The European Lawyer

France Banking/Finance

4 Feb 2012

International Acquisition Finance - France

Editors: De Pardieu Brocas Maffei - Pierre Minor

1. MARKET
The world financial crisis has undoubtedly affected the financing markets and particularly acquisition and LBO financing. Even though the small and mid-cap markets remain active, the number of major acquisition transactions has significantly decreased over the past year due to a number of factors, mainly the lack of available financing. A number of features can indeed be identified as being consequences of the new financial environment: bank financing has become more expensive and the amount available has clearly been reduced leading to an increase of the mezzanine indebtedness and equity. Sellers’ credits are also often needed to complete the financing. Banks are no longer underwriting financing prior to syndication, which is now achieved prior to closing of the transaction and club deals are often arranged at the outset of the transaction. The documentation relating to the financing is no longer “debtor oriented” as the banks stand firm on the major covenants, financial ratios and events of default. Finally, the economic situation of many businesses has led to renegotiation of existing transactions in order to amend the financial ratios which are no longer being met.

2. DOCUMENTATION
The governing law of facilities agreement in relation to acquisition finance in France depends very much on the international or cross-border nature of the transaction. It also depends on the location of the investors and of the arranging banks. If English law applies, which is often the case, French law is retained not only for domestic transactions but also in situations where the lead arrangers are French banks. Facility agreements or syndicated loans usually follow the LMA standard documentation. Since the LMA published a French law facility agreement model, French law is more frequently chosen as the governing law of the financing. One should point out that whatever law is chosen to govern the credit agreement, French law would apply to security interests created on assets located in France. As far as the language is concerned, facility agreements are often drafted in English particularly in the context of cross-border transactions.

3. ACQUISITION/FINANCING STRUCTURES
The typical financing structure of an acquisition in the French market, depending on the size of the transaction, combines senior debt, junior debt, mezzanine debt and equity and as indicated above, a seller’s credit. The senior debt takes the form of a loan agreement often divided in several tranches. The first tranche bears less risk and is subject to priority repayment. The subsequent tranches are usually repaid after the first tranche over a longer period. The senior debt has a lower pricing than the subordinated debt in terms of interest margins and fees. It is secured by means of guarantees and security interests and ranks ahead of the other acquisition debts.

The junior debt takes the form of a bond issue, the repayment of which only takes place after repayment in full of the senior debt.

The mezzanine financing is subordinated to the repayment of the senior and junior debt. This type of financing is usually subscribed by investment funds in search of high remunerations. Such specific financing is granted through the issuance of hybrid securities such as “BSA” (warrants giving the right to subscribe to shares), “OBSA” (bonds with warrants giving the right to subscribe to shares) or “ORA” (bonds redeemable in shares). The mezzanine’s remuneration consist of interest and rights under the hybrid securities which, once exercised, enable the investors to become shareholders of the holding company and to obtain additional remuneration corresponding to the capital gain resulting from the sale of the holding company’s shares.

Finally, an important part of the financing structure will be the equity granted by the investors, which will naturally rank behind any other debt. If the investors were to provide a mix of equity and debt, such debt would be unsecured and rank behind the senior debt, the mezzanine debt and all the junior debt.
The ranking of such debts is usually organised through a contractual arrangement taking the form of an inter-creditor agreement. Alternatively a subordination could also be achieved through the granting of various debts to different structures within the group leading to a structural subordination.

Corporate benefit issues and financial assistance rules will apply (see respectively 8.2 and 10 below), when arranging the way the financing can be structured and security interest granted.

4. REGULATED TARGETS
Transactions in respect of regulated entities such as credit institutions and investment firms (“Regulated Entities”) are subject to specific rules and restrictions, particularly, transactions (i.e. acquisition, sale or increase in equity interest, either directly or indirectly) where a person or an entity would acquire or lose effective control on the management of the Regulated Entity or the third, fifth or tenth of voting rights in the Regulated Entity (the “Transactions”).

Some Transactions are subject to the Bank of France’s prior approval (see (i) below) where other Transactions are only subject to an obligation to inform such authority (see (ii) below).

