Detailed Explanation of the French M&A Process: A Guide for Chinese Companies
Introduction

This guide aims to highlight the differences in approach and law that may be of particular interest to those unfamiliar with French M&A practices. Engaging experienced legal counsel from the outset is paramount for navigating the complexities of French M&A and ensuring a smooth and successful transaction. Often, Chinese companies may underestimate the crucial role of lawyers in the negotiation process, which is a core attribute of M&A practice.

Structure of the Transaction

When considering an acquisition in France, Chinese companies will typically encounter two primary transaction structures: the acquisition of shares or the acquisition of a business (going-concern).

• Share Purchase: This is generally the simplest and quickest method, involving the transfer of ownership of the target company's shares through a share purchase agreement. The agreement will detail the conditions, price, payment terms, representations, warranties, and indemnification provisions. While straightforward, it's crucial to note that the purchaser acquires the company with all its existing liabilities. Registration duty for share transfers varies depending on the form of the company, with rates of 0.1% for SAS and SA companies and 3% for SARL companies.

  
  

• Asset Purchase (Cession de Fonds de Commerce): This involves acquiring specific assets, contracts, and potentially liabilities of a business. This structure is more complex and regulated under French law, with mandatory representations and warranties, creditor notification requirements, and different tax implications. Registration duty rates for the purchase of a going-concern are 3% for the portion of the price between €23,000 and €200,000, and 5% for the portion above €200,000. Due to its complexity and higher tax implications, this structure is often avoided in favor of a prior transfer of assets into a new company followed by a share sale.

  
  

The choice of structure will depend on various factors, including tax considerations, the desire to carve out specific liabilities, and the overall objectives of the acquiring company. Legal counsel will be instrumental in advising on the most suitable structure based on the specific circumstances.

Preliminary Considerations

Before embarking on an acquisition, Chinese companies should consider several key aspects of the French legal landscape:

• Different Forms of Company: France has various types of commercial companies, with the société par actions simplifiée (SAS) being the most common form for private commercial entities. Other forms include the société anonyme (SA) and the société à responsabilité limitée (SARL). Each form has specific legal requirements regarding share capital, management structure, and transfer of shares. It is crucial to review the by-laws (statuts) of the target company, which can be obtained from the relevant Commercial Registry, to understand provisions related to share transfers, management powers, and any limitations. Legal counsel can assist in interpreting these documents and advising on their implications.

  
  

• Foreign Investments in France: Recent changes in French law have streamlined the process for foreign investments. Currently, only investments in "sensitive" sectors (such as public order, safety, or national defense) require prior authorization from the French Treasury Department. For non-EU foreign investors, any transaction resulting in the acquisition of more than 33.33% of the share capital or voting rights in a French company within these sensitive sectors is subject to prior approval. It is essential to determine if the target company operates within a sensitive sector and comply with the necessary authorization procedures. Legal advisors can guide Chinese companies through the application process for any required authorizations.

  
  

• Employee Protection: French labor law provides significant protection to employees. In transactions involving companies with more than 50 employees, there is a requirement to inform and consult the works council (comité social et économique) regarding the proposed acquisition. This consultation must occur before any binding agreement is signed. Additionally, employees of a business being sold as a going-concern, and in some cases shareholders of a company being sold, have a right to be informed of the proposed sale, potentially allowing them to make a purchase offer themselves. Failure to comply with these obligations can result in fines. Legal counsel will ensure compliance with these complex labor law requirements.

  
  

Pre-Agreement Phase

The pre-agreement phase is critical, and it is highly advisable for Chinese companies to engage legal counsel to assist in drafting the Letter of Intent (LOI). A well-drafted LOI will underline the key steps of the process and significantly influence the subsequent negotiation process. Common preliminary agreements include:

• Confidentiality Letter: This agreement protects sensitive information shared during the initial stages of discussions. It may also include non-solicitation covenants regarding employees and customers.

  
  

• Exclusivity Agreement: This grants the potential buyer a period of exclusive negotiation, preventing the seller from engaging with other interested parties.

  
  

• Letter of Intent (LOI): Also known as a memorandum of understanding or term sheet, the LOI outlines the main agreed principles and the roadmap for the transaction's subsequent steps. It is paramount that the LOI is drafted with the close involvement of legal counsel. This document will typically set out the proposed price mechanism, whether it will be a fixed price, a price adjustment mechanism based on financial metrics such as EBITDA or EBIT, an earn-out structure, or involve deferred consideration. For instance, the LOI might state that the final price will be based on a multiple of the target company's EBITDA for the last financial year, subject to certain adjustments identified during due diligence. The LOI will also detail the proposed structure of the transaction (share deal or asset deal), the key conditions precedent that need to be satisfied for the acquisition to proceed (such as obtaining regulatory approvals or third-party consents), and the anticipated calendar or timeline for the transaction. While some provisions like confidentiality and exclusivity are legally binding, the LOI generally carries a strong moral obligation and sets the stage for future negotiations. It is essential to clearly state which provisions are legally binding to avoid the LOI being construed as a definitive agreement. Negotiations must be conducted in good faith, as per Article 1104 of the French Civil Code, and abrupt termination or misleading conduct can lead to liability.

  Often, Chinese companies may not consider this stage as crucial and might assume that most of these aspects can be negotiated later in the purchase agreement. However, this approach is generally not favored in France and can lead to unnecessary delays and misunderstandings in the acquisition process. 

  Experience indicates that Chinese companies sometimes face challenges at this stage by presenting offers that are perceived as unattractive or by providing LOIs that lack sufficient detail, particularly in the price negotiation, which can unfortunately lead to exclusion from tender processes. Therefore, engaging legal counsel to meticulously draft the LOI is a critical first step for Chinese companies.

