Anticipate and manage the consequences of mergers and acquisitions transactions on the performance of public contracts
In a recent case relating to the collapse of the Morandi bridge in Genoa in 2018, the Court of Justice of the European Union (CJEU)1 ruled that a modification having an impact on the shareholding of the operator of a public procurement contract – in this case, a concession contract – must not be regarded as a substantial modification of the contract itself; therefore, a new tender procedure does not have to be organised.
This recent case law provides an occasion to review the consequences that mergers and acquisitions transactions are likely to have on public contracts subject to French law.
Under French law, a large number of contracts are classified as public contracts, either by law2 or based on the criteria defined by case law3.
Public contracts may be crucial for the business of an operator. For example, the business of an infrastructure operator (airport, highway, stadium, etc.) is often based on major public contracts – generally a global contract such as a concession, a public private partnership contract (PPP) or public domain occupation contract. As another example, some suppliers of medical devices enter into a very large number of public contracts with public entities such as hospitals of health care centres.
Such contracts, which are often crucial for the performance of a public service mission or of a strategic mission of general interest, are by way of principle awarded through a tender procedure.
When the public contract operator is subject to a merger and acquisition transaction (for instance in case a branch of activity involving the public contract is sold to another entity, or in case of a transfer of all or part of the shareholding of the public contract operator to another entity), the question arises as to whether such transaction may lead to the termination and retendering of the public contract.
In order to anticipate the consequences that mergers and acquisitions transactions are likely to have on the performance of public contracts and thus reduce the risks of jeopardising these contracts, it is essential to be aware of the main principles governing the impact of these transactions on the contracts and the precautions to be taken.
To this end, it is necessary to determine, from the outset, whether the transaction is likely to result in the transfer of public contracts to another legal entity (1.), whether it is likely to result in the termination and launch of a new tender procedure for some of the contracts (2.) and/or whether it is likely to trigger prior formalities to be followed with the contracting authorities (3.).
Finally, a clear methodology must be set up in order to carefully manage the consequences of such operations (4.).
1. Determine whether the transaction is likely to result in the transfer of the public contract to another legal entity
Not all transactions result in the transfer of public contracts to another legal entity.
The French administrative supreme court (le “Conseil d’Etat”) ruled that the transfer of a public contract constitutes ” the pure and simple takeover, by the transferee who is the new holder, of all the rights and obligations resulting from the previous contract“4.
It concludes that transactions which do not result in the transfer of the contract to another legal entity, do not constitute a transfer of contract. For example, the transformation of the public contract operator into another form of legal entity, or a modification of the ownership of the shares of the company, even if very significant5, do not per se result in the transfer of the contracts.
As stated in the introduction, the CJEU recently adopted a similar approach, ruling that a change in the ownership structure of the company holding the contract does not constitute a modification of the contract.
However, the question arises as to whether the transfer of 100% of the shares of a special purpose vehicle (SPV) holding a single public contract to a new operator must be treated as a transfer of the contract itself, on the ground that the SPV’s shares are initially held by the entities which were selected through a tender process.
To our knowledge, there is no case law that specifically addresses this question. Following the reasoning of the Conseil d’Etat referred to above, the sale of 100% of the shares should not constitute a transfer of contract as long as the legal entity holding the contract remains the same and that a change in the shareholding does not involve substantial modifications to the performance of the public contract.
However, we believe that the reasoning could be different if the transfer of 100% of the shares is accompanied by other changes, such as modifications or transfer of sub-contracts to which the public contract operator is a party.
Determining whether the transaction involves the transfer of contracts is key since the rules and formalities to be completed depend on this question.
2. Assess whether the transaction is likely to lead to a termination and retendering of the public contract
As we mentioned above, public contracts are usually awarded through a tender procedure.
This is generally true for public procurement and concession contracts, as well as for specific contracts related to the use of public domain, especially when the occupation allows the holder to use the public domain for an economic purpose6.
The Conseil d’Etat ruled that transactions that do not entail the transfer of contracts to a new entity can, save in certain circumstances, be carried out without the need to launch a new tender procedure7.
For transactions involving the transfer of contracts to a new entity, article R. 2194-6 of the French Public Procurement Code states that the transfer is not treated as a substantial modification which triggers the need to terminate the contract and the launch of a new tender procedure if this transfer takes place:
- As a result of a clause of the contract;
- or as part of a “restructuring” operation of the initial public contract operator.
However, in both cases, it is necessary that:
- the new contractor fulfils the conditions set by the contracting authority to participate in the initial tender procedure (particularly in terms of technical, professional and financial capabilities).
- the transaction is not being carried out with the aim of bypassing the obligations set out in the French Public Procurement Code.
If the contract transfer does not comply with the abovementioned conditions, a third party could go to court and claim for the cancellation of the contract, if necessary, by means of an expedited procedure8. In this case, the criminal risk should also be considered9.
It should be noted that the concept of “restructuring” is not precisely defined under French law. Directive 2014/24/EU of 26 February 2014 specifies that “takeover, merger, acquisition or insolvency” operations10 are restructuring operations.
Although this should not be considered as a comprehensive list, particular care must be taken when assessing the effects of the planned transaction in order to ensure that it qualifies as a “restructuring” transaction within the meaning of the abovementioned provisions. For example, the Conseil d’Etat ruled that the substitution of a member of a consortium holding a public contract by another operator does not constitute a restructuring operation11.