 (i) Transactions where the Bank of France’s prior approval is required:
 Are subject to the Bank of France’s prior approval all Transactions other than Transactions occurring between entities which are placed under the effective control of a same entity, except if following the Transaction the Regulated Entity is held or controlled by one or several persons who are not located in the European Economic Area.

 (ii) Transactions where the Bank of France must be informed:
 In the event the Transaction occurs outside France, between foreign entities, the Bank of France’s prior approval of the relevant Transaction is not required. However, in this case, the Bank of France must be immediately notified with a description of the relevant Transaction and potential consequences on the Regulated Entity.

If no prior approval is required, it must however, be highlighted that the Bank of France would assess the consequences of the Transaction on the licence previously delivered to the targeted Regulated Entity. The Bank of France might consider that the contemplated Transaction does not ensure any longer the sound and prudent management of the Regulated Entity.

The Bank of France will also appraise the suitability and the financial soundness of the proposed acquirer. In this respect, the Bank of France, in line with provisions of Directive 2007/44/EC, will have regard notably to:

• the reputation of the proposed acquirer;
• the reputation and experience of any person who will direct the business of the Regulated Entity as a result of the proposed Transaction;
• the financial soundness of the proposed acquirer; and
• the ability to comply with prudential ratios and requirements.

Furthermore, it must be noted that the Bank of France has a very restrictive policy regarding Transactions where the acquirer of the Regulated Entity is not himself a Regulated Entity.

5. LISTED TARGETS
The acquisition of a company listed on a French regulated market may be implemented either through a voluntary tender offer or through the acquisition of a controlling block of shares followed by a mandatory tender offer.

A mandatory tender offer has to be filed when:

• a person, acting alone or in concert with other persons, becomes the owner of more than one-third of the shares or voting rights of a public company. This is also the case when the one-third threshold is indirectly exceeded as a consequence of the acquisition of control of a company which has as its main assets a participation in excess of one-third of the shares or voting rights in a public company; or
• a person, acting alone or in concert with other persons and which owns more than one-third and less than 50% of the shares or the voting rights of a public company, increases its participation by more than 2% in any given 12-month period.

The Autorité des Marchés Financiers (“AMF”) General Regulation includes a certain number of exceptions to the obligation to file a mandatory tender offer and also provides that the AMF may grant a waiver of the obligation in certain circumstances.

A voluntary tender offer may be an offer in cash or against shares (or other types of securities listed on a regulated market), or any combination thereof.

When a tender offer is filed with the AMF it becomes irrevocable, which means that the offer is not subject to any conditions except:

• the acquisition of a minimum percentage of the shares or voting rights;
• the delivery of the necessary administrative authorisations and clearances; and
• the obtaining of the approval of a meeting of the shareholders of the offeror if required by the laws applicable to the offeror or by its articles of association.

Furthermore, the offeror may withdraw its offer during the course of the offer, subject to the consent of the AMF, if the target takes certain measures which are immediately applicable and which modify its nature.

The offer must be filed with the “Autorité des Marchés Financiers” (AMF) by one or more investment bankers (prestataires de services d’investissement), which must guarantee the commitments of the offeror. The offeror must file its prospectus.

The AMF has 10 stock exchange days to determine whether the offer (including the information given to the market by the prospectus) conforms with all applicable laws and regulations. If the AMF concludes that the offer conforms with all applicable laws and regulations, it will issue and make public a declaration of conformity.

The target must file its own prospectus with the AMF within five stock exchange days of the AMF declaration of conformity. The offeror or the target may also file a fairness opinion issued by an independent expert. A fairness opinion is required in all instances where there is a risk of a conflict of interests or of unequal treatment of shareholders.

In case of a mandatory takeover, the offered price for the securities must be at least equal to the highest price paid for the same securities by the offeror, or by persons acting in concert with it over a period of 12 months before the filing of the bid. However the AMF may adjust (upwards or downwards) the price in circumstances and in accordance with criteria determined in the AMF General Regulation.
The AMF supervises the takeover procedures and the conduct of the offer, according to its General Regulations.

