I OVERVIEW OF M&A ACTIVITY2
After an outstanding rebound in 2014 (756 transactions valued at €124.4 billion in total, which represented a dramatic surge of 320.6 per cent compared to 2013), French M&A activity (i.e., cross-border M&A transactions targeting France and domestic M&A transactions) stabilised in 2015, with 744 transactions worth a total of €70.8 billion.
Although activity significantly decreased as compared with the historic records reached in 2014, 2015 French M&A activity nonetheless recorded its third-highest transaction count and second-highest value since 2007 (659 transactions worth a total of €149.7 billion).
While the volume of transactions remained comparable, the number of large-cap transactions valued above €5 billion decreased, with only three such transactions amounting to a total value of €30.49 billion, as opposed to five such transactions amounting to a total value of €68.1 billion in 2014. As a result, France’s share in European M&A activity decreased to 7 per cent (18.4 per cent in 2014), a median figure compared with those recorded since 2007; correlatively, France’s ranking among European countries for M&A activity fell to third position (France was first in 2014).
Despite a significant 46.6 per cent drop as compared with 2014 (241 transactions worth a total of €94.9 billion), cross-border M&A transactions targeting France remained strong in 2015, with a total of 214 transactions valued at €50.6 billion in total. Inbound M&A activity represented 71.5 per cent of the total value of French M&A activity in 2015. Domestic M&A activity also recorded a significant 31.7 per cent drop as compared with 2014, with 503 transactions worth €20.2 billion. On the contrary, outbound M&A activity remained stable, with 358 transactions valued at €44.3 billion, a mere 1.5 per cent decrease as compared with 2014 (367 transactions worth €45 billion).
The value of aborted mega deals remained high in 2015 and in the first quarter 2016. Two transactions representing a total value of €26 billion failed to complete in 2015 and in the first quarter of 2016, both in the telecommunication sector: SFR’s contemplated purchase of Bouygues Telecom, Bouygues’s telecommunication subsidiary for €10 billion; Orange’s contemplated purchase of Bouygues Telecom (€10 billion), and the consequential divestment of some of Bouygues Telecom’s assets to SFR-Numericable (€3.5 billion) and to Iliad (€2.5 billion).
Despite the availability of low-cost financing and positive macroeconomic conditions, French M&A activity was impeded by the volatility in the stock markets, which caused companies to either cancel or postpone investment and divestment plans, as well as strategic decisions.
Despite the contraction of M&A activity compared to 2014, several mega deals were announced in 2015, including the acquisition by Air Liquide, a listed French-based industrial gas producer, of Airgas, Inc for €12.5 billion; Nokia Oyj’s takeover bid on Alcatel-Lucent, a French-listed company providing telecommunication equipment, for €11.49 billion; and the divestment by LafargeHolcim Ltd, a Swiss-listed company operating in the cement industry, of certain assets that were acquired by CRH Plc for €6.5 billion, following Holcim Ltd’s successful takeover bid on Lafarge and the ensuing merger.
After an impressive surge in 2014, French private equity activity stabilised in 2015. Despite a significant decrease in the value of transactions from that recorded in 2014, the total value of private equity transactions is in line with the median recorded since 2007. Although the number of buyouts of French companies announced in 2015 slightly increased as compared with 2014 (from 190 to 201), the total value of those transactions dropped by 45.5 per cent (from €21.3 billion to €11.6 billion). Similarly, the number of exits that were announced slightly increased (from 146 to 153), whereas the total value of those transactions dropped by 47.4 per cent (from €20.9 billion to €11 billion).
Notable private equity transactions announced in 2015 include the acquisition by Apollo Global Management LLC and BPI France, the French public investment bank, of Verallia, the French-based glass manufacturer, for €2.9 billion; the acquisition by CVC Capital Partners Limited of an 80 per cent stake in Linxens Group, a French-based company providing chip-related technologies, for €1.5 billion; and Cinven Partners LLP’s purchase of a 90 per cent stake in Labco, a French-based provider of medical diagnosis, for €1.1 billion.
French M&A activity in the first quarter of 2016 dropped by 64 per cent as compared with the first quarter of 2015, and by 54 per cent as compared with the last quarter of 2015, while private equity activity shrunk by more than 70 per cent as compared with the first quarter of 2015. On the contrary, outbound M&A activity strongly rebounded in the first quarter of 2016, with a 97.6 per cent hike as compared with the first quarter of 2015.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The French Commercial Code and the French Civil Code – in respect of which the provisions relating to contract law will be reshaped as of October 2016 – provide the statutory framework and form the legal basis for the purchase and sale of corporate entities. Additionally, the French Monetary and Financial Code and the General Regulations of the French Financial Markets Authority (AMF) provide for the regulation of takeovers by the AMF, which is the supervisory authority for the French financial markets. As a general rule, French takeover rules apply if the target is a French or EU public company whose securities are listed in France and, in some instances, if the company is dual-listed.
Rules relating to the financial services industry, to the listing and public offering of securities, and to the prevention of market abuse are set out in the French Monetary and Financial Code and in the General Regulations of the AMF.
