The acquisition of a company is effected through a purchase of its share capital from the company’s existing shareholders. It therefore entails not only the purchase of the company’s assets, but also of its liabilities. The acquisition of a company should be distinguished from the acquisition of a company’s goodwill (“fonds de commerce”), which consists in the purchase of the company’s assets from the company itself.
The standard process applied for the acquisition of a company in France is as follows:
1. Preliminary non-binding offer letter
The purchaser should first consider addressing a preliminary offer letter to the sellers.
The main purpose of such offer letter is generally to:
- specify the assumptions on the basis of which the valuation of the company was determined (amount of indebtedness or cash, amount of turnover, etc.),
- describe the main terms and conditions pursuant to which the purchaser would be willing to acquire the company, and
- provide for a timeframe of the forthcoming acquisition process in relation to due diligence, drafting and negotation of the sale and purchase documentation, etc.
A potential purchaser would also include in its preliminary offer letter, and endeavour to negotiate, an exclusivity clause, whereby the sellers would commit not to engage or pursue negotiations with other purchasers during a specified period of time. The purpose of such exclusivity is to enable the purchaser to carry out the due diligence and negotiate with the sellers without incurring the risk that they may withdraw from the process for a competing offer.
In the event however that there are several bidders for the company, the sellers may be unwilling to grant exclusivity unless the offer is binding and fully-financed.
As the due diligence of the company may reveal unexpected risks or liabilities which may have an impact on the purchase price or the purchaser’s willingness to proceed with the acquisition, the offer letter should be non-binding. The purchaser should therefore make sure that it contains appropriate provisions which enable it to walk out of the acquisition process.
2. Due diligence
A due diligence should be carried out to assess the risks associated with the purchase of the company. Such risks may consist in:
- tax liabilities,
- risk of reassessment of employee social contributions or pensions,
- risks of termination for change of control of material commercial contracts, financing agreements or permits and authorizations,
- expiring material commercial contracts,
- off-balance sheet commitments,
- material third party claims,
- absence of a valid right of ownership over certain material assets,
- etc.
As regards due diligence potential issues, it should be noted for example that, for tax reasons, French commercial companies often do not own the real estate they use. Such real estate is usually held by sister companies of a specific type (“sociétés civiles immobilières”), whose sole corporate purpose is to own and lease the property. The purchaser and its advisors should therefore ensure that all assets which should fall within the scope of the acquisition are indeed owned by the company whose shares are acquired or are otherwise included in the sale and purchase agreement.
The due diligence is carried out on the basis of documents provided by, and interviews with, the sellers, encompassing all aspects of the company’s business for the last three to four years (which is the period of limitation applicable to most corporate and tax law issues).
3. Binding offer letter
On the basis of the risks discovered during the due diligence and their impact on the purchase price and the transaction, a new offer letter may be addressed to the sellers. The binding character of this offer letter is generally subject to negotiations between the purchaser and the sellers and their advisors. The offer letter may still be subject to conditions, such as obtaining the necessary bank financing, authorization of the transaction by the purchaser’s board of directors, grant of statutory clearances which may apply to the transaction, etc.
The offer letter should also detail the material obligations of the parties as regards the sale and purchase of the company, and set deadlines for the completion of the transaction (for example, as regards finalisation of outstanding due diligence aspects, of the sale and purchase documentation, etc.).
4. Share purchase and warranty agreements
Although for some limited liability companies, such as “sociétés par actions simplifiée” (“SAS”) and “sociétés anonymes” (“SA”), the transfer of shares may be effected by a mere transfer order (“ordre de movement”) signed by the seller, it is customary to enter into a share purchase agreement.
The share purchase agreement details:
- certain representations and warranties given by the parties regarding their capacity to enter into the agreement and, respectively, to sell and purchase the shares;
- the modalities of the payment of the purchase price;
- escrow provisions, earn-out provisions, provisions regarding the reduction of the purchase price (as the case may be);
- the organisation of closing and the obligations of the sellers until then as regards the management of the company;
- etc.
A warranty agreement providing for representations and warranties to be given by the sellers is also generally concluded. Such representations and warranties relate to the sellers’ right to convey the ownership of the shares to the purchaser, the genuine character of the information provided during the due diligence, tax, employment, commercial and other aspects of the company’s business.
5. Ancillary agreements
Ancillary agreements are generally entered into to ensure that the purchaser will successfully take over the company with the cooperarion of the sellers. The nature of such ancillary agreements and of the seller’s obligations in relation therewith will depend on the company’s business. Thus, if a parent company is selling a subsidiary which owns the intellectual property rights of products whose manufacturing or distribution is ensured by another company of the group, ancillary manufacturing or distribution agreements may be entered into to ensure that there will be no disruption in the commercial chain or process during a specified transitory period of time.
6. Founders’ minority shareholding interest
To enable the purchaser to benefit from the sellers’ experienceIt during a transitory period of time (generally two to three years), it is customary to provide that the sellers will retain a minority shareholding interest in the company during such period of time. The founders’ obligations to accompany the purchaser in the management of the company, as well as their obligation to sell their remaining shares on expiry of the transitory period, are generally detailed in a shareholders’ agreement.
7. Clearances
In certain cases, the transaction may have to be authorized by governmental authorities or material commercial contractors. The obligations of the parties in relation to such authorizations should be detailed in the share purchase agreement, and the completion of the transaction (i.e., its closing) should be conditioned on obtaining such authorizations.
Certain formalities in relation to foreign investments in France may also have to be complied with.
The acquisition of a company is a complex process which requires the involvement of a team of lawyers specialised in mergers and acquisitions, tax, employment, etc.