6. MEZZANINE DEBT/INTERCREDITOR ARRANGEMENTS
As indicated above, the mezzanine debt takes the form of hybrid securities giving the right to subscribe to shares or being redeemable into shares. If the lenders’ remuneration combines interest and equity, their rights are subordinated to the rights of the senior lenders. Contractual subordination under French law results from an agreement called “subordination agreement” or “inter-creditor agreement” pursuant to which the company as debtor and the junior creditors agree that their claims will rank behind the senior creditors. Such contractual subordination is often organized as a third party beneficiary right (stipulation pour autrui) as per article 1121 of the French civil code. The contractual arrangement organises the ranking of the claims of the senior and of the junior creditors in case of insolvency or enforcement of rights against the assets of the company. It also contains undertaking by the junior creditors not to require or receive payment of their claims prior to the senior creditors. In the event junior creditors benefit from second ranking security interest, the contractual arrangement contains provisions on the decisions to enforce such security interest and distribution of enforcement proceeds.

6.1 To what extent are high yield bonds used in these transactions?
Only large-scale LBOs resort to high yield bonds which are bonds offering a high remuneration and are redeemed after a long period (8 to 10 years). They are fully subordinated to the senior lenders and cannot be repaid prior to the senior debt. In order to offer sufficient liquidity to the investors, high yield bonds are usually issued for a minimum of 100 million euros. It should be noted that, unlike OBSA or OCEANE, such bonds do not give access to the share capital and shall not result in the allocation of any equity kicker. In order to avoid any competing claims between the senior creditors and the holders of such bonds, the subordination is sometimes not organised by contract but results from the structure of the financing, the high yield bonds being issued by an entity other than the holding company.

6.2 Are there any specific issues related to mezzanine and inter-creditor arrangements?
Whether such contractual arrangements can be enforced in all situations including bankruptcy remains questionable. Trustees and liquidators consider that the principle of equality of treatment among the creditors should prevail unless they benefit from a lien or a security interest. One could mention however a decision of the Paris court of appeal dated 12 February 1985 whereby the court ruled that a contractual arrangement organizing the ranking of claims should be recognized and applied by the relevant bodies in charge of the bankruptcy proceedings to the extent that they have been made aware in a clear and express manner of the existence of such arrangement. Notwithstanding such court decision, the matter is still considered moot.

7. EQUITY KICKERS
An equity kicker is a right granted to certain lenders to obtain participation in the share capital of the borrower and to have the benefit of an increase in value of the equity of the borrower. As indicated above, an equity kicker may be granted to mezzanine lenders or junior lenders to take into account the junior ranking of the debt. It allows a lower pricing of such debt. It is usually granted in the form of warrants or hybrid securities redeemable in shares or giving the right to subscribe to shares.

8. SECURITY
Under French law, Article L. 225-216 of the French Civil Code prohibits a company to use its assets or credit to finance the purchase of the company’s shares. This prohibition applies to the granting of either a loan or security interest by a company and if the loan and security interest are granted in view of the subscription or purchase of its own shares by a third party. The breach of the provisions of the article gives rise to criminal sanctions. Furthermore, it is generally admitted that in case of financial assistance, the security interests which could have been granted would become null and void.

8.1 What are the common forms of security structures and packages that can be granted over property/assets?
French security interest legislation over tangible and intangible assets has been substantially liberalized since the law reform enacted by Ordinance of March 23, 2006.

Two regimes apply in addition to special regimes contemplated under the French Monetary and Financial Code:

• pledges over tangible moveable property,
• pledges over intangible moveable property.

The above regimes are provided for in the French Civil Code. Since such law reform, dispossession of the pledgor is no longer a condition of validity of the pledge in respect of a right in rem. However, in the absence of dispossession registration with a central registry is now required.

Security interests can be granted to an agent for the account of the lenders pursuant to article 2328-1 of the French Civil Code as recently modified by the Law no 2008-776 dated 4 August 2008 (“loi de modernisation de l’économie”).

The most common form of security granted in the context of acquisition finance transactions is the pledge of shares issued by companies (i.e. shares issued by Sociétés Anonymes or Sociétés par Actions Simplifiées). This pledge takes the form of a pledge of securities account (nantissement de compte d’instruments financiers). This pledge is covered by the provisions of Article L. 431-4 of the French Monetary and Financial Code. The securities account pledge is only applicable to financial instruments which must be registered by book entry with a financial intermediary, a central depository or the issuing company.