French merger control rules are mainly contained in the Commercial Code. These rules do not apply to intra-European cross-border mergers, which are instead subject to the EU Cross-Border Mergers Directive regime. In addition to the applicable laws and the General Regulations of the AMF, NYSE Euronext operates the three French regulated markets and some organised markets.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i Major revision of French contract law
French contract law, which is set out in the French Civil Code, is in the course of being significantly amended as per an Ordinance dated 10 February 2016. Subject to ratification by the French parliament, the vast majority of the Ordinance’s provisions will come into effect on 1 October 2016 and will be applicable to contracts entered into after this date.
The material amendments that are relevant to M&A transactions include, without limitation:
- a the strengthening of the obligation to negotiate agreements in good faith and to fairly disclose crucial information: a party who is aware of decisive information (other than information relating to the value of the subject matter of the contract) shall disclose it to the other party prior to entering into the contract, provided that the recipient of the information is bona fide unaware of such information and should be entitled to rely on the other party providing it. Breach of this duty renders the party that failed to provide such information liable and may render the contract void;
- b the sanction of abuse of a state of dependency: a contract may be voided if a party, having abused the other party’s state of dependency, obtained from the latter an undertaking it would not have otherwise agreed to and thus gained a manifestly excessive benefit;
- c a limitation to the right to seek specific performance as a remedy to breach of contract: it would no longer be possible to seek such specific performance if performance is impossible or if there is a manifest disproportion between the cost for the debtor and the benefit for the creditor;
- d the possibility for a creditor to unilaterally and proportionally reduce the price to be paid to the debtor in the event of poor performance by the latter of its own obligations; and
- e the possibility to renegotiate the contract or to have it either amended or terminated by the courts if an unforeseeable material adverse change renders its performance excessively onerous, unless the parties explicitly accepted the risk of such change.
ii Macron Act
The Macron Act was enacted on 7 August 2015. It is a comprehensive pro-business economic reform bill that comprises a patchwork of measures aiming at fostering greater competition in regulated professions and simplifying certain rules applying to small businesses. The Macron Act has amended diverse provisions relevant to M&A transactions. In particular, it has amended the Florange Act of 2014 by inserting a grandfathering clause, whereby a shareholder of a French-based company listed in the European Union or the European Economic Area that crosses thresholds triggering mandatory takeover bids as a result of the granting of an automatic double voting right pursuant to the Florange Act before 31 December 2018 is not required to file a takeover bid, provided that it abides by a standstill provision.
iii Transfer of significant assets of listed companies
Further to the SFR-Vivendi and Alstom transactions in 2014, and with a view to strengthening the framework for transfers of significant assets of listed companies, the French market authority published, on 15 June 2015, a recommendation (soft law), pursuant to which a consultative vote of the general meeting of the shareholders of a listed company shall be convened whenever it is contemplated to transfer significant assets (representing half of its consolidated assets based on certain thresholds).
The French market authority’s recommendation also includes new measures aiming at enhancing information to the market and promoting good practices, in particular with a view to demonstrating that a transaction is in line with the corporate interest of the issuer.
iv Update on the implementation of the Florange Act
As mentioned in subsection ii, supra, the Florange Act introduced automatic double voting rights (which previously had to be provided for in the by-laws of a company) for fully paid-up shares of listed companies that have been held for at least two years by the same shareholder. This change compelled certain listed companies to actively opt-out of the automatic double voting rights by amending their by-laws.
The importance of double voting rights was illustrated by Orange’s aborted acquisition of Bouygues Telecom from Bouygues SA, which was intended to result in Bouygues holding a significant stake in Orange (said to comprise between 10 and 15 per cent). The French state, which held (directly and indirectly) approximately 23 per cent of Orange’s shares, required as a condition to the transaction that Bouygues waived its double voting rights for 10 years. This demand turned out to be one of the key deal-breakers.
The first automatic double voting rights were granted on 3 April 2016. This should complicate any attempt to opt-out of the automatic double voting rights by amending by-laws, as such an amendment requires a two-third majority vote in a general meeting and would probably by opposed by shareholders benefiting from automatic double voting rights.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS3
i Cross-border inbound deals
Although they significantly decreased as compared with the record highs reached in 2014 (241 transactions worth a total of €94.9 billion), cross-border M&A transactions targeting France remained strong in 2015, with a total of 214 transactions valued at €50.6 billion.
Despite this significant decrease, France recorded its second-highest cross-border M&A transactions count and value since 2007 (204 transactions worth a total of €39.6 billion). Finland was the main foreign investor in France, with one transaction, Nokia Oyj’s takeover bid on Alcatel-Lucent, valued at €14.7 billion. This transaction was, however, of an exceptional nature, and does not illustrate a trend in the appetite of Finnish investors. The most active investor by the number of transactions remained the United States, with 59 transactions worth a total of €11.8 billion. As regards the banking and financial sector, there was no noteworthy material inbound investment in 2015 and in the first quarter of 2016, save as for BlackRock, Inc’s divestment of its 5.12 per cent stake in Axa for €2.6 billion (described below).
