In 2024, the French private equity market showed signs of recovery after a period of sharp slowdown in 2022/2023, marked by both economic and political challenges: rising interest rates by the European Central Bank, which directly impacted the ability of private equity funds to raise capital and finance the LBO transactions; persistently high inflation, which increased the operating costs of portfolio companies and made financial forecasting more complex; and finally, geopolitical tensions, which heightened the risks perceived by investors.

In this tense backdrop, private equity nevertheless experienced a timid but growing recovery in the first half of 2024. In the second quarter, private equity activity in Europe recorded a 27.3% increase in value over the previous quarter.

Trend towards flexible divestment processes and buy-and-build strategies

In 2024, funds continued to redirect their investments towards resilient, strategic sectors such as healthcare, technology and impact industries. Despite the appetite for these assets, there was a trend towards more flexible divestment processes in terms of timing (particularly with regard to bid submission deadlines) and a smaller number of targeted candidates. Acquirers took the time to carry out in-depth due diligence, to discuss the business plan with management, to find suitable financing, and to work out more complex arrangements with the seller (earn-outs, reinvestments).

Certain activities, previously neglected due to their strong regulatory constraints on entry (healthcare professionals, financial expertise, etc.), attracted growing interest from private equity funds.

Funds also turned to buy-and-build strategies, which involve acquiring a core company and then carrying out a series of acquisitions of companies in the same sector. These strategies generate operational and financial synergies, notably by optimising structural costs, and enhance the value of the group as a whole, making it more attractive for future disposal.

Last but not least, we have witnessed the rise of continuation funds, which, following the trend in the United States, have become an increasingly attractive exit option for funds wishing to maintain their support for a quality asset for a new cycle.

ESG

ESG and sustainability considerations are increasingly taken into account by the lenders in the French acquisition finance market. The lenders (funds and banks) require substantial ESG reporting and state ESG ratchet applicable to margins in bank loan documentation.

The entry into force of the Corporate Sustainability Reporting Directive (CSRD) and its European Sustainability Reporting Standards (ESRS) in 2024, as well as the upcoming publication of CSRD sustainability reports in 2025, should increase even more the availability of reliable and comprehensive ESG data and consequently the quality of ESG reporting.

More specifically, France is about to launch a new long-term financing scheme guaranteed by the State up to a limit of €5 billion to accelerate the ecological transition of the economy called “transition bonds”. The transition bonds will have a fixed term of eight years and a four-year grace period. The scheme will be distributed from the beginning of 2025 until 31 December 2029.

Ordinance n°2021-1192 reforming the security law (the “Security Law Reform”) and Ordinance 2021-1193 amending Book VI of the French Commercial Code (the “Insolvency Law Reform”), both issued on 15 September 2021 have recently modernised French security law, improved the interaction of security law with collective proceedings law and transposed under French law the (EU) Directive 2019/1023 of 20 June 2019, known as the “Restructuring and Insolvency Directive”.

These reforms have very positively impacted the acquisition finance market and have provided greater legal protection and predictability for creditors.

The main issues to keep in mind under French law concerning the structuring and documentation of acquisition finance are the following:

1. banking monopoly rules applicable to credit transactions;
2. corporate benefit (intérêt social) rules;
3. financial assistance (assistance financière) rules;
4. rules relating to interest rates (anatocism and global effective rate (TEG – taux effectif global);
5. rules affecting creditors’ rights in the context of insolvency proceedings.

In view of the increasing margins offered to companies wishing to secure their acquisition financing, in particular in an LBO-type transaction, and the shortfall in banks’ credit commitments that these companies are facing in the current economic climate, one of the solutions that has become recurrent is the use of a Tranche C, in addition to the classic senior Tranches A and B. Unlike the “hybrid” financing arrangements historically set up in the format of senior debt (loan) and mezzanine debt (bond), the use of this mechanism maintains a certain contractual simplicity, as Tranche C is incorporated in the initial credit agreement. In the vast majority of cases, Tranche C is underwritten as a loan by a debt fund. This Tranche C is repayable in fine, based on the unitranche model, and has a longer maturity than the two senior tranches (generally six months or one year longer than the longest maturity of the first two tranches). Subject to certain contractual adjustments, the security granted to secure the financing will also be shared.

Another trend we can observe is the acceptance by borrowers of a certain degree of uncertainty regarding the total amount of financing made available to them through the use of unconfirmed (or incremental) credit lines. This is the case, for example, when the acquirer/borrower wishes to obtain additional financing in order to carry out build-up transactions within a reasonable timeframe. This contractual technique provides the borrower with the assurance of being able to attempt to obtain additional financing without having to form a new banking pool or negotiate a waiver with its current lenders and enables the lenders to position themselves at the forefront when the moment comes, without any firm commitment, which is particularly valuable at a time of great uncertainty regarding refinancing rates.

Sellers tend to obtain from the buyers that they provide them with commitment letters issued by the equity funds/lenders financing the acquisition in equity/debt, including certain funds’ commitments.

There is no equivalent to the Xerox language in the French market. However, the risk for lenders to be found liable by a court to pay damages to the seller is fairly low in the absence of direct contractual undertaking vis-à-vis the seller and damages awarded by French courts are substantially smaller than in the US.

According to the French banking monopoly rules, only French and EU passported credit institutions and French financing companies (sociétés de financement) are authorised to grant credits on a usual basis (including the purchase of non-matured receivables) in France. Exceptions have also been recently enacted under French law, in order to authorise (i) on the one hand, certain alternative investment vehicles and securitisation vehicles (fond professionnels spécialisé  – FPS –, fonds professionnels de capital investissement – FPCI –, société de libre partenariat – SLP, organismes de titrisation – OT – and organismes de financement spécialisés – OFS) to have a lending activity in France and (ii) on the other hand, foreign entities and institutions whose corporate purpose or activities are similar to those of the above-mentioned regulated entities authorised to lend in France, to acquire non-matured receivables arising under credit transactions entered into by regulated entities, except for receivables against individuals acting for non-professional purpose.