The following requirements need to be met in order to ensure the perfection of the securities account pledge:

• The pledgor (who must be the person in whose name the securities account is opened) must execute a written pledge statement (déclaration de gage de compte d’instruments financiers), in the French language; containing a number of mandatory provisions.
• The pledge statement must be filed with the custodian.
• The pledge statement may be registered with the French tax authorities. Although registration is not a pre-requisite for perfection purposes, most French financial institutions proceed with the registration as a matter of practice as registration provides for date certainty. This is relevant in an insolvency situation particularly if a transaction is under threat of being voided.

Please note that the pledge is perfected on the date of execution of the pledge statement and notification to the custodian.

As far as partnership interest is concerned, there are no specific rules that apply to security interest over partnership interest (société en nom collectif, société en commandite, société à responsabilité limitée). Such pledge is governed by the rules applicable to the pledge over tangible moveable property and is governed by article 2333 et seq. Such pledge must be registered with the registrar (greffe) of the competent commercial Court (the registration of such a pledge remains valid for five years and then expires if not renewed prior to the end of such term).

The second commonly used form of security interest is the security interest over receivables. These security interests mainly consist in (i) pledges (nantissements) over receivables, (ii) “Dailly law” assignments of receivables, and (iii) delegation (délégation) of receivables.

 (i) A pledge over receivables (other than a “Dailly law” assignment) becomes valid and binding between the pledgor and the pledgee, and enforceable against third parties, upon execution of a pledge agreement (articles 2356 et seq. of the Civil Code). The enforceability of such a pledge against the debtor of the pledged receivables requires however that the debtor of the pledged receivables either (x) be notified of the pledge agreement or (y) execute the pledge agreement as a party thereto. In addition, the notification of the pledge to the debtor of the pledged receivables also entitles the secured creditor to require that the pledged receivables be directly paid in its hands (in satisfaction of the secured debt), unless otherwise provided for in the notification; similar provisions apply where the pledge agreement is executed by the debtor of the assigned claims.

 (ii) Under a “Dailly law” assignment (cession Dailly or cession de créances professionnelles à titre de garantie) governed by Articles L. 313-23 et seq.of the Monetary and Financial Code, the borrower assigns to the lender receivables that the borrower holds against one or several third parties (such as tenants having entered a lease agreement with the borrower). Such assignment may take the form of a transfer of title by way of security or of a security interest. A Dailly assignment is perfected upon execution by the borrower (which assigns the receivables) of a private deed (bordereau) without any notification to the debtors of the assigned liabilities being required for perfection purposes.

 It should be noted that Dailly assignments are only available where (i) the beneficiary of the assignment is a credit institution extending credit and licensed in France or otherwise licensed to carry out its activities in France through the European Passport and (ii) the Dailly assignment is made by the borrower to secure financing extended by that credit institution to the borrower.

 (iii) A delegation governed by Articles 1275 et seq. of the Civil Code is an assignment of a contractual obligation. It is an agreement whereby (a) an obligor and a creditor agree that a third party (or several third parties) shall be liable for paying the sums due by the obligor to the creditor and (b) that third party accepts to be personally liable vis-à-vis the creditor for the payment of those sums. The obligor usually holds debts against the third party accepting the delegation which in practice could be considered as a form of assignment of receivables. No specific steps or formalities other than execution of the agreement are required in order to perfect a delegation.

Other security interests in the form of cash pledge and cash account pledge are also used in acquisition financing transactions.

Under Article 2336 of the French Civil Code, a pledge is created by an instrument in writing designating the secured claims, the quantity of goods posted as security, together with their nature or kind. It is perfected either by dispossession or by publication in a special register. When a pledge is granted with dispossession over fungible goods such as cash, the pledged assets need to be segregated unless the agreement provides otherwise. When the agreement provides otherwise, then the secured creditor holds title to the pledged assets and is required to return the equivalent.

A cash account pledge can be created over a cash account in the name of the pledgor and is governed by Articles 2355 et seq. of the French Civil Code and by Articles 521-1 et seq. of the Commercial Code.
Contrary to the cash pledge, the secured creditor would, in this case, only be pledgee and be regarded as the holder of a lien. If such lien would be regarded as a pledge over a claim governed by Articles 2355 and 2366 of the Civil Code then notice of the debtor (i.e., the depositor lien) may be required unless such debtor is a party to the instrument. Otherwise, form requirements are identical to the cash pledge.