In this context, in addition to Nokia Oyj’s takeover bid for Alcatel-Lucent for €11.49 billion and CRH Plc’s acquisition of certain assets of LafargeHolcim Ltd for €6.5 billion (described in Section I, supra), notable cross-border M&A transactions targeting France that were announced in 2015 or in the first quarter of 2016 included XPO Logistics, Inc’s purchase of a 67 per cent stake in Norbert Dentressangle, a listed French-based company providing transportation services, and the ensuing takeover bid, for €3.24 billion; and BlackRock, Inc.’s divestment of its 5.12 per cent stake in Axa, a French-listed insurance company, for €2.6 billion, announced in January 2016.
Notable domestic M&A transactions also included Vivendi’s divestment of its remaining 20 per cent stake in Numericable-SFR, a French-based cable and telecommunication provider, which was acquired by Altice NV, its listed Luxembourg-based parent company ultimately owned by Patrick Drahi, and by Numericable-SFR for €3.9 billion; Eurosic’s takeover bid on Foncière de Paris SIIC, a French-listed property owner, for €2.97 billion; and Total’s takeover bid for Saft, a French-listed company that manufactures batteries, for €950 million.
ii Cross-border outbound deals
Having nearly doubled in 2014 compared to 2013, outbound M&A activity remained stable in 2015, with 358 transactions valued at €44.3 billion, a mere 1.5 per cent decrease as compared with 2014 (367 transactions worth €45 billion).
As in 2014, outbound M&A transactions were mostly aimed at the United States – and interestingly not at European Union Member States – with 52 transactions valued at €21.8 billion. As regards the banking and financial sector, there were no significant outbound M&A transactions in 2015 and in the first quarter of 2016.
In this context, in addition to Air Liquide’s acquisition of Airgas, Inc for €12.5 billion (described in Section I, supra), notable outbound M&A transactions that were either announced in 2015 or in the first quarter of 2016 included the merger between Capgemini, a French-listed company providing computer-related services, and IGATE, settled in cash for €4.1 billion; the acquisition of a 67 per cent stake in Neptune Orient Lines by CGA-CGM, a French-based shipowner, for €2.2 billion; and the takeover bid initiated by Fnac, a French-listed company providing cultural products, on Darty Plc for €1.19 billion
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES4
i Decrease of high-value transactions in 2015 and weak start to 2016
French M&A activity in 2015 has been marked by a decrease in the number of high-value transactions: only three transactions were valued at above €5 billion, for a total value of €30.49 billion, as opposed to five such transactions for a total value of €68.1 billion in 2014.
None of the five most important European transactions in 2015 involved France. Consequently, while the overall number of French M&A transactions stayed comparable, the overall value of French M&A transactions dropped by 43.1 per cent as compared with 2014. French M&A activity nonetheless recorded its third-highest transaction count and second-highest value since 2007.
French M&A activity experienced a major downturn in the first quarter of 2016, while outbound M&A transactions strongly rebounded. French M&A activity fell to €5.4 billion, a 64 per cent drop compared with the first quarter of 2015, and the lowest quarterly result since the first quarter of 2013 (€3.5 billion). This major downturn affected both cross-border M&A transactions targeting France (52 transactions worth €1.5 billion in total, a 82.9 per cent drop compared with the first quarter of 2015, and the lowest quarterly result since the second quarter of 2009) and domestic M&A activity (126 transactions worth €6.3 billion in total, a 38.1 per cent drop compared with the first quarter of 2015, and the lowest quarterly result since the first quarter of 2013), despite a slight increase in the number of transactions. On the contrary, outbound M&A transactions strongly rebounded, with 107 transactions valued at €4.3 billion, a 97.6 per cent hike compared with the first quarter of 2014.
Despite a weak start, and the continuing uncertainty arising from a ‘Brexit’, financial observers remain confident for 2016 thanks to the recovered confidence and appetite of foreign investors for European assets, supported by the weakness of the euro and historically low interest rates.
ii Most active sectors in the 2015–2016 period
In 2015, technology, industrial and construction were the most active sectors with regard to French M&A activity.
With 81 transactions worth €18.1 billion in total, up from €1.5 billion in 2014, technology was the most active sector in 2015 due to the €14.7 billion takeover bid initiated by Nokia Oyj on Alcatal-Lucent. However, without taking this transaction into account, technology would merely have been the seventh most active sector in 2015, with transactions for a total value of only €3.4 billion. Furthermore, had the contemplated acquisition of Bouygues Telecom by Orange (€10 billion), and the ensuing acquisition of some of Bouygues Telecom’s assets by SFR-Numericable (€3.5 billion) and by Iliad (€2.5 billion) been successful, telecommunications would have been the most active sector in the 2015–2016 period; absent those aborted transactions, telecommunications was merely the sixth most active sector in the 2015–2016 period, with transactions amounting to a total value of only €3.59 billion. Consolidation of the telecommunication sector remains a trend, driven by high capital expenditure requirements.
The second most active sector in 2015 was industrial and chemicals, with 159 transactions worth €12.3 billion in total, up from €7.4 billion in 2014.
