I OVERVIEW OF M&A ACTIVITY
Against all odds, the presidential election that took place in the first half of 2017 did not affect the pace of investments. Although the aggregate value did not equal the historical record reached in 2014, M&A activity in 2017 nonetheless recorded its second-highest annual value during the past decade.
Even though the presidential election did not have any direct detrimental impact on deals during the first half of 2017, there was less activity in the second half of the year, which may indicate that investors were awaiting the new government's reforms. Indeed, the government intends both to vigorously reform and to simplify certain corporate duties of French companies, but in the meantime it may strengthen other regimes, including the regime applicable to investments made by foreigners in French companies, which will be a key issue in 2018.
In 2017, M&A activity followed the same expansion trend observed in the past two years. Even though the total number of transactions has decreased since 2016, their aggregate value reached €92.8 billion, an increase of nearly 20 per cent.
M&A activity was driven by several large cap deals, including the €12.1 billion acquisition of a 25.9 per cent stake in Christian Dior SA by private investor Bernard Arnault, which was carried out to simplify the structure of the LVMH Group. Simultaneously, LVMH Moët Hennessy Louis-Vuitton SE achieved the total absorption of Christian Dior Couture SA for a value of €6.5 billion. Other significant deals were announced, such as the €8.3 billion tender offer initiated by Safran on Zodiac Aerospace's share capital (see Section V) and the acquisition by the government of a 50 per cent stake in the French company Areva SA.
Cross-border M&A transactions targeting France decreased in 2017, as in the previous year, reaching €31.6 billion, which represents a fall of nearly 13 per cent. Conversely, cross-border outbound deals skyrocketed in 2017, with an aggregate value that was worth more than twice the amount registered in 2016 (€99.6 billion in 2017 versus €44 billion in 2016). The main targets for French companies in 2017 were European companies, being subject to 294 deals valued at €61 billion, which differs from 2016, when the United States was the main centre of interest.
Private equity transactions – both buyouts and exits – confirmed the attractiveness of the French market: 352 deals were recorded for a total aggregate value of €31.5 billion, making the year under review one of the best transaction years (apart from 2014) since 2007.
Notable private equity transactions announced in 2017 include the takeover by Gecina SA of Eurosic SA for €5.8 billion and the sale by Engie SA of a 70 per cent stake in Engie E&P International SA to Neptune Oil & Gas Limited for €4.6 billion.
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 were reshaped in October 2016 – provide the statutory framework and form the legal basis for the purchase and sale of legal entities. Additionally, the French Monetary and Financial Code and the General Regulations of the French Financial Markets Authority (AMF) provide the regulations relating to takeovers. 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 apply to cross-border mergers having effects on the French market (as currently defined through worldwide and France-wide turnover thresholds) but with no 'EU dimension'. Mergers with an 'EU dimension' (i.e., involving companies whose turnovers exceed the thresholds set by the EU Merger Regulation) are instead subject to the review of the European Commission.
Within the framework of 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 Use of blockchain technology in corporate law
France has adopted an ordinance dated 8 December 2017 that enables companies to use blockchain technology to record and transfer certain securities. This new option will apply to securities issued in France and governed by French law that are not listed on a regulated market or on a multilateral trading facility.
In practical terms, non-listed French companies such as a société anonyme (SA) or a société par actions simplifiée (SAS) (the most widespread French business structures) will be able to decide to register their securities on a shared electronic recording device (i.e., a blockchain) instead of the current book entry. Similarly, the transfer of securities will be possible through this blockchain and, therefore, will not require a transfer from one account to another. Finally, a pledge over the securities registered on the blockchain will be possible. An implementing decree was expected in the first half of 2018 but is now unlikely to occur before the autumn.
ii Law regarding the duty of vigilance of parent companies
On 27 March 2017, France adopted a law on parent companies' duty of vigilance. It applies to large French companies with a head count of either 5,000 or more employees working for the company and its direct or indirect subsidiaries registered in France, or 10,000 or more employees working for the company and its direct or indirect worldwide subsidiaries.