8.2 Are there any limitations in security (eg up-stream or cross-stream guarantees)?
Under French corporate law, a company has a corporate interest distinct from that of its shareholders or affiliates even in the case of a wholly owned subsidiary. If the contemplated transactions, such as the issue of guarantees, are detrimental to the guarantor’s corporate interest, it may be characterized as a misuse of credit or misappropriation of company assets (“abus de biens sociaux ou de crédits sociaux”). Pursuant to paragraph 3 of Article L. 242-6 of the French Commercial Code a misuse of credit or misappropriation of company assets occurs when “the chairman, the directors or general managers of a corporation [société anonyme], who in bad faith, used the assets or credit of the corporation in a way which they know to be contrary to the interest of such corporation, for personal gain or to give an advantage to another company or undertaking in which they have a direct or indirect interest.”

Under prevailing French case law, it appears that security interests or guarantees granted by a subsidiary in order to guarantee the obligations of its parent company (or another company within the same group) do not constitute a misuse of credit or misappropriation of company assets of such subsidiary to the extent that the following conditions are satisfied:

 (i) the guarantor and the company or companies whose undertakings are being guaranteed must belong to the same group of companies and such group must be a coherent economic entity with actual commercial and economic relations between the various companies in the group, as opposed to a mere conglomerate resulting only from the existence of common shareholdings or directors;

 (ii) the delivery of the guarantee must be in the common interest of the group (from an economic, labour or financial point of view) and in accordance with a policy defined for the group as a whole. It must not be in the sole interest of the dominant company (usually but not exclusively the parent company) or its majority shareholders, and it must result in overall benefits (financial, industrial or otherwise) for the group as a whole which are more significant than the aggregate benefits which each company in the group could have realized in isolation; and

 (iii) the issue of the guarantee or the granting of security interest by the subsidiary should not be contrary to the corporate interest of such subsidiary. The guarantor must indeed benefit from part of the underlying guaranteed obligations and the amount of the guarantee must not exceed the financial capacity of the guarantor; in other words, the sacrifice it incurred must not expose it to excessive risks and should not be without adequate consideration; in that respect, it is recommended to determine the maximum amount of the guarantee incurred by each guarantor taking into account its financial capacity; further consideration may need to be given to a possible remuneration of the guarantor on account of the guarantee provided.

When enforcing these principles the courts will always consider the circumstances of each particular transaction and in practice the courts deliver judgments on a case by case basis. In any case, the guarantor giving its upstream guarantee needs to have a tangible economic interest for doing that. Courts tend to have a very strict approach when applying these principles.

Finally, it should be noted that in the case where the guarantor issuing upstream or cross-stream guarantees is not itself a borrower under the guaranteed facility, finding an economic justification to the issue of such guarantees raises difficulties regarding the corporate interest of such guarantor.
Pursuant to article L. 242-6 3° of the Commercial Code, in case of a misuse of credit or misappropriation of company assets, the president, the general managers or the directors of a “société anonyme” may be subject to criminal sanctions. Lenders may also be potentially exposed to the risk of being held liable as accomplices under those violations.

In a decision handed down by the Supreme Court on June 17, 1997, the creditors having obtained upstream guarantees totally out of proportion with the guarantor’s income were held liable on the grounds of tort liability and ordered to pay damages to the guarantor.

In case of opening of bankruptcy proceedings (judicial protection, reorganisation and liquidation proceedings) against a given debtor, Article L.650-1 of the French Commercial Code as introduced by law n°2005-845 dated July 26, 2005 (Loi de Sauvegarde des Entreprises) reforming French bankruptcy legislation, provides that if a creditor is held liable by a French court for damages resulting from the credit facilities granted to such debtor, the security interests and/or the guarantees obtained in return of such credit facilities will be null and void.

Article L. 650-1 of the French Commercial Code further provides that the creditors could be held liable by a French court only in case of fraud, interference (immixion) of the creditor in the management of the debtor or in the situation where the security interest and/or the guarantees obtained in consideration of the credit facilities are disproportionate to the credit facilities. As this provision has only been recently introduced in the French legislation, there is no case law available to clarify both the scope and extent of such provision.