The third most active sector in 2015 was construction, with transactions for a total value of €7.69 billion, down from €30.5 billion in 2014. The main driver within the construction sector was the merger between Holcim Ltd and Lafarge and the ensuing transactions, as illustrated by CRH Plc’s acquisition of some of LafargeHolcim Ltd assets for €6.5 billion (divestment of those assets was a condition imposed by the EU antitrust authority for the merger between Lafarge and Holcim).
iii Stabilisation of private equity activity after considerable 2014–2015 surge
After an exceptional 2014, French private equity activity stabilised in 2015. Despite a significant decrease in the aggregate value of transactions from the record high reached in 2014, the total value of private equity transactions is in line with the median recorded since 2007. Domestic activity was significant in 2015, with 210 transactions worth €3.6 billion in total.
Although the number of buyouts of French companies announced in 2015 slightly increased as compared with 2014 (from 190 to 201), the total value of those transactions dropped by 45.5 per cent (from €21.3 billion to €11.6 billion). The most active sectors with regard to private equity buyouts were the industrial and chemicals sector (42 transactions worth €4.3 billion), the technology sector (€2.1 billion), and the pharmaceutical, medical and biotechnology sector (€2.0 billion).
In addition to Apollo Global Management LLC and BPI France’s acquisition of Verallia for €2.9 billion, CVC Capital Partners Limited’s acquisition of a 80 per cent stake in Linxens Group for €1.5 billion and Cinven Partners LLP’s acquisition of a 90 per cent stake in Labco for €1.1 billion (described in Section I, supra), notable buyouts that were announced in 2015 include the acquisition of the Vacalians Group, a major European campsite and mobile-home company operating under the Tohapi brand, by Permira for an undisclosed consideration.
The number of exits that were announced slightly increased (from 146 to 153), whereas the total value of those transactions decreased by 47.4 per cent (from €20.9 billion to €11 billion). The most active sectors with regard to private equity exits were the pharmaceutical, medical and biotechnology sector (€2.84 billion), the technology sector (€1.98 billion), and the industrial and chemicals sector (€1.89 billion).
Notable exits that were announced in 2015 include the divestment by Bain Capital LLC and Astorg Partners of their 80 per cent stake in the Linxens Group for €1.5 billion; the divestment by Electra Partners LLP, 3i Group Plc, Natixis Private Equity, TCR Capital and CM-CIC Investissement of their 90 per cent stake in Labco for €1.1 billion; and the sale of Global Closure Systems, a French-based container-closure provider, by PAI Partners for €0.7 billion.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
i Solid results in 2015
France’s private equity segment (the second-largest in Europe behind the UK, and now almost back to its pre-crisis volumes) has remained buoyant in 2015, with over 230 leveraged buyout (LBO) transactions that, together with an increasing venture capital segment and an active mid-cap market, have stimulated the overall financing needs of the French market, although the corporates market remained rather dull throughout 2015, reflecting the general economic conditions prevailing in France over the same period, so that as a whole, 2015 represented a good year for financing providers, but not a record one. It is worth noting that the market still bears the signs of relative cautiousness, as one often tends to see mid-cap structures where the initial acquisition is implemented first with equity, which is to be refinanced in part by debt funding at a later stage only.
According to some market observers, the general level of activity from a financing perspective is expected to decrease slightly over 2016, while in contrast some other commentators fear a return of an acquisition bubble because of a perceived excess of liquidity in the market.
ii Overall improvement in liquidity, alternative lenders and banking sector fighting back
The past year was driven by an improvement in liquidity resulting from two elements: it has been noticed that for the first time since 2011, the amount of outstanding credit generated by the banks has progressed (+3.6 per cent) more quickly over the space of a single year than market financing (+3.1 per cent).
As regards market financing, 2015 has followed the tendency of further lending disintermediation that has emerged over the past few years. In that respect, it should be noted that unitranche instruments (that is, where the entirety of the debt is subject to the same terms, replaying the senior/mezzanine debt construct that was prevalent a number of years ago) have been very prominent in 2015. A surge in alternative financing providers (markets, insurance companies) involving an ever-increasing range of financing structures has also been seen. As such, France has the largest European alternative financing provider presence, with 138 alternative credit providers accounting for 25 per cent of all investments made by alternative financing providers across Europe.