Various exemptions apply, such as deferred payment or advances in commercial contracts or treasury transactions (opérations de trésorerie, including the granting of loans and guarantees) between companies that have direct or indirect capital links with each other that confer to one of the linked companies effective control over the others. Bonds issues also fall beyond the scope of the French banking monopoly.

Violation of the French banking monopoly is a criminal offence punishable by up to three years’ imprisonment and €375,000 fine for a natural person and €1,850,000 for a legal entity. In addition, civil penalties may apply but credit transactions entered into in breach of said rules would generally remain valid.

There are no specific requirements regarding the benefit of security, except regarding the assignment of professional receivables by way of security (the so called “Dailly Law” assignment under Articles L.313-23 to L.313-34 of the French Monetary and Financial Code) which is reserved to the regulated entities authorised to lend in France (above mentioned).

There are no exchange control rules currently in force in France.

A special control regime governed by articles L.151-1 et seq. and R.151-1 et seq. of the French Monetary and Financial Code is applicable in France to foreign investments. Under this regime, EU investors benefit from less onerous restrictions than non-EU investors. It potentially applies to any foreign investor (i) acquiring control of a French company or (ii) acquiring all or part of a line of business of a French company. It also applies to non-EU foreign investors (i) acquiring a stake of 25% or more of the voting rights in a French company or (ii) since the COVID-19 crisis (this restriction having become permanent since an ordinance and a decree of 28 December 2023 entered into force on 1st January 2024), acquiring a stake of 10% or more of the voting rights in a French listed company.

Such transactions will have to be authorised by the Ministry of Economy if they concern a “sensitive” sector, including activities relating to national defence, any activity that is essential in order to safeguard the country’s national interests in the fields of energy, water supply, transport services, space operations, electronic communications, public safety, public health, etc, or, in relation to the operation of businesses, infrastructures or facilities which are of “vital importance” to the country within the meaning of French law.

Since the ordinance and decree of 28 December 2023 entered into force on 1st January 2024 rendering certain COVID-19 measures permanent, new sensitive sectors are concerned such as the extraction, processing and recycling of critical raw materials, which are essential for the protection of national interests.

The Ministry of Economy can authorise the investment unconditionally or subject to the fulfilment of certain conditions in order to ensure the preservation of national interests, or he can prohibit it based on certain grounds.

In case of violation of the control of foreign investment rules, the Ministry of Economy can take the necessary interim measures in order to protect French national interests, order injunctions to the investor concerned and/or impose a penalty of up to the highest of the following amounts: twice the amount of the irregular investment, 10% of the annual VAT-exclusive turnover of the company carrying out the protected activities, five million euros for legal entities or one million euros for natural persons.

The security interests that are typically put in place in a security package to secure the repayment of a senior debt in acquisition financing transactions in France are:

• a first-ranking pledge over the target’s shares; if the target is a stock company (société par actions) issuing financial securities registered in shareholder’s account (compte d’actionnaire), such as a limited liability company (société anonyme – SA) or a simplified joint stock company (société par actions simplifiée – SAS), the pledge will be granted over the financial securities account in which the purchaser’s shares in the target will be transferred to be pledged; if the target is another type of companies, such as limited liability company (société à responsabilité limitée – SARL), real estate civil company (société civile immobilière – SCI) or partnership company (société en nom collectif – SNC) issuing shares (parts sociales), the pledge will be granted over the shares themselves held by the purchaser;
• a Dailly Law assignment governed by articles L.313-23 to L.313-34 of the French Monetary and Financial Code (if the borrower is the acquirer) or a first-ranking pledge over receivables granted by the purchaser covering intragroup downstream loans or advances granted to the target company to refinance its existing indebtedness or, as the case may be, to be granted to members of the group for the purpose of financing or refinancing authorised capital expenditure (capex) or external growth transactions if these transactions are also financed by the senior lenders under the setting up of capex lines or incremental facilities;
• a Dailly Law assignment (if the borrower is the acquirer) or a delegation (délégation) governed by article 1366 et seq of the French Civil Code, pertaining to any sums due under the acquisition documents and, as the case may be, the acquisition documents relating to any future authorised external growth transactions;
• a pledge or a delegation pertaining to any insurance proceeds which may be due under the key man insurance policies, or alternatively, the introduction of a loss-payee clause in favour of the senior creditors in the key man insurance policies;
• a pledge over the balance of the bank accounts held by the borrower;
• as the case may be, a first-ranking pledge over the on-going business (nantissement de fonds de commerce) or shares of an eligible target in the context of external growth transactions financed by the senior lenders;
• as the case may be, a pledge over the borrower’s shares granted by the borrower’s shareholder(s);
• as the case may be, a personal and joint and several guarantee (cautionnement solidaire) of the purchaser in respect of any sums owed by the target company in its capacity as the borrower of part of the credit facilities.

Other security interests can be provided from time to time, depending on the specifics of the transaction, such as a pledge over intellectual property (IP) rights (patents, trademarks, software or design and models), a mortgage (hypothèque) over real property, etc.

French law also provides for a certain number of security interests transferring the ownership of the secured assets to the beneficiary or to a trustee, offering a stronger position to the beneficiary in the context of insolvency proceedings. If they are not yet commonly used in the context of acquisition finance transactions, they tend to emerge in other financing sectors and should also be able to replace some of the above-mentioned security interests in the future. These are (i) the civil law assignment of receivables by way of security (cession de créances à titre de garantie) governed by articles 1321 et seq and 2373-1 et seq of the French Civil Code, (ii) the transfer of cash by way of security (cession de sommes d’argent à titre de garantie) equivalent to a cash collateral, both created by the Security Law, and (iii) the security-trust (fiducie-sûreté) governed by articles 2372 et seq of the French Civil Code pursuant to which the borrower will transfer selected assets, rights and securities to a trustee (fiduciaire) who will retain such assets in a special-purpose estate, as a guarantee for the repayment of the sums due under the finance documents.