Such companies are required to draw up and implement a 'vigilance plan'. Vigilance plans should provide 'reasonable measures' pertaining to identifying risks and preventing serious violations with respect to human rights, fundamental freedoms, the health and safety of people and the environment arising from the activities of the company, the affiliates under its control or their subcontractors or suppliers with whom there is an 'established business relationship'. Failure to draw up and implement a vigilance plan could result in the company being subject to civil liability and to a court order to comply with the parent companies' duty of vigilance.
iii Rationalisation of various corporate duties
The year 2017 was characterised by a strong determination to reform the corporate law in order to simplify, clarify and ease the day-to-day business of French firms.
An ordinance dated 4 May 2017 has amended certain companies' general meeting processes and their decision-making procedures. As an example, the articles of association of a non-listed French SA may provide that general meetings will only be held by videoconference or other means of telecommunications enabling the identification of shareholders. Likewise, the adoption or amendment of a share transfer approval clause in a French SAS no longer requires unanimity.
Following this trend, several ordinances and decrees were published in July and August 2017 simplifying both the corporate social responsibility reporting and annual reporting of companies. These measures have the benefit of clarifying the annual reporting duties of listed and non-listed companies. The government has also announced various measures to maintain the attractiveness of French corporate law (see Section X).
iv Modernisation of Euronext
The trend observed in tender offers (see Section V.iii) follows on from the modernisation of the stock market Euronext. Along with the simplification of the markets (Alternext became Euronext Growth and Marché Libre became Euronext Access) and various improvements, a new market for start-ups and SMEs was created: Euronext Access+. This may make the French stock market more attractive to companies and support the trend concerning public offers.
v Declaration of beneficial owners
As of 1 April 2018, all French companies (apart from listed companies) and all foreign companies with an establishment registered in France shall report their ultimate beneficial owners to the French Trade and Commerce Registry (and keep this information up to date) subject to criminal sanctions. Beneficial owners are deemed to be either individuals who own, directly or indirectly, more than 25 per cent of the share capital or voting rights in the reporting company, or who exercise control over the reporting company within the meaning of Paragraphs 3° and 4° of Article L 233-3 I of the French Commercial Code. According to these statutory provisions, a person is deemed to control a company when he or she actually determines the decisions of the shareholders' meeting of such company by the voting rights he or she holds; or he or she has the power as a shareholder to appoint or remove the majority of the members of the executive, administrative or management bodies of such company. The purpose of this new duty is to enhance the transparency of companies' ownership for anti-money laundering purposes, but its implementation may be burdensome.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
In 2017, French companies (as bidders or target companies) were involved in seven of the top 20 announced European deals, with France being a major regional player.
i Cross-border inbound deals
For the second consecutive year, cross-border M&A transactions targeting France decreased, with a significant drop seen during the second half of 2017. The trend observed over the previous years of the United States being the leading investor in France continued, reaching an aggregate value of €11 billion for 55 transactions.
The interest of Chinese investors in the French market remains significant, with the aggregate amount of transactions realised in 2017 equalling 2016 (circa €2 billion).
Notable domestic M&A transactions included:
- the €12.1 billion acquisition by private investor Bernard Arnault of a 25.9 per cent stake in Christian Dior SA;
- the €6.9 billion acquisition by the government of a 50 per cent stake in French company Areva SA; and
- the €6.5 billion takeover of Christian Dior Couture SA by French-listed luxury company LVMH Moët Hennessy Louis Vuitton SE.
ii Cross-border outbound deals
In 2017, the aggregate value of outbound M&A deals soared substantially, €61 billion of which was invested in European companies, representing a threefold increase as compared with 2016.
While the United States remained a prime target, the Asia-Pacific region was also attractive.
In this context, notable outbound M&A transactions that were announced in 2017 included:
- the €24 billion merger between the French-listed ophthalmic lenses manufacturer Essilor International and the Italian-listed eyewear Luxottica Group;
- a €20.9 billion takeover of Westfield Corporation, an Australian shopping centre company, by French-listed property investments company Unibail-Rodamco; and
- a €6.3 billion takeover of Maersk Olie Og Gas AS, a Dutch oil and gas company, by the French-listed integrated oil and gas company Total SA, a transaction that was completed in the first quarter of 2018.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Strong activity in 2017; many opportunities in 2018
For the second consecutive year, the overall value of M&A increased (by 18 per cent as compared with 2016, while the number of M&A transactions remained stable:
869 in 2016, 861 in 2017). France stands out in the top 20 announced deals in 2017, with seven French companies initiating and four French companies being targeted by such deals.