Despite the above tendency, and while banks had previously seen their market share used up by other market players at times when they were themselves seeking to reduce their market shares (because of capital adequacy requirements or otherwise), 2015 has been a year where bank lenders were to be on the offensive again, in particular on the small and medium-sized enterprises sectors in respect of investment financing. The initiatives of the European Central Bank may have played a part in this respect, allowing such a decrease in interest rates that, in turn, banking credit happened to be sometimes cheaper than bond issuances.
iii Euro private placement (Euro PP) financing
Similarly, the Euro PP market in France has not reached the commentators’ expectations, with a total volume below €4 billion, barely higher than in 2014, and with a larger number of smaller transactions. It was initially expected that the market would increase strongly, although France has lagged behind compared to the European Euro PP market, which has really begun to take off. In early 2015, the Euro PP Steering Committee (consisting of major Euro PP market participants) released two model private placement agreements (each drafted in French and in English) responding to the needs of national and international investors. These templates cover the entirety of the Euro PP market, whether in the form of loans or by way of issuance of bonds, and were developed through a consensual market consultation (with representatives of almost all industry participants). In January 2016, the Association française des marchés financiers edited a Code of Best Practice for Euro PP arrangers, which is designed to standardise industry best practices in this area. It is hoped such guidance will help French Euro PP further develop this financing source.
iv Possible slow end for the ‘double LuxCo’
As mentioned in previous editions, LBO creditors have required borrowers to implement a structure involving two holdings in Luxembourg (a ‘double LuxCo’ structure) with a view to limiting potential downsides resulting from potential issues arising from French insolvency rules. As borrowers have regained gradually a position of strength in their negotiation with lenders, there has been a disinclination to adopt such structures since they result in high implementation and running costs: while 100 per cent of the transactions rated by Fitch in 2012 used this structure, the corresponding number was less than 30 per cent for 2015. It remains to be seen whether that movement will be enhanced in the future.
VII EMPLOYMENT LAW
i Employees’ right to make an offer to buy the shares or assets in small and medium-sized companies
Pursuant to the Hamon Act of 2014, as modified by the Macron Act of 2015, companies with fewer than 50 employees, or companies with between 50 and 250 employees that fall into the category of small or medium-sized companies (i.e., companies with a turnover below €50 million or a balance sheet total below €43 million), must inform their employees of any proposal to sell 50 per cent or more of the shares of the company or the sale of the company’s business as a going concern with a view to allowing them to make an offer to purchase the shares or the business.5 The Hamon Act does not grant any priority or pre-emption right to the employees; however, the procedure does impact the timetable for the proposed transaction and can also have an impact on the confidentiality of the transaction.
In companies with fewer than 50 employees, the employees must be informed of the proposed sale no later than two months prior to the signing of the transaction. In addition, the transaction cannot take place before the expiry of this two-month period unless all employees have informed the company that they do not wish to make an offer.
In companies with between 50 and 250 employees, the employees must be informed of the proposed sale at the latest when the works council of the company is informed and consulted on the transaction in question. Unlike in the case of companies with fewer than 50 employees, the law does not set any specific deadline prior to which the transaction cannot take place (except that the works council consultation process will have to be completed before any binding documentation with respect to the transaction is signed, in compliance with generally applicable French employment law rules).
The law provides that the employees are subject to an obligation of discretion with respect to the information that they receive by virtue of the new law. For the moment, it is not clear what information regarding a company and its activities must be given to its employees in connection with the specific procedure. According to a strict interpretation of the law, when a company informs its employees of their right to make an offer to buy the company or the business, it is not required to give information on any other potential bidders or any documents relating to the company or its strategy.6 However, should one or more employees ultimately decide to make an offer to buy the company or the business, the Hamon Act (and its implementation Decree of 28 October 2014) is silent as to the level of information that the company must provide to them.
Failing to comply with the obligation to inform employees that they can make an offer to purchase the shares or assets of a company exposes the seller to a monetary fine that cannot exceed 2 per cent of the value of the underlying transaction.
Following an information procedure under the Hamon Act, the contemplated sale must take place within two years of the date on which the employees are informed of the transaction; otherwise, the company must complete the information process again.
ii Reinforced role of the works council of the target of a takeover bid
Until recently, in a public company takeover context, the works council of the target company was merely provided with information regarding the transaction in the event of a friendly or hostile takeover bid (with no opinion, whether positive or negative, being required). Pursuant to the Florange Act, the works council of the target company must now be formally consulted and issue an opinion (either positive or negative) on the takeover bid (whether friendly or hostile).
The consultation of the target company’s works council must be completed (i.e., a positive or negative opinion must be issued) within one month of the offer being filed. If the works council has not issued an opinion within this time frame, it will be deemed to have been consulted, except in certain exceptional circumstances where the works council can justify in court that it did not receive sufficient information on the transaction.
In any case, the board of directors or the supervisory board of the target company cannot make a decision with respect to the takeover bid (including whether to recommend the bid) until the consultation process with the target company’s works council has been completed. Note that in a situation in which the bidder has entered into a prior agreement with the target (generally called a ‘tender offer agreement’) specifying the main terms and conditions of the offer and providing for a break-up fee based on the recommendation of the target’s board, it should be carefully assessed whether such agreement triggers the obligation to consult the works council prior to its signature.
During the consultation process, the target company’s works council may ask the offeror questions about its industrial and strategic plans for the company. It may also choose to be assisted by a third-party expert (whose fees will be paid by the target company, and who will issue a report that will assess the offeror’s industrial and strategic plans and their impact on the target company and its employees). The third-party expert has three weeks from the filing of the offer to issue its report.
iii Defined time limits for the works council to issue its opinion in compulsory consultation situations
A Decree dated 27 December 2013 establishes the time limit for works councils to issue their opinion in the event that consultation is compulsory. Unless an agreement is reached between the employer and the trade union representatives (or, failing that, the works council) that provides for a specific time frame for its consultation, the members of the works council must issue their opinion within the following time limits (the starting point being the date the employer discloses the information): one month generally; two months if the works council is assisted by an expert; three months if one or more health and safety committees (CHSCT) are involved in the project; and four months if a temporary coordination committee of the CHSCT is created.