It should also be noted that, since the Security Law Reform entered into force on 1^st January 2022, the lenders benefitting from a third-party security, i.e. a security provided by a grantor which is not the borrower, must, as for joint and several guarantors (cautions), provide in writing to such grantor before 31 March of each year information regarding the secured amount (calculated as at 31 December of the previous year) and the end of the secured period.

The security interests granted by the purchaser will, to the extent permitted by law, benefit the hedging banks which have entered into the subordination agreement provided that they are also senior lenders (or affiliates of a senior lender).

On their side, mezzanine lenders will generally require to be provided with second-ranking security interests over the same assets as the senior creditors and will enter into an intercreditor agreement with them generally determining standstill provisions giving senior lenders control over the initiation of the enforcement procedure and providing for payment priorities.

Besides, it should be noted that Dailly Law receivables assignment can only secure the repayment of a professional loan granted to the assignor (it cannot be granted by any third party guarantor or security grantor) and the beneficiary should be either a French or passported EU credit institution, a French financing company or an alternative authorised lender (see Question 6). For alternative lenders, such as debt funds, and/or in order to secure a bond issuance, other security interests are available, such as the pledge over receivables or the civil law receivables assignment.

Under French law, there is no concept of floating charge. Security interests should be created over each type of asset separately (shares, receivables, bank accounts, real estate property, IP rights, etc).

However, the pledge over on-going business enables to capture several classes of assets (forming the business) under the pledge, namely the trade name, the leasehold rights, the customer base, the goodwill, the fixed assets (furniture, tools and machinery, equipment) and the IP rights (trademarks, brands and patents).

Furthermore, the security-trust (fiducie sûreté) is also a type of universal security interest which can include all types of assets, rights and security interests depending on the parties’ agreement. It is created by way of a written contract entered into between the settlor(s) (constituant(s)), the trustee (fiduciaire) and the beneficiary(ies) (bénéficiaires) which must contain certain mandatory provisions and must be registered within one month of its signing date for validity purposes. The title to assets which are subject to the fiducie-sûreté are transferred to the trustee (fiduciaire) and held by it in a special-purpose estate which remains beyond the reach of the debtor’s and the trustee’s creditors during the term of the trust agreement (subject to exceptions).

Regarding security over future assets or for future obligations, they are possible provided that these assets or obligations are clearly identified or identifiable at the time the security is granted.

The secured obligations must be identified or at least identifiable at the time the security interest is created. Depending on the type of security interests, it can also be necessary, generally for publicity purposes, to provide a cap on liabilities (e.g. for mortgages, pledges over on-going business, movable assets, etc). This cap is usually calculated by reference to the principal amount of the secured debt to which is added a percentage of 20 to 30% of the principal amount representing the interest, default interest, fees and expenses.

Formalities for taking security

The typical security in an acquisition financing transaction are entered into under the form of a private deed between the grantor and the beneficiaries, with no need for any notarial deed.

For certain types of security, formal requirements apply for validity purposes.

This is the case for the pledge over financial securities account which must be created under a pledge statement (déclaration de nantissement) signed by the pledgor and must contain certain mandatory provisions for validity purposes.

Regarding the Dailly Law receivables assignment, it should be formalised by the execution of a form (bordereau) that must contain specific mandatory provisions for validity purposes. It is delivered to the assignee and takes effect from the date affixed on the form by the assignee. The notification of the assignment to the assigned debtor can be made at any time and will trigger the obligation for the assigned debtor to make payment directly to the assignee (unless otherwise contractually agreed).

A trust (fiducie) must be formalised under a written trust agreement containing certain mandatory provisions and must be registered with the tax administration within one month of its signing date for validity purposes.

In all cases, the secured assets and secured liabilities should be sufficiently identified for the security interest to be validly created.

Formalities for perfecting security

The formalities for perfecting security may vary depending on the type of security interest concerned. In particular:

1. a pledge over financial securities account must be registered in the share transfer register (registre de mouvement de titres) and the shareholder’s individual accounts of the issuing company. A certificate of pledge is generally requested to be issued by the financial securities account holder (being the issuing company or an authorised financial intermediary) and by the bank account holder when a special cash account onto which the cash proceeds arising from the pledged shares will be credited is also pledged (the parties may opt to exclude cash proceeds from the pledge);
2. a pledge over shares (nantissement de parts sociales) must be registered with the relevant commercial court registrar (greffe du tribunal de commerce) to be enforceable against third parties, said registration having to be renewed every five years;
3. a pledge over the balance of a bank account must be notified to the account bank for enforceability purposes, except if it is a party to the pledge agreement;
4. a pledge over on-going business must be registered with the relevant commercial court registrar (greffe du tribunal de commerce) and, if IP rights enter into its scope, with the national trademarks and patents authority (Institut national de la propriété industrielle) and published in the official bulletin of industrial properties (Bulletin officiel de la propriété industrielle) to be enforceable against third parties, said registration having to be renewed every ten years.

The costs involved are nominal (save for the trust (fiducie) or the security over real property and, depending on the number of intellectual property rights and the place of their registration) and the formalities are carried out on completion or very shortly afterwards.

In principle, French companies may give upstream and cross-stream guarantees subject to compliance with rules on corporate benefit (intérêt social) and corporate authorisation.

The corporate benefit rules require that the guarantor must receive some “real and adequate benefit”. The absence of benefit renders the guarantee unenforceable and criminal sanctions may be imposed on directors for misuse of corporate assets (abus de biens sociaux). What constitutes real and adequate benefit is not defined by law, but examples include financial remuneration, the existence of cross guarantees in favour of the guarantor and interest of the guarantor in the financial success of the debtor. The established rules of thumb are that:

1. the companies involved must form part of a genuine group operating under a common strategy aimed at a common objective;
2. the risk assumed by the guarantor must be proportionate to the benefit; and
3. the financial support by the guarantor should not exceed its financial capabilities.