The first and second quarters of 2017 were particularly active, representing a global value of nearly €75 billion, which is surprising given the fact that the political context was uncertain due to the presidential election. However, the two last quarters of 2017 did not follow the same path, with the aggregate value of the deals announced during this period being worth €19.2 billion.
The intense activity of the first half of the year may be explained by the 'jumbo deals' entered into, such as the acquisition by Bernard Arnault of a 25.9 per cent stake in Christian Dior SA (see Sections I and IV) and the tender offer initiated by Safran on Zodiac Aerospace's share capital. Between its announcement in January 2017 and the signing of a business combination agreement in May 2017, this transaction was significantly reshaped into a tender offer, which was made in the form of a cash offer on a principal basis targeting 100 per cent of Zodiac Aerospace's share capital, complemented by a subsidiary exchange offer targeting a maximum of 30.4 per cent of Zodiac Aerospace's share capital. The tender offer was launched at the end of December 2017 and was successfully completed, and in March 2018, Safran owned more than 95 per cent of Zodiac Aerospace's share capital.
This trend appears to be continuing in 2018, with many situations ongoing (including several privatisation projects) although they have as yet not led to formal processes. As a matter of fact, the state has expressed its wish to privatise three major companies during 2018: the airport company ADP, the gambling company FDJ, and the energy producer and distributor Engie.
ii Most active sectors in 2017
In 2017, consumer, energy, mining and utilities, and defence were the most targeted sectors. The pharma, medical and biotech sector has experienced a significant decrease since 2016 due to the significant acquisition of Merial by Boehringer Ingelhein, a €11.4 billion mega deal that was completed in 2016. Indeed, the most targeted sectors do not appear to reflect investors' appetite, as these sectors change from year to year because of certain 'mega deals'. The fact that the consumer sector was the most active sector in 2017 is easily explained by the two deals that targeted Christian Dior SA and Christian Dior Couture SA together for an aggregate value of €18.6 billion (see Sections I and IV).
Energy, mining and utilities formed the second most active sector in 2017 due to the €6.9 billion acquisition of a 50 per cent stake in Areva SA by the government.
Surprisingly, defence was the third-most active sector in 2017, mainly due to the €8.3 billion tender offer initiated by Safran on Zodiac Aerospace's share capital.
iii Tender offers in 2017
In 2017,5 the number of tender offers increased for the second consecutive year, reaching 40 deals. The total value of the target companies was €106 billion. This number was treble the number registered in 2016. However, this spectacular leap has to be linked with the operations related to Christian Dior SA (described in Sections I and IV), which represent 44 per cent of the aggregate value. All the operations launched in 2017 were friendly, half being initiated by companies themselves (as part of share buyback programmes) or by their historical shareholders.
iv Development of private equity activity
In 2017, the private equity trend was upwards in terms of both value and deal counts. Buyout and exit deals reached an aggregate value of €31.5 billion, which is close to the pre-crisis levels. The most attractive sector, by deal value, was the pharma, medical and biotech sector.
In this respect, buyouts rose from €11.2 billion in 2016 to €18 billion in 2017. The most valuable buyout transaction registered in 2017 was the buyout by Neptune Oil & Gas Limited, a British company, of Engie E&P International SA. Together with Carlyle, CVC Capital Partners and China Investment Corporation, Neptune acquired the company from Engie SA, which is thus divesting from its hydrocarbon exploration and production branch. In addition to this specific buyout, the buyout of Sagem Sécurité by Advent International Corporation and Bpifrance SA for €2.4 billion was also a notable transaction.
Similarly, exit deal value in 2017 increased by more than 30 per cent, reaching €21.1 billion. The main exit was the €5.8 billion friendly tender offer by Gecina SA, a French listed real estate investment trust, on Eurosic SA, another French listed real estate investment trust. Other notable exits announced in 2017 included the sale by HBM BioVentures AG and Seventure Partners SA of Advance Accelerator Applications SA for €2.9 billion.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
i Overview on financing sources
The increase of M&A transactions did not benefit all financing segments equally. Indeed, 2017 is noticeable for a rise in bond issues, with 140 issues (all currencies) conducted by French non-financial companies for a total amount of €75 billion, compared to €65 billion in 2016. This performance was enhanced by the ECB's expanded quantitative easing, pursuant to which the ECB acquired about €80 billion of securities (including bonds) per month from January to March 2017, and about €60 billion per month from April to December 2017, making the secondary bond market substantially less volatile and encouraging investors to take a position on the debt of non-financial companies. This general observation must nevertheless be nuanced by the decrease in convertible bond issues, which fell by 43 per cent (in value) in 2017.