If the works council has not issued an opinion within the relevant time limits, it will be deemed to have been consulted and to have issued a negative opinion.
iv Obligation to look for a buyer in the event of the closure of a business division
Among its provisions, the Florange Act has introduced an obligation for an owner seeking to close a business to attempt to find a buyer for the business. This obligation applies to an intention to close any business division with more than 1,000 employees when such closure would result in planned collective redundancies (i.e., more than 10 employees). This obligation provides for specific information obligations toward the works council and the employees of the target business, as well as an obligation on the company or the group to consider all offers to acquire the business and to justify any decision taken in respect of such offers to the works council.
VIII TAX LAW
i Tax consolidation group regime amendment following the European Court of Justice (ECJ) Steria ruling
Following the ECJ ruling on the Steria case,7 the French tax consolidated group regime (set forth in Article 223A et seq of the French Tax Code (FTC)) has been modified by the 2015 Amended Finance Act passed on 29 December 2015.
Under the French participation exemption regime, dividends are exempted from corporate income tax (subject to a 5 per cent service charge) provided that the corresponding shares have been held for at least two years and such shareholding represents at least 5 per cent of the underlying company share capital.
When both the parent company and its subsidiary were part of the same French tax consolidated group, this service charge was eliminated (‘neutralised’) when determining the French tax consolidated group’s result. As non-French subsidiaries cannot elect to be part of such a group, the ECJ ruled that French law was imposing an unjustified restriction on the freedom of establishment, because a French parent company receiving dividends from an EU Member State subsidiary could not benefit from the neutralisation of such service charge at the group’s result level, whereas it could do so if the subsidiary were located in France.
The 2015 Amended Finance Act took this ruling into account: Article 40 provides that the service charge will no longer be neutralised at the group level, but will be reduced from 5 to 1 per cent should the distribution come from a subsidiary located in France or in another EU Member State, provided in the latter case that the EU subsidiary would have been a qualifying entity for the French tax consolidation regime if it had been located in France. Practically, if a French parent company is the head of a French tax consolidated group, the service charge for dividends received from its qualifying subsidiaries located in the EU will be limited to 1 per cent.
ii Participation exemption regime amendment
Starting on 1 January 2016, the anti-abuse provision in EU Directive 2015/121 dated 27 January 2015 is included in French law, as embodied by Article 29 of the 2015 Amended Finance Act. As per the amended Article 145 of the FTC, the participation exemption regime is not applicable to distributions resulting from an arrangement or a series of arrangements that, having been put into place for the main purpose, or one of the main purposes, of obtaining a tax advantage that defeats the object or purpose of the participation exemption regime, are not genuine having regard to all relevant facts and circumstances.
Besides, the benefit of the participation exemption regime has been extended to dividends received from subsidiaries established in a non-cooperative states or territories on condition that the French parent company is able to demonstrate that the distributing company has real activities in the above-mentioned jurisdiction and is not established there to fraudulently offshore taxable income. This modification was made compulsory after the French Constitutional Court ruled that the systematic exclusion of such dividends from the benefit of the participation exemption regime without any safe-harbour rule was unconstitutional.
iii Participation exemption regime and shares deprived from voting rights
In November 2015, the French Supreme Court for tax matters transferred to the French Constitutional Court a request for preliminary ruling on the constitutionality of the French participation exemption regime.8 Indeed, the latter provides that shares deprived from voting rights are not taken into account when computing the 5 per cent participation threshold in a French company, whereas the Parent–Subsidiary Directive did not contemplate such condition regarding voting rights. Accordingly, a dividend distributed by an EU subsidiary to a French parent company was in the scope of the participation exemption regime even if the parent company’s shares in the latter did not have voting rights, whereas in a purely domestic situation (French parent and French subsidiary), these dividends could not benefit from this regime. In February 2016, the French Constitutional Court ruled that this difference of treatment was unconstitutional, and that dividends corresponding to shares without voting right were entitled to the participation exemption regime regardless of the location of the distributing subsidiary.9
iv Action for failure brought by the European Commission against France regarding the additional 3 per cent tax on distributed dividends
Article 235-ter ZCA of the FTC states that distributions of dividends, irrespective of the nature or the tax residence of the beneficiary, are subject to a 3 per cent tax at the level of the distributing company. On 26 February 2015, the European Commission initiated an action for failure against France regarding this tax and its potential incompatibility with the Parent–Subsidiary Directive, which prohibits withholding tax on dividends falling within its scope, and the principle of freedom of establishment, as French law provides for an exemption of this tax for distributions made within a consolidated tax group that is necessarily composed of only French companies.
