval. Before completion, parties should determine whether an application for approval is necessary. Failure to obtain this approval can result in severe sanctions, including administrative, criminal, and civil penalties. To facilitate the approval process, it is advisable to consult with the Treasury Department of the Ministry of Economy before filing an application. This preliminary consultation can help identify potential issues, expedite the process, and possibly reduce the review period.

In conclusion, careful management of regulatory requirements is crucial for the successful execution of cross-border M&A transactions involving French companies. Compliance with these requirements, along with proper planning and collaboration with legal experts, can help minimize risks and ensure a smoother transaction process.

Benoît Lafourcade
Benoît LAFOURCADE Co-founder & partner

Our latest news