Regarding the syndicated loan market, activity on the French market for 2016 had fallen significantly before seeing a slight improvement in 2017. Indeed, amounts borrowed by companies represented €75 billion in 2017 compared to €120 billion in 2015. Thus, the largest acquisition financing put in place in 2017 did not exceed €9 billion, despite historically low borrowing costs.
We also noted the come-back of substantial transactions on the IPO market in 2017 as well as an increase in the amounts issued in the context of capital increases, which rose from €6.9 billion in 2016 to €11.2 billion in December 2017, two-thirds having been used to finance acquisitions.
According to commentators, the number of M&A transactions should globally increase again from 2018 to 2020, with a peak this year in France, where M&A activity should increase by 40 per cent. In the same way, financing conditions should remain favourable in 2018: ample liquidity, low interest rates, a high level of liquidity remaining to be invested by private equity buyers and recent legal reforms.
ii Recent legal reforms
In 2017, France demonstrated its willingness to modernise the legal framework applicable to securities and bonds issues with a view to competing with the mechanisms already existing in Anglo-Saxon countries.
Modernisation of the law on security interests
After the reform of the law of contracts in 2016, France continued the modernisation of the law relating to security interests with the adoption of a new status for the security agent role.
Governmental Order No. 2017-748 dated 4 May 2017 came into force on 1 October 2017, and has given new powers to security agents. Previously, security agents had a simple representative role, and their prerogatives were quite limited. Further to such reform, a security agent can be the direct holder of both security interests and personal guarantees granted by the debtor. He or she can act in his or her own name for the benefit of the creditors of the secured obligations. Consequently, a security agent benefits from the same powers as a fiduciary. Moreover, security agents are now able to take legal action to defend the interests of creditors. In practice, the security interests are directly transferred to and managed by the security agent. The latter then becomes the new owner of the security interests, but must keep them separate from his or her own estate. Therefore, a change of one or several beneficiaries is now possible without any consequences for the security agent or additional formalities.
Simplification of the law on bond issues
Governmental Order No. 2017-970 dated 10 May 2017, completed by Decree No. 2017-1165 dated 12 July 2017, significantly simplifies the legal framework for bond issues. First, the Order simplifies the formalities required to issue bonds, particularly regarding the corporate steps that an issuer needs to take. It also introduces a new regime for wholesale bond issues pursuant to which the relationship between the bondholders and the issuer can be contractually agreed between the parties where the bonds are issued with a nominal value equal to at least €100,000. It must be noted that bonds issued by the state, convertible bonds and bonds with warrants are expressly excluded from this new regime. The Order also provides for the possibility for the issuer to amend unilaterally the terms and conditions of the bonds in cases of material error. Furthermore, it clarifies the rules governing the appointment of the representative of the bondholders and the conditions under which he or she can delegate some of his or her powers. It also simplifies the convening and holding of general meetings of bondholders and introduces a new procedure for the written decisions of bondholders. Finally, the Order provides for a simplification of the rules applying to the grant and release of security interests to bondholders.
VII EMPLOYMENT LAW
i The Macron Labour Law Reform
On 22 September 2017, the government enacted several executive orders,6 which were ratified by the Parliament on 29 March 2018: the Macron Labour Law Reform has brought significant changes to French labour law with a view to simplifying the existing rules and regulations under the French labour code and granting more flexibility for employers in respect of employee management, thus attempting to make France more attractive to foreign investors. The Macron Labour Law Reform includes provisions that may have an effect on M&A transactions; the main ones are as outlined below.
The Macron Labour Law Reform has created a unique representative body in lieu of the existing staff delegates, works council and health and safety committee: the social and economic committee (SEC). An SEC will have to be implemented in companies with 11 or more employees by 31 December 2019 at the latest. SECs will replace the works councils as from such date, and will exercise similar functions to those of the works councils. As is the case for works councils, relevant compulsory consultations with SECs must be carried out within certain time limits (see Section VII.iv).