v Referral to the ECJ regarding preliminary ruling on the preferential tax regime for partial asset contributions in a cross-border situation
Article 210 C of the FTC states that partial asset contributions made by a French company to an EU company may only benefit from the preferential tax regime (providing for a tax rollover treatment of the capital gains arising from the contribution) under the condition that a prior ruling be granted by the French tax authorities. Such a ruling is not required for purely domestic partial asset contributions. In December 2015, the French Supreme Court for tax matters referred this provision to the ECJ for a preliminary ruling on the compatibility of these provisions with the freedom of establishment.10
IX COMPETITION LAW
The French Competition Authority has had responsibility for merger control since 2009 (this function was previously carried out by the French Minister for the Economy), and has increasingly adopted a more efficient approach to the application of its rules. In 2015, 192 concentrations were reviewed and cleared by the Authority, six of which were cleared conditionally, that is, with remedies.
i Application of the new merger control guidelines of 10 July 2013
First, it is important to note that on 10 July 2013, new guidelines on merger control were adopted by the French Competition Authority, revising the previous guidelines of December 2009 and taking into account the Authority’s experience since.
The new guidelines on merger control set out measures aimed at facilitating the pre-notification process, specifying the criteria for the simplified notification procedure, the conceptual framework of the analysis of relevant markets and the role of this analysis, and proposing standard models for transfers of assets and trustee mandates. Those guidelines also place greater emphasis on economic and econometric analysis, especially quantitative tests, when the data and methodology used are reliable and verifiable. In particular, the new guidelines introduce a reference to the upward pricing pressure, illustrative price rise and gross upward pricing pressure index (GUPPI) tests, used to measure the impact of a merger on prices without having to define the relevant market.
In 2014, the French Competition Authority used the test in its decision of 14 April 2014 authorising the acquisition by Orlait of exclusive control over the UHT milk activity of Terra Lacta. In the decision, the Authority based its analysis of unilateral effects on the GUPPI test, using profit margins and diversion ratios to conclude that a post-merger price increase by the new entity was not likely. It cleared the acquisition unconditionally, concluding that it would not have an adverse effect on competition in view of the highly competitive market structure and strong countervailing buyer power. Another notable feature of this case is that the acquisition of control was based on a long-term contractual relationship between the parties, namely an exclusive distribution agreement that made Orlait Terra Lacta’s exclusive distributor of UHT milk. The agreement gave Orlait sole control over Terra Lacta’s UHT milk activity in accordance with point 51 of the Authority’s merger control guidelines, which states that in exceptional cases, control can be acquired on a contractual basis. The exclusive distribution agreement contained a provision whereby Terra Lacta would acquire a minority stake in Orlait.
ii Substantial penalties can be imposed for gun-jumping
When French thresholds are met, pre-merger filing is mandatory. This applies to all concentrations, including foreign-to-foreign transactions and even in the absence of an overlap between the parties’ activities.
Individuals and companies acquiring control of all or part of an undertaking are responsible for notifying. In the case of a merger, this obligation is incumbent upon the merging entities. In the case of a joint venture, parent companies must file a joint notification.
Sanctions for not filing or for closing before clearance are as follows: corporate entities – up to 5 per cent of the turnover in France during the previous financial year (plus, where applicable, that of the acquired part generated in France); and individuals – up to €1.5 million. For instance, on 26 December 2013, the French Competition Authority imposed a fine of €4 million on Castel Frères, a company active in the wine sector, for failing to notify its acquisition of six companies that were part of the Patriarche group before closing the transaction on 6 May 2011. The Authority was informed of the operation by a third party and found that there was evidence that Castel Frères had engaged in such ‘gun-jumping’ on purpose in order to close the transaction rapidly. Even though the transaction was finally notified and authorised by the French Competition Authority on 2 July 2012, the Authority stated that this does not make the breach any less serious. On appeal, the Administrative Supreme Court reduced the amount of the fine to €3 million taking into account the fact that the transaction was notified shortly after the Authority’s request, and that Castel Frères did not intend to bypass the competition rules.11
Finally, the parties may be required, subject to a periodic penalty for non-compliance, either to file the concentration or to demerge. Transactions that have been completed without clearance are illegal and not enforceable. There are no criminal sanctions for not filing.
The power of the Authority to withdraw merger approvals was validated in 2012 by a decision of the French Constitutional Court in the context of the appeal by Canal Plus and Vivendi against an order to re-notify the purchase of its former rival TPS.12
iii Diversification of remedies that can be imposed by the French Competition Authority
Regarding commitments and injunctions, in its new merger control guidelines, the French Competition Authority provides several examples of its decision-making practice, which is characterised by a preference for structural remedies (e.g., divestment of minority shareholdings). However, in the case of complex transactions, the Competition Authority pragmatically accepts behavioural remedies, of which it provides several examples. Merger review over the past few years confirms such trend. For instance, in 2015, in four cases out of six, the Authority conditioned its approval only on behavioural remedies,13 whereas in the two other cases, structural and behavioural remedies were taken.14
An illustration of such behavioural remedies can be found in an Authority decision dated 9 July 2015 relating to the acquisition of Les Journaux du Midi by La Dépêche du Midi, active in the press sector. The main competition concern raised by the Authority was not a risk of price increase resulting from the transaction, but a risk of the homogenisation of the titles’ content, and thus a reduction in the quality and diversity of the regional newspapers. To addressed such concerns, the acquirer committed not to proceed with the harmonisation of its titles’ content, to maintain a distinct, dedicated editorial board for each title, and to continue distributing all its regional daily press in two specified French departments.15
It is also important to note that the French Competition Authority carefully monitors the implementation of remedies, and may withdraw an authorisation in cases of non-compliance. In such a case, the parties will then have to either restore the situation to what it was before the transaction (i.e., ‘unwind’ the operation) or re-notify the transaction to the Competition Authority within a month. Compliance with commitments by the companies is central to the process of French merger control.