While corporate benefit can generally be assumed where a parent company guarantees one of its direct or indirect subsidiaries, the test is much more difficult with respect to upstream or cross stream guarantees. As a result, prudent market practice is to limit upstream/cross stream guarantees to working capital facility (when applicable) and to an amount equal to that which the guarantor and its subsidiaries receive from the loan either directly as a borrower or indirectly by downstream intercompany loans. On the basis that the guarantor does not have to pay more than it has borrowed, the second limb of the corporate benefit test should therefore be satisfied.

The rules as to corporate benefit apply equally to security given by subsidiaries in relation to the financial obligations of its parent/sister company.

A guarantee by a French company must be granted for a purpose within the objects of that company and must bear a direct relation to the main activity of that company. Also, specific corporate procedures which vary depending upon the corporate form of the guarantor may have to be complied with.

In addition to the restrictions referred to in Question 6 (banking monopoly), Question 8 (control of foreign investments), Question 13 (corporate benefit) and Question 15 (financial assistance), it can be noted that the consultation of the works councils (comité social et économique) may be required in particular in the context of the granting of on-going business pledges (though their formal approval is not, strictly speaking, required). Such consultation must take place within a “reasonable period of time” (i.e. can take a few days up to several weeks depending mainly on the relationship with the members of the works council), and in any case before the pledge is executed.

In addition, depending on the corporate form of the concerned company, French law may require specific corporate authorisations: (i) in respect of regulated transactions (conventions réglementées) or (ii) for the purposes of the granting of guarantees (in particular in respect of limited liability companies (sociétés anonymes), for which it is necessary to get prior authorisation from the board of directors to issue a guarantee covering third party’s obligations.

With respect to regulated transactions entered into by limited liability companies, any agreement entered into, either directly or through an intermediary, between the company and its general manager, one of its assistant general managers, one of its directors, one of its shareholders holding a fraction of the voting rights greater than 10% or, in the case of a corporate shareholder, the company which controls it within the meaning of article L.233-3 of the French Commercial Code, must be subject to the prior consent of the board of directors.

The same applies to agreements in which a person referred to in the previous paragraph has an indirect interest. Agreements entered into between the company and another company are also subject to prior consent if the company’s general manager, one of its deputy general managers or one of its directors is the owner, an indefinitely liable partner, a manager, a director or a member of that firm’s supervisory board or, more generally, is in any way involved in its management. However, the previous provisions are not applicable to agreements relating to usual operations (opérations courantes) entered into under normal terms and conditions.

Pursuant to article L.225-216 of the French Commercial Code, a French company (i.e stock company (société par actions)) may not advance funds, grant loans or give security with a view to the subscription or purchase of its own shares by a third party. Any loan, security or guarantee granted in violation of the provisions of article L.225-216 is null and void.

The financial assistance prohibition cannot be covered by a special authorisation of the board or of the shareholders of the company. In addition, directors or managers who would approve the granting of financial assistance in violation of article L.225-216 of the French Commercial Code may be held liable to a fine of up to €150,000.

It is generally considered that the prohibition further includes (i) the financing of the acquisition of the shares of parent companies or (ii) the refinancing of the acquisition of its own shares or of the shares of parent companies by the company, as the point is here to prevent the French company from securing the financing for the acquisition of its shares whether directly or not.

However, if certain amounts of the loans are used for the purposes of financing working capital needs of the French company or to refinance its existing debt, the latter would be authorised to give security or guarantee to secure the amounts actually received by it without conflicting with the financial assistance prohibition.

Financial assistance does not apply to the financing or guaranteeing of the acquisition of the shares of a sister company but it would be subject to the limitation applicable under the corporate benefit principle mentioned above.

Under French law, there is no procedure equivalent to the “whitewash” procedure existing under English law. However, article L.225-216 of the French Commercial Code does not prohibit the service of the acquisition loan by the use of dividends or voluntary reserves (réserves non obligatoires) paid by the French company to its parent company after the purchase of the shares (provided that there are some profits and voluntary reserves available for distribution).

As mentioned above, a French company could give guarantees and/or security for refinancing debt or revolving facilities used for the purposes of financing working capital needs without conflicting with the financial assistance prohibition. However, the prohibition of financial assistance is generally considered as applying to the refinancing of the acquisition of the French company’s shares or in case of quick merger between the borrower and the French target company.

The shares of the French target company may be pledged without breaching the prohibition.

It is strongly recommended to split the acquisition debt and the refinancing debt in several tranches or facilities in order to avoid any confusion that may lead to the application of the financial assistance prohibition to the funds made available indistinctly.

It exists two different regimes alternatively applicable to the security agent in France:

1. either the regime of the general mandate under article 1984 of the French Civil Code under which the security agent is appointed as mandataire (i.e. agent acting in the name and on behalf of the secured parties) for the purpose of taking, managing and enforcing security;
2. or the security agent regime introduced in the French Civil Code in 2007 and reformed in 2017, which has been specifically created to import and adapt under French law the concept of security trustee; under this regime governed by articles 2488-6 et seq. of the French Civil Code, the security agent acts in its own name and for the benefit of the secured parties, i.e. it holds and manages the security/guarantees created in its favour for the benefit of the secured parties (as a trustee). The security/guarantees are segregated from the security agent’s assets (as a trustee).

Whereas the security agent regime is better suited to syndicated loans, certain domestic banks, notably in midcap transactions, are still reluctant to use it, due to the accounting and organisational constraints as well as prudential treatment uncertainties and additional liability incurred.

However, the use of the general mandate regime may raise certain issues, e.g.:

1. for the purposes of enforcing the security (and more generally for entering into any legal proceedings) and filing any claim in any bankruptcy proceedings, the security agent may need to benefit from a special mandate delivered by each of the secured parties at the time when the contemplated action is initiated;
2. the perfection of the security may require that the names of all creditors (and not only the name of the security agent) appear on the relevant registries or security documents themselves.

