Typical due diligence issues

In France, pre-acquisition due diligence is standard. While the issues that a foreign investor should be aware of will be determined by the particularities of the transaction and target company or business, some key issues in due diligence of a French target include the following:

• Employment: French employment law is complex with a comprehensive Labor Code (Code du Travail), with little scope for individual negotiation.
• Compliance: Compliance matters have become key issues since the entry into force of (i) the Sapin II Law relating to transparency and anti-corruption, which requires large companies and groups (with at least 500 employees and an annual turnover in excess of EUR 100 million) to implement compliance programs, and (ii) the Duty of Vigilance Law which requires French companies with more than 5,000 employees in France or more than 10,000 employees in France and abroad, to undertake reasonable measures to prevent human rights violations, severe physical or environmental damage, and health risks resulting from the activities of the company, the companies it controls directly or indirectly and the subcontractors and suppliers with which the company has established business relationships.
• Data Protection: Data protection issues are becoming more important in light of the EU General Data Protection Regulation, which extends personal data protection and increases sanctions for non-compliance.

Pricing and payment

Independent appraisals are not required to support the valuation of the target in a share or asset deal. Buyers typically rely on their internal valuations.

Purchase price adjustments are common. The choice of adjustment generally depends on the calculation method of the purchase price and type of business operated by the target. It is common for the purchase price to be stated on a "cash-free debt-free" basis, with a purchase price adjustment based on target working capital for the purpose of confirming the value of the target company at closing. Although less common, the purchase price may be stated to be "cash-free debt-free" on the basis of a locked box mechanism based on locked box accounts prepared as close as possible to the signing date. A locked box mechanism is typically used in private equity transactions where the selling party is a private equity fund. Earn-outs are sometimes seen in smaller transactions where the management by the sellers is key to the target business for a transition period after closing, or in deals involving start-up or bio-tech businesses, the valuation of which is uncertain at the time of the transaction.

From a legal perspective, there are generally no restrictions regarding the payment of the purchase price in or out of France, as there are few controls over foreign exchange transactions. Most commonly, the purchase price is paid in Euro. However, payment in other currencies or a consideration by way of shares is also possible (the euro equivalent of the purchase price amount, if not paid in Euro, needs nevertheless to be determined (or determinable) for tax registration purposes). If the purchase price does not reflect the fair market value, this may have tax consequences. French transactions also commonly provide for an escrow arrangement (and more rarely for the holdback) for part of the purchase price to secure the payment of any future purchase price adjustment or indemnities given for breach of the sellers' representations and warranties or specific indemnities.

Signing/closing

The Civil Code provides for an express obligation on parties negotiating a transaction, including a sale of shares, assets or business, to negotiate in good faith. This duty applies both in pre-contractual negotiations and during performance of the contract. The duty includes the obligation to inform the buyer of relevant important facts that the buyer could not discover on its own. Also, where negotiations are at an advanced stage giving rise to a reasonable expectation that the transaction will proceed, the unilateral termination of the negotiations by a party may give rise to damages if such termination is characterized as unfair/wrongful.

Whether or not signing and closing is simultaneous will depend on the conditions and complexity of each transaction, and in particular if any third-party prior approval (e.g., antitrust or foreign investment) is required. Both mechanisms are common.

Foreign investment restrictions

France has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed.

The foreign investment review (FIR) regime is limited to certain sectors deemed to be sensitive. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

France has a mandatory and suspensory merger control regime, which means that transactions that meet the relevant criteria need to be notified to the competition authority and cleared before they can be completed.

It is also necessary to consider EU merger control rules. Mergers involving companies active in several member states and reaching certain turnover thresholds are examined at European level by the European Commission. This allows companies trading in different EU member states to obtain clearance for their mergers in one go. For further information, see the more detailed section on "Antitrust/merger control".

EU Foreign Subsidies Regulation

As of 12 October 2023, the EU Foreign Subsidies Regulation (FSR) requires qualifying transactions, and bids in response to certain large public tenders in the EU, to be notified for upfront clearance by the European Commission where the companies involved have benefited from foreign financial contributions (a broad concept) that exceed certain (low) thresholds. Acquisitions of a target with annual revenues in the EU of at least EUR 500 million will trigger FSR deal notifications. Acquisitions of smaller targets will not, regardless of deal value. Outright mergers and large joint ventures will trigger a notification requirement if the EUR 500 million EU-wide revenue threshold is met by one of the merging parties or the joint venture.

Other regulatory or government approvals

Other regulatory or governmental approvals must be evaluated on a case-by-case basis, depending notably on the relevant industry and the deal structure (e.g., in case of transfer of operational permits).

Obligation to consult the social and economic committee (comité social et économique) (CSE)

Generally, where a business is acquired by a share or asset sale, the management of the target company must inform and/or consult the target's employees and if applicable, the CSE, about the proposed sale.