If such refusal to comply with the remedies is confirmed, the Competition Authority is also able to impose financial penalties on the notifying parties of up to 5 per cent of their net turnover achieved in France. In this regard, the French Competition Authority recently fined the Altice/Numéricable group €15 million for its non-compliance with one of the commitments undertaken for the acquisition of SFR. At the time, Altice and Numéricable had committed to divest Outremer Telecom’s mobile telephony business and, within this context, to maintain the viability, market value and competitiveness of this business, and not interfere with the management of the divested concerns. However, the Authority found that Altice/Numéricable increased the subscription prices of Outremer Telecom in La Réunion and Mayotte, which necessarily affected its competitiveness in these territories. As a consequence, the Altice/Numéricable group was considered to have failed to respect its commitments.
As a final observation, the recent Macron Act empowers the Authority with the right to impose, subject to fines, injunctions or prescriptions as a substitute for commitments the parties did not comply with. Such a right enables the replacing of a commitment that has become outdated without withdrawing the clearance decision.
i Draft law on parent companies’ duty of vigilance
A draft law currently being discussed before the Senate (the upper house of the Parliament) following its adoption by the French National Assembly (the lower house of the Parliament), imposes a duty of vigilance on large companies (i.e., companies that employ either 5,000 or more employees directly or through affiliates located in France, or 10,000 or more employees directly or through affiliates located in France or abroad). Such companies would be required to draw up and implement a ‘vigilance plan’, which would provide for ‘reasonable measures’ to identify and prevent several risks (including risks relating to violations of human rights, bodily harm or environmental hazards) arising from the activities of a company, its affiliates, or the subcontractors or suppliers with which the company or its affiliates have an ‘established business relationship’. Failure to draw up and implement a vigilance plan could result in the company being subject to tort liability, as well as to a fine of up to €10 million.
ii Draft law overhauling French labour law
In an attempt to reduce the chronically high rate of unemployment in France and to increase France’s competitiveness by making the French labour market more flexible, the socialist government has introduced a draft labour law overhaul. The ‘El Khomri’ draft law is intended to extend the purpose and scope of collective bargaining at a company’s level, and to facilitate the entering into collective agreements at this level. In particular, it is meant to allow companies and their employees to reach collective agreements on working time conditions that may be less favourable to employees than those negotiated at the occupational sector level. It would also enhance legal certainty for redundancies. This draft law is, however, the main focus of the opposition to the government, and may therefore be subject to major amendments.
1 Didier Martin is a partner at Bredin Prat.
2 The financial data mentioned in this section have been extracted from the Mergermarket Trend Report Q1–Q4 2015 (France) and the Mergermarket trend report Q1 2016 (France).
3 The financial data mentioned in this section are extracted from the Mergermarket Trend Report Q1–Q4 2015 (France).
4 The financial data mentioned in this section have been extracted from the Mergermarket Trend Report Q1–Q4 2015 (France) and the Mergermarket trend report Q1 2016 (France).
5 These provisions of the Hamon Act do not apply to companies that are subject to insolvency proceedings.
6 The guidelines that have been published by the French Ministry of Labour for the implementation of the Hamon Act confirm this approach.
7 CJEU, 2 September 2015, C-386/14, Groupe Steria SCA.
8 CE, 12 November 2015, Case No. 367256, Sté MétroHolding.
9 Cons Const, 4 February 2016, Case No. 215-520, QPC.
10 CE, 30 December 2015, Case No. 369311, Sté Euro Park Service.
11 Judgment of the Supreme Administrative Court dated 15 April 2016, Appeal No. 375658.
12 Case No. 2012-280 further to a request for a preliminary ruling on a question of constitutionality.
13 Acquisition of Les Journaux du Midi by La Dépêche du Midi, decision dated 4 June 2015, Case No. 15-DCC-63; acquisition of Société Réunionnaise de Produits Pétroliers by the Rubis group, decision dated 13 May 2015, Case No. 15-DCC-104; acquisition of Société Anonyme de la Raffinerie des Antilles by the Rubis group, decision dated 13 May 2015, 15-DCC-54; acquisition of Quick by Burger King, decision dated 10 December 2015, Case No. 15-DCC-170.
14 Case No. 15-DCC-63.
15 Case No. 15-DCC-63.