Introduction of greater flexibility around employment restructuring
Rules governing collective redundancies for economic reasons
Under French law, in order to implement collective redundancies for economic reasons employers must provide valid economic grounds justifying the redundancies. Since the Macron Labour Law Reform, these grounds must now be assessed at the level of the French territory only (i.e., at the level of the French employer company only, or at the level of the French company and any other entities of the group located in France if those entities belong to the same business sector as the French company). Before the Macron Labour Law Reform, such grounds were assessed at the level of the group as whole in France and abroad.
These amendments further progressed on the simplification of the redundancy rules that had been initiated under Law No. 2016-1088, which entered into force on 8 August 2016 (El Khomri Act). The El Khomri Act introduced two main changes to the redundancy rules: the codification of two grounds of dismissal previously only recognised by case law (restructuring aimed at safeguarding a company's competitiveness and the closure of a company); and the addition of economic indicators defining the concept of 'economic difficulties'.
Since the El Khomri Act was enacted, economic difficulties are now mainly appreciated on the basis of a significant decrease in the number of orders or the turnover of a company, appreciated by reference to a number of quarters and the number of employees within a company (e.g., in companies with less than 11 employees, a decrease of the turnover during one quarter is considered as a sufficient ground for an economic redundancy). These indicators do not constitute an exhaustive list, and any other element justifying the existence of economic difficulties can be used to justify 'economic difficulties'. Therefore, despite these modifications, French case law will continue to be of key relevance when establishing whether a company is facing economic difficulties.
Collective mutual termination procedure
To facilitate job reorganisations and head count adjustments other than for economic reasons, the 2017 Macron Labour Law Reform has introduced an ad hoc voluntary termination procedure called the collective mutual termination procedure. Under the procedure, employees apply for a voluntary departure plan, which must be validated by the French Labour Administration. Companies will not have to demonstrate economic difficulties before implementing such an agreement. Under the supervision of the French Labour Administration, the voluntary departure plan must contain specific provisions, and in particular the maximum number of job terminations contemplated and the modalities of information for SECs (no consultation with an SEC is required). The collective mutual termination procedure does not prevent an employer from hiring new employees either for a new position or a position occupied by an employee who agreed to the mutual termination of his or her employment contract.
ii Employees' right to make an offer to buy 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 and 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.7 The Hamon Act does not grant any priority or pre-emption rights 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.
Regarding companies with fewer than 50 employees, such employees must be informed of a 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 a proposed sale at the latest when the works council or the SEC 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 or SEC 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 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.8 However, should one or more employees ultimately decide to make an offer to buy the company or the business, the Hamon Act (and its implementing Decree of 28 October 2014) is silent as to the level of information that the company must provide.
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.
iii Reinforced role of the works council or the SEC of the target of a takeover bid
Pursuant to Law No. 2014-384, which entered into force on 29 March 2014 (the Florange Act), in a public company takeover context, the works council or the SEC of the target company must 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 or the SEC must be completed (i.e., a positive or negative opinion must be issued) within one month of an offer being filed. If the works council or the SEC 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 or the SEC can justify in court that it did not receive sufficient information about 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 or the SEC 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 or the SEC prior to its signature.
During the consultation process, the target company's works council or the SEC 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.
iv Defined time limits for works councils or SECs to issue their opinion in compulsory consultation situations
A decree dated 27 December 2013 establishes the relevant time limit for works councils to issue their opinion in the event that their 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 their consultation, the members of the works council must issue their opinion within the following time limits (the starting point being the date on which 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.
As indicated in Section VII.i, the SEC will replace the works council on 31 December 2019 at the latest. The defined time limits within which the SEC will have to render its opinion in compulsory consultations (and that will apply as from the setting up of the SEC) are as follows: one month generally; two months if the SEC is assisted by an expert; and three months in very specific situations where the consultation is carried out in a company that has one or more local SECs involved in the consultation process being assisted by at least one expert.9 As is the case with the works council, these time limits apply in the absence of an agreement entered into between the employer and the trade union representatives (or, failing that, the SEC) providing for a specific time frame for the consultation of the SEC.
v Obligations 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.
vi Obligations of employers in the fight against corruption and the protection of whistle-blowers
The Sapin II Law on transparency, the fight against corruption and the modernisation of the economy created two new obligations for employers aimed at fighting corruption and protecting whistle-blowers.