On the contrary, in large-cap and cross border transactions, the security agent regime is more commonly used.

French courts recognised in 2011 that (i) a foreign trust can be used for holding security interests in France and file a claim in French bankruptcy proceedings and (ii) the parallel debt mechanism is also compliant with French international public policy if there is no risk of double counting of the secured debt.

However, in order to avoid conflict of law issues in case of enforcement or in the context of the opening of bankruptcy proceedings against the French debtor, when security interests governed by French law are created in favour of the lenders, it is sometimes incorporated in the facility agreement governed by a law other than French law, a specific clause providing for the appointment of a security agent governed the provisions of articles 2488-6 et seq. of the French Civil Code by the finance parties.

LBO financing can be provided by a bank (or a pool of banks), debt investors (term loans C, mezzanine, junior, unitranche) or a group of financing providers made up of banks and investors.

Senior bank loans can comprise several tranches, including bullet and amortising term facilities aiming at financing the acquisition price and associated costs and the refinancing of the existing debt (including of the target company), a revolving credit facility and a committed or uncommitted credit facility aiming at financing future capital expenditures and/or build-up transactions.

This financing will generally be formalised by the execution of a credit agreement based on the standards provided by the Loan Market Association (LMA) entered into between the arranger(s), the agent, the security agent, the lenders, the borrower and, as the case may be, the sponsor(s) or guarantor(s). The finance parties will benefit from security (see Question 9 above) materialised under security documents (except the delegation pertaining to the insurance key manager – or the loss payee clause – which is generally entered into within a period varying from 3 to 6 months after completion of the transaction). A subordination/intercreditor agreement will organise the subordination of certain payments and more globally the relationships between the senior lenders, as the case may be, the hedging banks, the shareholders of the borrower and the borrower.

Mezzanine financing can be put in place in LBO transactions to increase leverage. It is usually provided by investment funds and structured as a private bullet bond issuance, having a five to eight-year maturity, remunerated by a mix of cash and payment-in-kind (PIK) interest and potentially by an equity kicker.

Instead of a bank loan and a mezzanine financing, it has become common on the mid-cap market to see unitranche financing, having the same characteristics as the mezzanine financing and easier to manage for the sponsors.

The documentation relating to the bonds issuance in the context of mezzanine or unitranche comprises a subscription agreement entered into between the subscriber(s), the representative of the bondholders masse and the issuer. The bonds are governed by terms and conditions generally attached to the subscription agreement as a schedule.

Due to the type of financing and their dual culture and appetence to support the business, debt funds will generally require the appointment of an observer (censeur) in the supervisory board of the issuer.

The main clauses of a subscription agreement are very closed to the provisions of a credit agreement. One can nevertheless note that, the French law requirement to provide an indication of the overall effective rate (TEG – taux effectif global) applicable to a loan does not apply to a bond issue. In a credit agreement, failure to provide the TEG or providing an erroneous TEG may be sanctioned by the reduction of the contractual interest by the judge to be determined by notably taking into account the actual prejudice caused to the borrower.

If the loan has already been fully drawn down by the borrower, the transfer could take the form of a simple assignment of receivables (cession de créances) which only needs to be formalised in writing and notified to the borrower if it is not a party thereto. Collateral security is automatically transferred with the assigned receivables when they are ancillary (accessoires) to said receivables. This would not be the case of an autonomous guarantee which would only be transferred if it is expressly provided therein. In the case of a French law personal joint and several guarantee (cautionnement), the guarantor (caution) could take this opportunity to withdraw from its commitment by paying the purchase price of the receivable to the assignee (droit de retrait litigieux) if it is called by the assignee.  For enforceability (opposabilité) purposes however, it may be necessary to record the new creditor with public registers or to amend the security documentation to quote the new beneficiary.

Whether the loan has already been fully drawn down by the borrower or not, other transfer mechanisms are available to the lenders such as the assignment of contract (cession de contrat) or the novation (i.e. the extinguishment of an obligation by the replacement of a new one). In both situations, the consent of the borrower is needed but, for the assignment of contract, it can be given in advance in the credit agreement.

The assignment of contract when it occurs should give rise to a written agreement and the new agreement should be notified to the borrower if it is not a party thereto. If security interests have been provided by third party guarantors, and if the former lender is released from its obligations under the assigned contract, then the existing security provided by third party guarantors disappear and should therefore be reiterated in favour of the new lender.

The novation cannot be automatic; it should be clearly stated in the deed of novation. The borrower can give its consent in advance to the selection of the new creditor by the former creditor. In accordance with the provisions of article 1334 of the French Civil Code, the security rights do not survive the novation except if they are expressly reserved to secure the new obligation, with the consent of the third-party guarantors if applicable.

The legal regime applicable to priority of competing security interests and of survival of contractual subordination provisions in the context of insolvency proceedings has recently been clarified by the Security Law Reform and the Insolvency Law Reform.

Priority of competing security interests

It has been clarified by the Security Law Reform that, despite the existence of a right of retention legally organised, successive ranking pledges could be created over receivables, bank accounts and financial securities accounts.

Subject to contractual priority arrangements, the ranking of a security interest will depend on the date on which the security is perfected. If it has to be published or registered on a public or corporate registry (pledges over shares, IP rights, moveable assets without dispossession, mortgages, etc), the beneficiary whose security has been published first will have priority; if it has to be notified to be enforceable against the concerned debtor (pledges over receivables, bank accounts, etc), the beneficiary whose security has been notified first to the concerned debtor will have priority.

However, the rank of security interests can also be contractually organised between the secured creditors, as it is usually the case in LBO or other complex financing transactions involving different classes of creditors, e.g. senior lenders, second lien lenders, mezzanine lenders, hedging banks and shareholders.

Methods of subordination

The most commonly used methods of subordination are (i) the structural subordination consisting in splitting the senior/mezzanine/junior debts between capital structures at several levels with separate covenants and security interests or (ii) the contractual subordination organised under an intercreditor agreement setting out more generally the payment waterfall, the rank of the security interests and the enforcement restrictions.