Companies with more than 11 employees must have a CSE. For companies employing between 11 and 49 employees, the CSE has limited power and is not consulted on share or asset sale. For companies employing more than 50 employees, the powers of the CSE are extended and the CSE must in summary be consulted on a significant share or asset sale.

The Labor Code requires the target's management to inform the CSE about the proposed sale and consult it to obtain its opinion. This involves the target's management giving the CSE an information note on the proposed sale and consequences for employees, in particular. The consultation process must take place between one and three months before any binding agreement or letter of intent is signed, even at the parent company level, if that agreement involves France and French management is aware of it. This consultation requirement can affect the parties' ability to keep the acquisition confidential.

Although the CSE cannot prevent the proposed sale (unless the purpose of the transaction is to deny employees of their rights), the CSE can apply for a court order to have the transaction suspended until the obligations to inform and consult have been complied with. A CSE may also appoint an expert to evaluate the information provided by the target, which can impact the transaction timetable. In theory the CSE bears the expert's costs, but in practice the CSE may insist that the target's management bears these costs.

Failure to consult the CSE may result in the target and the head of the target being liable for fines.

In addition, the health, safety and working conditions commission (CSSCT) of the CSE should be consulted on major changes to health and safety, and working conditions in the company, which may include the sale of a business.

Hamon law obligation to inform employees

French law ("Loi Hamon") obliges smaller and mid-size employers to inform employees directly before a proposed sale of: (i) at least 50% of the shares; or (ii) the business (going concern) of their employer, with a view to allow them to make an offer to buy the shares or business. No priority or preemption right is granted to employees, and the seller has no obligation to consider an unrealistic offer that is made by an employee and the refusal to accept an offer by an employee need not be justified.

This obligation applies even when no consultation of the CSE is required. Companies that have no CSE consultation requirement (i.e., companies with less than 50 employees) must inform all employees of the proposed sale at least two months before any binding agreement related to the sale is signed. Also, the sale cannot take place before the end of this two-month period unless all employees have informed the company that they waive their right to make an offer.

Companies with a CSE and between 50 and 250 employees, and that fall into the category of small or medium-sized companies (i.e., companies with a turnover below EUR 50 million or a balance sheet total below EUR 43 million) must inform employees of the proposed sale at the latest when the company's CSE is informed and consulted on the proposed sale. The sale can only take place once the CSE consultation process has been completed. Failure to comply with this obligation to inform may trigger the payment of a fine of to 2% of the purchase price of the proposed sale.

The seller only needs to disclose to its employees its intention to sell its shares, or to sell the business as a going concern, as applicable. The seller does not need to disclose the name of the proposed buyer and has no duty to provide information or documents relating to the company, its strategy or its financial statements to employees, even if an employee has indicated its interest in buying the shares, or the business (as applicable). Employees are subject to an obligation of discretion under Loi Hamon.

Transfer taxes/value-added tax (VAT)

A share acquisition is exempt from French VAT and subject to transfer taxes as follows:

• Transfers of shares in a Societé Anonyme (SA) or Société Par Actions Simplifieé (SAS) are subject to 0.1% transfer tax.
• Transfers of shares in a Société à Responsabilité Limitée (SARL) are subject to 3% transfer tax with an allowance on the taxable basis equal to EUR 23,000 multiplied by the percentage of shares transferred.
• Transfers of shares in French real estate-oriented companies are subject to 5% transfer tax. A real estate-oriented company is a French or non-French non-listed company whose assets consist of more than 50% of real estate or assimilated assets in France.

The acquisition of a business (asset deal) may be subject to VAT (at 20%) and to transfer taxes under the following conditions:

• Transfers of real estate assets are subject to 5.81% or 5.09% transfer tax depending on location (to be increased by notary fees and other related expenses) and may be subject to VAT under certain conditions.
• Transfers of ongoing business/clientele/activity/trademarks and patents registered in France are subject to transfer tax at an escalating rate of 0% up to EUR 23,000 of taxable basis, 3% from EUR 23,001 to EUR 200,000 and 5% above EUR 200,000 and are generally exempted from VAT under specific relief.
• Transfers of isolated assets may not be subject to transfer tax in certain circumstances but should generally be subject to VAT.

Transfer taxes are assessed on the purchase price or the fair market value if higher. They are normally borne by the buyer but the parties may agree otherwise. However, the seller and the buyer are both severally and jointly liable for their payment to the French Treasury.

Income tax/withholding taxes

Participation-exemption regimes are available in France on dividends (95% exemption, subject to holding at least 5% in the distributing company for at least two years, or 99% for distributions within a tax group) and on capital gains on sales of substantial shareholdings/controlling interests (88% exemption, subject to a two-year holding requirement).

EU laws and double taxation treaties signed by France provide for reduced rates or exemptions on withholding taxes applicable to French-sourced income.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.