Since 1 January 2018, employers with more than 50 employees must implement an internal process allowing employees to report, confidentially, any crime or criminal offence, a serious and obvious violation of an international treaty ratified or approved by France, or a threat or serious damage caused to the general interest, that they have had knowledge of personally during their employment.
Employers with more than 500 employees must also implement:
- a code of conduct that must give a definition as well as examples of what could constitute an act of corruption, and also include disciplinary sanctions to be taken in cases of its violation;
- a process allowing employees to report, confidentially, any violations of the company's code of conduct; and
- a training programme for the executives and staff most exposed to potential risks of corruption.
Any employee who submits, in good faith, a report of a violation will be considered as a whistle-blower and will benefit from a specific protective status against dismissal. Reports of violations must also be followed by an internal investigation that must verify the truthfulness of the report. Therefore, when implementing such processes, employers must ensure their compliance with the French labour regulations, in particular with regard to the protection of employees' rights to privacy as well as mandatory information and the consultation of employee representatives, particularly when implementing monitoring devices.
vii Risk of requalification of equity instruments granted to managers (management packages) as remuneration subject to social security charges
The Paris Court of Appeal ruled in July 2017 that gains realised by managers upon the sale of equity instruments (warrants in the case at hand) in the context of an LBO exit, when such instruments were granted to the managers (because of their status) and kept by the latter to the extent that they remained within the company, should be considered as a salary for social contributions purposes (i.e., the gain would be subject to social contributions at a rate of around 40 to 50 per cent on an employer's part, and around 20 to 30 per cent on an employee's part).10 Indeed, it was held that the conditions under which such warrants were granted (to employees only) and may be kept (for as long as the beneficiaries remain within the company) establish a strong link with the employment agreement or corporate office (e.g., directorship) of the relevant beneficiary. The case is pending before the Supreme Court and, should it be confirmed, it cannot be ruled out that this principle would apply to any kind of equity instrument awarded in the same circumstances as the ones at stake. The outcome of this litigation will need to be monitored closely, considering its potential significant impact on the cost of management packages.
VIII TAX LAW
i Repeal of the additional 3 per cent tax on distributed dividends
Article 235 ter ZCA of the French tax code (FTC), introduced in 2012, originally stated that distributions made by entities subject to French corporate income tax, irrespective of the tax residence of the beneficiary, were subject to a 3 per cent tax at the level of the distributing company (subject to certain exceptions such as SMEs).
On 30 September 2016, the French Constitutional Council ruled such 3 per cent tax unconstitutional as it failed to observe the constitutional principles of equality before the law and before charges levied by the state.11 Indeed, the aforementioned Article provided for an exemption for distributions occurring within a French tax consolidated group; however, this exemption did not apply to distributions made to companies that fulfilled the conditions to be part of a French tax consolidated group, but that had not elected such tax regime; or were not able to elect such tax regime as they were located in another EU Member State. Following such decision, such exemption was extended by law,12 and distributions made to qualifying companies meeting the criteria to be part of a French tax consolidated group had they been located in France are, in principle, exempt from the 3 per cent tax (in particular, a qualifying company was required to hold at least 95 per cent of the distributing company).
Furthermore, on 27 June 2016, the French Administrative Supreme Court referred the two following questions to the Court of Justice of the European Union (CJEU) for a preliminary ruling:13
- Does Article 4 of the Parent Subsidiary Directive (PSD) preclude a levy such as the 3 per cent tax, which is payable on the distribution of profits by parent companies that are liable to corporation tax in France and which is assessed on the basis of the sums distributed?
- Is a levy such as the 3 per cent tax to be regarded as a 'withholding tax' from which, pursuant to Article 5 of the PSD, profits distributed by a subsidiary must be exempt?
In the procedure before the CJEU regarding the Belgian fairness tax, the Advocate General considered it to be contrary to the PSD, and mentioned in his opinion the similarities with the French 3 per cent tax on distributed dividends, paving the way for similar decisions to the extent that, for the French case, the Advocate General dispensed with an opinion and no hearing was held. On 17 May 2017, the CJEU ruled both the Belgian fairness tax and the French 3 per cent tax to be contrary to the PSD.14 Regarding France, the CJEU first underlined that profits received from subsidiaries and redistributed by a parent company to its shareholders fall within the scope of Article 4 of the PSD. Consequently, it judged that Article 4 of the PSD precluded a levy on the distributions, by a parent company, of profits consisting of dividends received from a subsidiary. Such preliminary ruling echoed the action for failure the European Commission initiated against France in February 2015.