A contractual subordination is generally organised under an intercreditor agreement establishing the ranking of security interests granted in the transaction and providing for the allocation of payments among the beneficiaries of such security interests in case of enforcement. The intercreditor agreement is also frequently used to extend the security interest to additional secured parties on a pari passu basis with the prior ranking security.

French law does not provide for equitable subordination rights, except for the so called “participative loan” which is a special type of shareholder’s loan subordinated by law and treated as equity from an accounting standpoint.

However, a shareholder may potentially incur liability by imposing to its subsidiary the repayment of a shareholder’s loan in the context of financial difficulties.

Choice of a foreign law

French private international law recognises as a general rule the choice of a foreign law to govern an international civil or commercial contract, except if the foreign law has been chosen to elude the application of mandatory provisions of the laws of any other jurisdiction having a close connection with the relevant transaction (in which case, French courts may choose to apply the laws of such jurisdiction irrespective of the choice of another law by the parties) and do not contravene international French public policy rules (ordre public international français) or French overriding mandatory provisions (lois de police).

Submission to a foreign jurisdiction

The choice of a foreign court as the competent jurisdiction to rule a dispute in connection with the contract would generally be recognised by French courts pursuant to and subject to French private international law, provided that, in particular, it does not contradict any mandatory or exclusive jurisdiction.

Waiver of immunity

A waiver of immunity from jurisdiction (judgment by its own courts only) or from enforcement (unseizability of its assets) by a foreign state could be held as valid by a French judge if, according to case law, it is certain, express and unequivocal, and regarding the seizure of assets allocated to diplomatic missions, it is special in accordance with article L.111-1-3 of the French Civil Enforcement Proceedings Code. Furthermore, enforcement proceedings may only be implemented on property belonging to a foreign state with the prior authorisation of a judge.

Enforcement of foreign judgements

The procedure for the enforcement of a judgment of a non-French court in the French courts is determined by reference to the applicable reciprocal enforcement arrangements or conventions in place between France and the relevant state.

In particular, a final judgment obtained in the courts of an EU member state could be enforceable by the French courts without re-examination or re-litigation of the matters adjudicated subject to and in accordance with the EC Regulation N° 1215/2012 dated 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast Brussels I Regulation).

Where no such arrangements exist, a final judgment could be enforceable by the French courts without re-examination or re-litigation of the matters adjudicated, through an action for exequatur brought before the competent French court provided that the court is satisfied that the requirements established by case law for the enforcement of foreign judgments in France are met, among which that the judgment is not contrary to French international public policy, both pertaining to the merits and procedure of the case.

Security interests can only be enforced if the debtor has failed to comply with a payment obligation of secured liabilities having become due and payable. Therefore, if a creditor wishes to enforce its security interest following a financial covenant breach, it will have to first accelerate the debt and obtain an actual payment default under the credit agreement.

Enforcement will in each case be subject to the following conditions: (i) the underlying secured obligations must exist and be due and payable; and (ii) the creditor must serve a formal notice (mise en demeure) on the pledgor (and, as the case may be, the debtor of the pledged receivable), informing the latter of its intention to enforce the security interest (in certain cases, and depending on the applicable regime, the notice will need to contain specific details, failing which it is invalid).

Then there are generally two options available to a creditor for the enforcement of the security interest, in particular when it is a pledge. It can request the competent court to either (i) order the sale of the pledged assets by way of public auction (vente forcée), the creditor being in that case paid out of the proceeds of sale (and, as the case may be, in competition as to ranking with other creditors benefiting from a right or security over the shares) or (ii) allow the judicial attribution (attribution judiciaire) of the pledged shares to the creditor (which has the advantage of avoiding any competition with other secured creditors).

If it is expressly provided in the pledge agreement, the creditor may also, as a third option, be entitled to enforce the pledge by contractual foreclosure (pacte commissoire) of the secured assets, in which case there will be no need to obtain a court order in order to enforce the pledge. However, in both the judicial attribution and contractual foreclosure options, the value of the secured assets must be appraised by an independent expert.

The expert will have to determine the value of the secured asset at the time of the foreclosure and, in the event that such value would be higher than the amount of the secured liabilities remaining outstanding, the difference (soulte) will have to be paid by the beneficiary to the pledgor or, said difference may also be deposited onto a special account until all the secured liabilities have been effectively repaid or when there are other secured creditors remaining unpaid.

As regards share pledges, the enforcement may, in some occasions, require the approval of the other shareholders, if any, of the company whose shares have been pledged. Therefore, it is generally important to determine whether the granting of the pledge had been approved by the other shareholders of the company in advance, in order to avoid any delay and/or challenge at the time of enforcement.

Furthermore, in companies having a works council (conseil social et économique), there can be no change of control unless the works council has been consulted and has provided an opinion. There is therefore a theoretical risk that enforcement could be challenged by the works council. Finally, regulatory consents may be applicable, i.e. from the French Markets Authority (Autorité des Marchés Financiers) in case of thresholds overstepping, or from the Ministry of Economy in case of a foreign investment in a sensitive business activity.

The contractual foreclosure (pacte commissoire) in accordance with the provisions of article 2348 of the French Civil Code should be expressly provided in the security agreement and is not available for some security interests or in some specific circumstances (e.g. for pledges over on-going business or to secure the repayment of a consumer credit).