3. Identify whether the operation requires to carry out prior formalities with the contracting authorities
When the operation does not entail the transfer of the contract to a new entity, the public authority does not as a principle have to authorize the operation.
For instance, a transfer of shares of the public contract operator is not subject to a prior authorisation to be granted by the public authority save if a contract clause contains an obligation for the public contract operator to obtain such prior authorisation or to at least provide a prior information to the public authority.
Nevertheless, if the contract is performed by an SPV, the contract often provides that the public authority must grant its prior written consent in the event of a modification in the shareholding of the project company; such clause also often contains an obligation to maintain the initial shareholding of the SPV for a certain period of time.
It should also be pointed out that, even in cases where a prior authorization is not required, the contracting authority is entitled to terminate the contract for reasons of general public interest (“motif d’intérêt general”) if the share transfer operation has an adverse effect on the performance of the contract, and/or in cases where, for instance, the transaction triggers a risk of conflict of interest for the contracting authority or for the operator.
If the transaction results in the transfer of the contract to a new entity, the prior authorisation of the contracting authority is required, even if the contract does not provide this obligation12, in order for the contracting authority to check that the contract transfer complies with the abovementioned principles of the French Public Procurement Code.
While there may be situations in which the authorization of the contracting authority can be established a posteriori, through subsequent acts which allows to consider that the contracting authority’s consent has been tacitly granted13, it is much safer to ensure that a prior written consent has been obtained. Indeed, in case it is considered that the contract was transfer without the contracting authority’s consent, the latter is entitled to terminate the contract due to a breach of the public contract operator.
However, the contracting authority may not arbitrarily withhold its consent and is only permitted to refuse the transfer if it has a legitimate reason to do so, which may be based on the technical, professional and financial capabilities of the transferee14. If the refusal is deemed unjustified, it is possible for the public contract operator to request the cancellation of the contracting authority’s decision, or to claim for damages.
Finally, should the contracting authority choose to remain silent and avoid replying to the request for a prior authorisation to transfer the contract, this could potentially result in complications. While there is currently no established case law on this matter, it could be considered that if the contracting authority did not reply within a period of two months, this could be interpreted as a refusal.
4. Practical tips for a clear methodology
Firstly, the consequences of a transaction on the performance of public contracts must be anticipated and managed well in advance, in order to avoid the operation being postponed in time while awaiting any feedback from the contracting authorities.
Secondly, it is necessary to carry out an audit of the concerned public contracts from the outset, in order to assess the potential impact of the operation on such contracts.
It may be appropriate to classify contracts into different categories in order to determine (i) the contracts for which a prior consent must be obtained, (ii) the contracts for which a simple prior information may be provided and, as the case may be, (iii) the contracts for which it is not necessary to implement any steps and precautions.
Thirdly, in case it appears necessary to write to the contracting authority, the necessary steps must be implemented in due course.
Fourthly, in order to maximise the chances that the contracting authority does not put the operation in jeopardy, requests for prior authorisation should be thoroughly composed of all available documents justifying that the new contract holder has all the technical and financial guarantees to ensure the due performance of the contract. This also avoids the risk that the contracting authority delays the process by requesting additional information or documents.
These requests usually contain the following type of information:
- explanations on the transaction and its timetable;
- documents proving that the new contract holder (or shareholder as the case may be) has all the capabilities required to perform the contract;
- explanations on the fact that the transaction will not entail any substantial change to the conditions of performance of the contract;
- where necessary, additional explanations to take account the specific constraints of certain public contracts.
Finally, it is necessary to consider all the other consequences of the transaction, particularly in terms of liability, in order to avoid that the former public contract holder be held liable for events occurring after the transaction.
Footnote(s):
1 CJEU 7 November 2024, c-683/22, Adusbef (p. 68 and 69)
2 These include contracts for the occupation of the public domain (pursuant to Article L. 2331-1 of the French General Code of Public Property) and public procurement contracts, concessions and public partnership contracts (PPP) when the contracting authority is a legal entity governed by public law (Article L. 6 of the French Public Procurement Code)
3 A contract is a public (administrative) contract if it is concluded with at least one public entity (TC, 21 March 1983, Union des assurances de Paris, n° 02256) and if it contains certain clauses which imply that it falls under the exorbitant regime of administrative contracts (TC 13 October 2014, Société Axa France lard, n°C3963)
4 Conseil d’Etat, 8 June 2000, no. 36480
5 In the above-mentioned CJEU ruling of 7 November 2024, the sale involved 88% of the shares
6 Article L. 2122-1-1 of the French General Code of Public Property
7 Conseil d’Etat, 8 June 2000, no. 36480
8 Articles L. 551-13 et seq. of the French Code of Administrative Justice
9 In particular, the offence of favouritism (“délit de favoritisme”) (Article 432-14 of the French Penal Code).
10 Article 72 d ii of Directive no. 2014/24/EU of 26 February 2014
11 Conseil d’Etat, 16 May 2022, no. 459408
12 Conseil d’Etat, 6 May 1985, Association Eurolat et Crédit Foncier de France, no. 41589
13 Conseil d’Etat, 28 May 2001, no. 203674: cases where the contracting authority sends service orders to the new co-contractor
14 Conseil d’Etat, 8 June 2000, no. 36480