Due Diligence Process

Pre-acquisition due diligence is a standard practice in French company acquisitions. This process allows the purchaser to verify the target company's financial, legal, tax, operational, environmental, and business status before committing to the acquisition. Legal due diligence will focus on identifying change of control provisions in contracts and assessing employment and benefits matters, given the complexity of French labor law. Vendors may provide due diligence reports, particularly in private equity transactions, and purchasers should seek a clear reliance letter from the firms conducting the due diligence. Information provided by the vendor should be cross-referenced with publicly available information from sources like the Commercial Registry and Land Charges Registry. If the target company owns real estate, engaging a Notary to investigate and certify the title is advisable. Critically, the debts and liabilities identified in the due diligence reports will serve as a crucial basis for negotiating the final purchase price. For example, if significant undisclosed debt is found, the buyer will typically seek a reduction in the agreed price to account for this liability. Legal counsel plays a vital role in reviewing due diligence findings and advising on their implications for the purchase price negotiations.

Antitrust Clearance

Depending on the size and scope of the transaction, antitrust clearances may be required from either the European Union or the French Competition Authority (Autorité de la Concurrence). If the transaction meets the thresholds defined in Article L 430-1 et seq. of the French Commercial Code, notification to the French Competition Authority is mandatory before the transaction can be completed. Failure to notify or completing the transaction before approval ("gun-jumping") can result in significant fines. Legal counsel will assess the need for antitrust clearance and manage the notification process.

Acquisition Agreement

The acquisition agreement for shares will contain several key clauses:

• Definitions: Following international practice, agreements often include detailed definitions of key terms. It is important to note that some definitions, such as the definition of "losses" (which determines the scope of indemnification) and "debt" (which impacts the net asset value and potentially the purchase price), are often subject to intense negotiation between the parties. Legal counsel will carefully negotiate these definitions to protect their client's interests.

  
  

• Recitals: These clauses provide context to the acquisition, potentially referencing the due diligence conducted.

  
  

• Price and Payment: The consideration can be in cash, shares, or assumption of liabilities, and may include adjustment mechanisms or earn-out clauses. The method for calculating any adjustments or additional consideration must be clearly defined.

  
  

• Signature and Closing: The agreement will specify the conditions precedent that need to be fulfilled before the closing date. It is standard to include covenants requiring the target company to operate in the ordinary course of business between signing and closing.

  
  

• Representations and Warranties: The vendor provides assurances about various aspects of the target company's business, status, accounts, and operations. These warranties are subject to disclosures made by the vendor.

  It is important for Chinese companies to clearly express their key concerns and potential risks they have identified to their legal counsel. This will enable the lawyer to propose specific representations and warranties in the acquisition agreement that address these key risks. For instance, if the Chinese company is particularly concerned about the target's compliance with environmental regulations, their lawyer will draft specific representations and warranties related to environmental permits and liabilities.

  
  

• Indemnification: This clause outlines the vendor's obligation to compensate the purchaser for losses arising from breaches of representations and warranties. Limitations on the amount and duration of this obligation are typically negotiated.

  
  

• Non-Compete Clause: It is standard for the vendor to agree not to compete with the acquired business for a specified period, typically up to three years. Such clauses must be reasonable in scope and duration to be enforceable.

  
  

• Dispute Resolution: Unless arbitration is preferred, disputes are usually submitted to the French courts. The agreement should ideally specify the competent court.

Stamping/Sealing in France

Unlike in China, in France, there is no concept of a formal company seal or stamp carrying the same mandatory legal weight as in some other jurisdictions. Therefore, the presence of a company seal or stamp on commercial contracts executed as private deeds is not a requirement for their validity.

Chinese clients should note this difference, as the legal significance attributed to company seals in China is not mirrored in French private commercial law. The validity of agreements primarily rests on the duly authorized signatures of the parties involved. Legal counsel will ensure that the appropriate individuals sign the agreement on behalf of each party.

Signature Formalities

The procedures for signing documents in France remain relatively formal. While it was traditionally standard practice for all parties to meet and sign the same original documents, with each signatory receiving an original copy, it is now increasingly common practice in France to use electronic signatures, even when a physical meeting is organized. Legal counsel will advise on the most appropriate signature method and ensure compliance with relevant regulations. Agreements are typically not signed in counterpart. While a Notary's presence is not generally required for signing share purchase agreements, a Notary will be necessary if the transaction involves the transfer of real estate or the creation of a mortgage. For SAS and SA companies, the share transfer is recorded immediately in the company's share transfer books upon closing. For SARL companies, the process is more involved, requiring notification of the transfer to the company and registration of the updated by-laws at the Commercial Registry. Legal advisors will manage all necessary filings and registrations.

Conclusion

Successfully completing an acquisition in France requires a thorough understanding of the French legal and regulatory landscape. Chinese companies should pay close attention to the structure of the transaction, preliminary considerations related to company types and foreign investment regulations, employee protection laws, and the intricacies of the acquisition agreement. The Letter of Intent is a particularly crucial stage requiring careful drafting with legal counsel, and the findings of the due diligence will significantly impact the negotiation of the purchase price. While the concept of a legally mandatory company seal differs from that in China, adhering to the signature procedures and understanding the nuances of French contract law are essential for a smooth and successful M&A process.

Throughout each stage of the French M&A process, the importance of engaging experienced legal counsel cannot be overstated. Lawyers play a central role in negotiations, drafting agreements, and ensuring compliance with French law.

Chinese companies that recognize and value the expertise of legal counsel are significantly more likely to achieve a successful acquisition in France.