The various procedures available under French law for distressed and insolvent companies are the following:

• Mandat ad hoc: these voluntary proceedings are confidential out of court proceedings pursuant to which the commercial court appoints a restructuring practitioner to assist a solvent debtor in its negotiation with its stakeholders under the aegis of the court;
• Conciliation: these voluntary proceedings are confidential out of court proceedings pursuant to which the commercial court appoints a restructuring practitioner to assist a debtor that is solvent or has been insolvent for no more than 45 days in its negotiation with its creditors under the aegis of the court;
• Safeguard (sauvegarde): these proceedings are judicial pre-insolvency proceedings available to solvent debtors facing difficulties that they cannot overcome and which can only lead to a “continuation” plan.
• Accelerated safeguard (sauvegarde accélérée): these proceedings are available as a closing stage following conciliation proceedings to all debtors (without size thresholds) who prepared a draft safeguard plan that is likely to be approved by classes of affected parties.
• Judicial reorganisation (redressement judiciaire): these proceedings are insolvency proceedings available to insolvent debtors which can lead to a reorganisation plan which can include a transfer of the whole business or to the liquidation of the company.
• Judicial liquidation (liquidation judiciaire): these proceedings are insolvency proceedings available to insolvent debtors where their reorganisation is manifestly impossible and the activity is necessarily terminated while the assets may be transferred.

Effects on Acceleration

Creditors are prohibited from accelerating a loan or terminating an ongoing contract on the sole basis of the opening (or of any filing for that purpose) of pre-insolvency and insolvency proceedings (other than judicial liquidation). Any contractual provision to the contrary, or more generally increasing the debtor’s obligations (or reducing its rights) by that sole same reason, is null and void.

In the context of judicial liquidation proceedings, all claims will become immediately payable upon the opening of the proceedings or, if the court expressly continues business activities on a temporary basis to ensure the preparation of a sale plan, upon the court’s approval of the sale plan or the cessation of the temporary continuation of the business.

Effects on enforcing security

While a mandat ad hoc is pending, no stay of payments and enforcement actions save for a rescheduling of debt for a maximum of 2 years that may be ordered by the court on a case-by-case under article 1343-5 of the French Code civil if creditors attempt to enforce their rights.

During the conciliation proceedings, the court has the ability to decide an individual stay of enforcements or rescheduling of claims (until the end of the conciliation, i.e. during maximum 5 months) if creditors do not grant a standstill request.

The opening of insolvency proceedings triggers an automatic and general stay of all payment and enforcement actions, with limited exceptions (notably the set-off right of related debts (créances connexes) or the financial obligations arising out of certain financial contracts (notably derivatives) and the recovery of pre-petition claims during the observation period (période d’observation) including (i) claims secured by a security conferring a retention right, (ii) claims assigned by way of a Dailly Law assignment and (iii) claims secured by a trust (fiducie)).

Furthermore, once these proceedings are commenced, the scope of existing security interest can no longer increase (e.g., dividends accruing after such commencement are no longer captured by share pledges and can be freely used by the debtor), with limited exceptions (notably the Dailly Law assignments of claims arising post-commencement pursuant to a framework agreement entered into before the opening of proceedings).

During the pre-insolvency proceedings all parties must comply with contractual provisions, including those creating contractual priorities amongst creditors, unless otherwise agreed by all parties.

In the context of insolvency proceedings (except judicial liquidation), the set-up of classes of affected parties must at least (i) distinguish between classes of secured / unsecured creditors and (ii) comply with the subordination /intercreditor agreement entered into prior to the opening judgment and notified to the administrator. The court may allow the plan to divert from the ranking of creditors if this is deemed necessary and does not excessively prejudice the rights of affected parties.

In the event of safeguard or rehabilitation proceedings, the “distributable assets” are determined after payment of creditors which are exempt from the proceedings (such as claims payable immediately to the beneficiary of a retention right or from property-based security interests, but also post-petition claims that are paid when due). There are many exceptions and legal privileges provided for in insolvency law, but the general outlines are the following:

1. employees’ super-privileged claims (wages due for 60 days prior to the opening of proceedings), including if already paid by the French wage guarantee insurer (AGS), which is then subrogated in the rights of employees
2. proceedings fees (e.g., court and legal fees relating to the liquidation proceedings)
3. claims benefiting from the ”New Money” conciliation privilege
4. claims benefiting from the ”Post Money” safeguard or reorganisation
5. employees’ wages due after the opening of proceedings (where not paid by the AGS)
6. in relation to disposal proceeds of real estate, claims that have been granted security interests over debtor’s real estate
7. new credits and claims arising out of the continuation of executory contracts after the opening of proceedings
8. claims benefiting from the public Treasury privilege (e.g., income, taxes, VAT, inheritance tax, etc.)
9. claims benefiting from other privileges
10. unsecured claims
11. in the event of judicial liquidation, all claims shall be subject to the same priority rules, except for pre-petition claims secured by a mortgage (hypothèque) which shall have priority over post-petition claims benefiting from the statutory “Post Money” privilege. Security with a retention right grants the beneficiary an exclusive right over the proceeds of the isolated sale of the affected assets. Similar exceptions shall apply to Dailly assignments and trusts (fiducies).

Certain transaction entered into during the hardening period (période suspecte) can be subject to clawback provisions. The hardening period starts from the date when the company is deemed to have become insolvent and may set by the bankruptcy court as far as 18 months prior to the date on which that company.

If the insolvency proceedings are preceded by a conciliation workout agreement, the insolvency date cannot be backdated to a date before the court order approving the workout agreement.

Notably, security interests granted by a French company during the hardening period:

1. are automatically void (that is, the court must declare these transactions void on petition by the administrator, the liquidator, or the Public Prosecutor) if they have been granted to secure a previously incurred debt (except security interests granted as replacement of an existing security interest of an equivalent nature and scope or Dailly Law assignments of receivables implemented in execution of a framework agreement entered into before the hardening period; and
2. are subject to optional voidance (that is, subject to the court’s discretionary decision on petition by the administrator, the liquidator, or the Public Prosecutor) if the secured creditor had knowledge of the insolvency of the debtor at the time it was granted.

Third party security can be affected by those voidance provisions.

Also, the payment of debts not due at the time of payment or the payment of debts made in a manner which is not commonly used in the ordinary course of business are also automatically void if made during the hardening period.

According to the provisions of article L.650-1 of the French Commercial Code, guarantees, security interests and any other credit support whatsoever granted by a party to its creditors may be under certain circumstances reduced or even declared null and void, if found disproportionate with the amounts they are securing.