8.3 Are there any other issues that might cause difficulties regarding the granting of security?
A certain number of transactions/acts can be challenged by the judicial administrator, the creditors’ representative, the liquidator or the Public Prosecutor, if they took place during the suspect period. This period runs from the date on which a company is deemed to have become insolvent and can be backdated by the court by up to 18 months before the judgment opening Judicial Reorganization Proceedings or Judicial Liquidation Proceedings.

According to Article L. 632-1 of the French Code of Commerce, certain transactions are automatically void if performed during the suspect period. Such transactions include the granting of any mortgages or pledges over the company’s assets on account of pre-existing debts.

Furthermore, pursuant to Article L. 632-2 of the French Code of Commerce, any payment of debts that fell due, or any transaction entered into for a consideration during the hardening period is voidable, irrespective of the benefit received by the debtor if at the time of the payment or transaction, the other party knew, or was in a position to know of the debtor’s insolvency.

9. CORPORATE THIN CAPITALISATION RULES
French corporate law does not provide for thin capitalisation rules. However, the tax deductibility of interest paid on related party’s loan is subject to thin capitalization rules provided by French tax law. A related party is defined as a company that controls, directly or indirectly, more than 50% of the share capital of another one or exerts the decision-making power, or any companies that are under the control of the same third party. Such deduction is subject to two series of limitations relating (i) to the interest rate and (ii) to the amount of the debt.

(i) Maximum rate of interest: The maximum rate of deductible interest is equal to the annual average of effective rates applied by credit institutions to variable rates loans granted to companies for an initial term of more than two years (such reference rate is regularly published), or, the rate that the borrower could have obtained from independent financial institutions in a similar situation, i.e. the “market rate”.

Part of interest exceeding the highest limit described above must be added back to the taxable profits of the borrower.

This limitation is also applicable to interest paid on loans granted by a direct shareholder who is not considered as a related party. In this case, the maximum rate of interest cannot be the “market rate”.

(ii) Under the limitation related to the amount of the debt, interest charges are entirely deductible with height of highest of the following limits:

• Debt equity ratio limit
• Deductible interest cap under this limit is equal to the amount of interest paid by the borrower to related parties multiplied by the debt/equity ratio of 1,5/1. The amount of equity taken into account is determined by the borrower whether at the beginning or the end of the tax year. The amount of debt is the average of sums placed at the disposal of the borrower during the tax year by related parties.
• Cap equal to 25% of operating profits (Profits taken into account are operating profits before tax, interest paid to related parties and depreciation allowances).
• Interest received from related parties: Interest charges due by the borrower to related parties are entirely deductible if their amount does not exceed the amount received by those entities.

If the part of interest exceeding the highest of the aforesaid limits is lower than 150.000 Euros, the whole interest is deductible. If not, disallowed interest must be added back to the borrower tax profits.
Nevertheless, disallowed interest can be carried forward within certain limits. Indeed, the amount of interest whose deduction is carried forward is subject to a reduction of 5% each year, applicable to the part of interest which has not be deducted during the tax year following the one during which they have been added back.

Also, exceeding interest can be deducted from profits of the tax year following the tax year during which they have been added back only if the cap of 25% of operating profits is respected during this tax year.
Finally, limitations related to the amount of the debt do not apply if the borrower proves that the debt/equity ratio of the group to which it belongs is higher than or equal to its own debt/equity ratio (the debt/equity ratio of the group computed taking into account debts contracted with third parties excluding intra-group debts).

For the application of this exclusion, the group in question must consist of French or foreign companies which are placed under the exclusive control of a company or other legal entity.

The exclusive control may take several forms. It can be a legal control, i.e. the direct or indirect holding of the majority of the voting rights during the annual general meeting. It can also be a contractual control resulting from contracts or by-laws and requiring that a company owns a participation in the controlled one; or a control resulting from facts; a control is deemed to exist when a company has owned during two successive tax years more than 40% of the voting rights in another company and at the same time, none of the other shareholders owns directly or indirectly more than this part.

10. FINANCIAL ASSISTANCE
As previously mentioned, article L. 225-216 of the French Commercial Code prohibits the company to use its assets or credit in order to finance the purchase of the company’s own shares.