No withholding tax applies on interest payment made to non-residents except if they are located in a non-co-operative within the meaning of Article 238-0 A of the French Tax Code (NCCT), in which case interest payments onto an account opened with a financial institution situated in an NCCT would give rise to a 75% withholding tax (subject to the existence of a double tax treaty providing for a reduction of such withholding tax).

The latest list of the Non-Cooperative State or Territory (NCST) as published in the EU official journal of 18 October 2024 includes the following countries: US Samoa, Anguilla, Fidji, Guam, Palaos, Panama, Federation of Russia, Samoa, Trinité-et-Tobago, US Virgin Islands, Vanuatu. Safe Harbour rules may apply to avoid the potential application of the 75% withholding tax by demonstrating that the main purpose and effect of the transactions in respect of which the interest is paid is not to allow the location of such interest in an NCCT.

French entities controlled by entities located outside France are taxable in France on profits transferred directly or indirectly to the entity located abroad through an increase or decrease in the purchase or sales prices or by any other means. If the rate interest paid by French entity is higher than interest applied by companies operating in the same business (i.e. they do not respect the arm’s length principle) it may generate some transfer pricing issues.

The acquisition of a public company through a tender offer (offre publique) is governed by the General Regulation (Règlement général) of the Financial Markets Authority (Autorité des marchés Financiers – AMF) and, to a lesser extent, by the French Monetary and Financial Code. Euronext rules also contain certain rules relating to tender offers.

The first step is generally the acquisition of a controlling stake through a block trade, in which case a mandatory tender offer has to be filed with the AMF (under the “simplified” procedure if the stake represents more than 50% of the share capital and voting rights, which means in particular that the offer period will last for 10 trading days only).

But the first step of the acquisition may simply be the filing of a voluntary tender offer, under the “normal” procedure, which means that the offer period will last for 25 trading days. In such a case, it is recommended for the bidder to obtain irrevocable undertakings to tender from major shareholders of the target.

The potential transaction has to be disclosed once a binding agreement (tender offer agreement or investment agreement) has been entered into or, even sooner, at the time exclusivity is granted to the bidder with the signing of a put option (which allows the start of the consultation process of the works council of the target). The announcement contains the price of the future tender offer, it being specified that the price of the acquisition of the controlling block constitutes a floor price.

When the block trade has actually been completed (or when all conditions precedent provided for in the binding agreement have been met, as the case may be), a sponsoring bank (banque présentatrice) files, on behalf of the bidder, the draft offer document with the AMF (this document is immediately made public). At this moment in time, the offer becomes irrevocable, which means that the bidder is committed to acquire the target shares, subject only to the conditions provided for in the tender offer (see Question 38 below).

Then the target has to file with the AMF a draft offer document in response once (i) the works council of the target has rendered its opinion (maximum period of one month) and (ii) the independent expert (if any) has issued its fairness opinion (minimum period of 20 trading days as from its appointment by the target). These opinions, together with the reasoned opinion of the target board of directors, are contained in the draft offer document in response (which is immediately made public).

Once the AMF has received the two draft offer documents, it takes in theory between 5 and 10 trading days to obtain the clearance of the offer from the AMF.

The offer can then open, once technical documents containing certain legal, financial and accounting information on the bidder and on the target are published, together with the final versions of the offer documents.

In a “normal” procedure, the duration of the offer period may be extended in case of counter-offers (which can be filed with the AMF until the fifth trading day preceding the end of the offer period). The filing of a counter-offer is also an event which allows the bidder to withdraw its offer. The other cases of withdrawal being (i) a regulatory clearance not being obtained, (ii) a minimum acceptance threshold not being met or (iii) major changes in the substance of the target due to measures taken by the target.

The results of the tender offer are made public by the AMF within 9 trading days from the end of the offer period and the settlement delivery is made 2 trading days later. Under the “normal” procedure, if the tender offer is successful (i.e. if the minimum acceptance threshold is met), the offer period is reopened for an additional 10 trading days’ period.

The legal mandatory cancellation threshold (seuil de caducité) under which any tender offer under the “normal” procedure becomes void is 50% of the share capital or voting rights. But bidders sometimes add a voluntary minimum acceptance threshold (seuil de renonciation), which in practice cannot be higher than 2/3 of the share capital or voting rights.

The bidder is entitled to implement a squeeze-out procedure (retrait obligatoire) to force the minority shareholders to sell their target shares if the target shares not tendered to the offer do not represent more than 10% of the share capital and voting rights of the target at the end of the offer.

The AMF generally refuses that the voluntary minimum acceptance threshold corresponds to the squeeze-out threshold.

Special resolutions, including amendments to the target’s by-laws, are adopted at a 2/3 majority of the votes expressed during shareholders meetings.

The standard route to delist a target is to file a tender offer followed by a squeeze-out after reaching the 90% threshold.

Target companies are prevented from offering any form of assistance, such as granting guarantees or security, for the acquisition of its own shares, in compliance with the financial assistance prohibition (see Question 15 above).

The role of the sponsoring bank is to guarantee the performance by the bidder of its obligations in connection with the tender offer (in particular its undertaking to acquire all the target shares tendered to the offer at the offer price). In order to be in a position to give such confirmation to the AMF in the filing letter (lettre de dépôt), the sponsoring bank requires the bidder (or its financing bank, as the case may be) to provide a cash collateral for the corresponding amount on the trading day preceding the filing of the offer.

In addition to the mandatory or voluntary minimum acceptance thresholds (see question 35), the bidder is also authorized to make the success of the tender offer conditional upon obtaining antitrust clearances. In the case of an exchange tender offer (i.e. when the consideration for the shares tendered is not cash but securities to be issued by the bidder), it is possible to make the tender offer conditional upon the approval of the issuance of the new securities by the bidder’s shareholders meeting.

In no event can the tender offer be conditional upon obtaining the necessary financing, which accordingly has to be put in place before the filing of the offer.