According to most legal scholars, Article L. 225-216 of the French commercial code should be interpreted restrictively as its violation gives rise to criminal sanctions. However, this matter is not free from uncertainty as a minority of scholars adopt a broad interpretation of Article L. 225-216 of the French Commercial Code. They consider that the prohibition of financial assistance may still apply for example to the indirect acquisition of shares of a company (a subsidiary of the target) acting as guarantor under the acquisition financing.

The prohibition laid down in article L. 225-216 of the French commercial code only applies to the granting of security by a company to secure the acquisition of its own shares. Therefore, it would not apply to the granting of security by a company to secure the repayment of credit facilities put in place for a different purpose. Article L. 225-216 also contains two exceptions relating to (i) transactions entered into by credit institutions in the ordinary course of business and (ii) transactions implemented in view of the purchase of a company’s shares by its employees.

There are arguments to support the view that the prohibition laid down in Article L. 225-216 of the French Commercial Code does not prevent the granting of security interests after (as opposed to before or concurrently with) the acquisition of the company’s shares, particularly within the framework of refinancing an acquisition debt.

However, the conditions of such refinancing should be assessed with care as it may appear as a mechanism used to circumvent financial assistance regulations. The risk would be greater if the refinancing follows soon after the acquisition which would tend to demonstrate that such refinancing was actually planned from the outset as part of the acquisition plan. A similar prudent approach should be adopted in respect of a merger between the holding company and the target occurring soon after the acquisition. Such merger may appear fraudulent if its purpose is to facilitate the use of the target’s assets in order to repay or to secure the acquisition debt.

The breach of the provisions of Article L. 225-216 of the French Commercial Code gives rise to criminal sanctions. Furthermore, it is generally admitted that in case of financial assistance, the security interests granted by the subsidiary are null and void.

11. DIRECTORS' LIABIITY
 (i) Civil liability
 The civil liability of the directors may be sought either by the company or the third parties for any damages incurred, provided that a causation link exists between such damages and the directors’ negligence. The directors’ negligence may be divided in three categories:

• violation of the legislative or regulatory rules applicable to the company;
• violations of the by-laws (statuts); and
• mismanagement (faute de gestion): the directors are liable for all their actions contrary to the company’s corporate interests.

Directors are also exposed to tort liability even on the basis of non voluntary actions, minor or serious misconduct. For instance, their liability may arise for lack of supervision of the managers (dirigeants sociaux).

Directors may be held liable by third parties if they commit a tort which is separate from and not within their required duties as directors (faute séparable de leurs fonctions). The directors in question must have been responsible for that tort.

When the tort is assigned to the director that director’s liability becomes personal. Otherwise, the directors are jointly and severally liable when a fault is common, i.e. when the fault was committed by the board of directors as a whole.

The directors’ liability may be sought either by way of personal action carried out by shareholders for any damages incurred personally or by way of a corporate action (action sociale). A corporate action set up to compensate damages incurred by the company, may be brought by the managers (dirigeants sociaux) or by the shareholders.

 (ii) Criminal liability
 The directors may also incur a special criminal liability on the basis of management and administration of the company. The main criminal offences set up by law are misuse of corporate assets (abus de biens sociaux), abuse of power or vote and distribution of fictitious dividends.

11.1 Are there any other concerns that exist in an acquisition finance context?
Institutions which enter into financial transactions with investors who are French residents need to be licensed as a credit institution or duly authorised under the so-called “European Passport”.

The relevant statute, Article L.511-5 of the French Monetary and Financial Code, does not refer to France or French residents. However, the position of Banque de France is to interpret those provisions broadly and should apply most likely whenever loans are made to a French resident.
Pursuant to Article L.311-1 of the French Monetary and Financial Code, banking transactions include (i) the receipt of funds from the public, (ii) credit operations, and (iii) making available to clients and managing means of payments.

Pursuant to Article L. 313-1 of the French Monetary and Financial Code, a credit operation shall be understood to mean any act by which a person, for valuable consideration, places or promises to place funds at the disposal of another person or assumes a commitment in favor of the latter in the form of guarantees. Leasing and, in general, any rental operation with a purchase option shall be treated as a credit operation.

12. LENDERS' LIABILITY
In the event a bankruptcy proceeding is opened against a debtor, lenders may be held liable under certain circumstances for all or part of the debtors’ liabilities.

Lender liability risk has been significantly reduced by the 2005 reform of French bankruptcy law, which came into force on January 1, 2006. The new statute creates an exemption from liability for all types of lender (not only credit institutions), except in the following circumstances:

• Fraud (L. 650-1 of the French Commercial Code).
• Improper interference with the company’s management.
• Where the lender has obtained a security interest that is disproportionate to the amount of the facility.

Moreover, in the framework of bankruptcy proceedings, lenders may face criminal liability actions, as “accomplices” (for having provided the means necessary to carry out the offence), if it is evidenced that managers took decisions or actions which are detrimental to the company’s interests, including avoiding or delaying bankruptcy proceedings by obtaining credit at deemed “ruinous” terms and conditions (e.g. significantly higher than commercial rates), embezzling or concealing all or part of the company’s assets or fraudulently increasing the company’s liabilities.

13. LEGAL OPINION
It is standard practice to provide legal opinions both on capacity and on the enforceability of French law governed agreements particularly the security package. Enforceability opinion always contains qualifications with respect to certain mandatory provisions of the law and with respect to enforceability in case of insolvency of a contracting party. No opinion is given on the financial assistance issue which is usually dealt with in the structure memorandum. No opinion is usually given on the corporate interest of the borrower or a guarantor.

14. ENFORCEMENT OF SECURITY
As a result of the 2006 reform, French law has been substantially liberalized. The new regime offers more flexibility as creditors have now a choice between keeping the collateral or disposing of it.

Pledges of securities accounts (gage de compte d’instruments financiers)
In respect of pledges over securities accounts (gage de compte d’instruments financiers), disposal of securities credited to the pledged securities account may be enforced for “Securities” traded on a “regulated market” or for “shares or unit in a collective investment undertaking” by (i) the sale of the securities on the relevant market or (ii) the transfer of property of the securities to the secured creditor.
Otherwise, a pledge is enforced for unlisted securities (other than shares or units of collective investment scheme) through sale by public auction or judicial allocation to the creditor. If specified in the pledge agreement, the pledgor can also acquire the title of the property of the pledged assets (“pacte commissoire”). In this case, the valuation of the shares will be made by an expert appointed by the parties themselves or by the court. Cash in the pledged account is transferred to the secured creditor.

In order to enforce a pledge, the creditors should, in respect of securities credited to the securities account which are traded on a regulated market or which represent shares in collective investment undertakings deliver a notice (mise en demeure) to the main debtor and to the pledgor upon occurrence of a default. At the end of the 8 day-period (or the extent of the period agreed upon) after giving such notice, the creditors may enforce the pledge either by selling such securities and applying the sale proceeds towards discharge of the secured obligations or transfer of title to the creditors.

Pledges of shares (other than shares credited to a securities account i.e. partnership interest)
The creditors can enforce the pledge either by the sale of the pledged shares or by requesting the judicial allocation of such pledged shares. They can also, if agreed between the parties either when the pledge is granted or at a later date, decide that title to the pledged shares will be transferred to them. In this case, the valuation of the shares will be made by an expert appointed by the parties themselves or by the court

Security interest over claims or receivables
With regard to a pledge over claims or receivables, once notice of the pledge is made to the debtor of the pledged claims or receivables, payment of such claims or receivables may only be discharged if made to the pledgee. Amounts received by the pledgee in respect of such claims or receivables shall be applied towards discharge of the secured debt after it becomes due. Otherwise, the beneficiary may keep the proceeds as security, in an account held with an authorized institution. In case of non-payment, eight days after a notice to the debtor of the receivables the creditor may allocate the funds towards repayment of its claim up to the unpaid secured amount (Article 2364 of the French Code civil). In the event of a default by the borrower under a credit agreement, the beneficiary of the pledge may also be allocated ownership of the pledged unmatured receivables and all the rights attached thereto (Article 2365 of the French Code civil).

It should be noted that specific rules apply (such as the filing of a proof of claim, stay of proceedings, priority of payment, etc.) during insolvency proceedings including safeguard, reorganisation and liquidation proceedings. In particular, a distinction has to be made between security interest which confer a right of retention and those which do not.