Following this CJEU decision, the French Administrative Supreme Court referred on 7 July 2017 a priority preliminary ruling to the French Constitutional Council on whether the 3 per cent tax was contrary to the constitutional principles of equality before the law and before charges levied by the state on the grounds that there was a difference in treatment between15 dividends redistributed by parent companies, depending on whether they originate from French subsidiaries, subsidiaries located in non-EU countries or EU subsidiaries; and distributions by a company originating from its own operating profits and distributions originating from dividends received from subsidiaries.
In its decision dated 6 October 2017, the French Constitutional Council welcomed the argument and ruled that the 3 per cent tax was contrary to the above constitutional principle of equality.16 This declaration of unconstitutionality had immediate effect as from the date of the publication of the decision (i.e., 8 October 2017) and applied to all cases for which a final judgment was not rendered at this date. For past distributions, taxpayers are also entitled to claim a refund of the 3 per cent tax unduly paid, subject to applicable statutes of limitation.
Following these various negative decisions, the law was subsequently amended, with the 3 per cent tax being repealed for distributions paid by French companies as from 1 January 2018.17 To finance the refunds of the 3 per cent tax without affecting the public budget, two additional surtaxes to French corporate income tax were introduced for large companies for the fiscal year 2017 only.
ii Modification of the rules regarding the rollover tax regime for partial asset contributions in a cross-border situation
The French prior ruling procedure for cross-border mergers was held contrary to the EU Merger Directive and the freedom of establishment by the CJEU.
Article 210 C of the FTC provided that when transfers were made to foreign legal persons by a French company, the applicability of the French rollover tax regime was subject to a prior ruling.
The ruling was granted if the taxpayer evidenced that:
- the operation was justified for commercial reasons;
- it did not have as its principal objective, or as one of its principal objectives, tax evasion or avoidance; and
- the manner in which the operation was carried out made it possible for the capital gains deferred for tax purposes to be taxed in the future.
This ruling was not required for mere domestic transfers. In Euro Park,18 the French Tax Administration denied the benefit of the rollover tax regime because the taxpayer did not seek this ruling and, in any case, it would not have obtained it under point (b). In response, Euro Park challenged the ruling procedure based on EU law.
The CJEU decision showed that the rules of the French ruling procedure were not sufficiently precise, clear and foreseeable. While it is only by way of exception and in specific cases that Member States may, pursuant to Article 11(1)(a) of the Merger Directive, refuse to apply or withdraw the benefit of all or any part of the provisions of that Directive, French law had recourse to a general presumption of tax evasion or tax avoidance, according to the CJEU. Furthermore, the CJEU noted that:
- French law treated cross-border mergers and domestic mergers differently; and
- that if such difference may be justified by the overriding public interest motive linked to preventing tax evasion or tax avoidance, in the present case, the prior ruling procedure introduced a general presumption of tax evasion or tax avoidance that goes beyond what is necessary to achieve that objective and could not, therefore, justify an obstacle to the freedom of establishment.
The CJEU therefore ruled that the prior ruling required to benefit from the rollover tax regime for cross-border mergers that was required by French law was contrary to Article 11 of the Merger Directive and the freedom of establishment. Consequently, the second Amended Finance Bill for 2017 has modified the provisions of French domestic tax law accordingly: the French legislator repealed the advance tax ruling required prior to any partial contribution of assets implemented to the benefit of a foreign beneficiary company (thus, a tax ruling will only be required in the context of a transaction that does not involve a qualifying 'complete and autonomous business'). For a transaction to benefit from the favourable merger tax regime, the contributed assets shall be allocated to a French permanent establishment of the foreign beneficiary company (unless such assets are qualifying shareholdings).
Finally, if the transaction benefits from the favourable merger regime, the French contributing entity will be required to file a specific return in order for the French Tax Administration to understand the purpose of the transaction as well as its consequences. Failure to file such specific return will trigger a €10,000 fine per transaction.
Ix COMPETITION LAW
The French Competition Authority has had responsibility for merger control since 2009 (this function was previously carried out by the Minister for the Economy), and has increasingly adopted a more efficient approach to the application of its rules. In 2017, 236 concentrations were reviewed and cleared by the Authority, eight of which were cleared conditionally (that is, with remedies). In one of the cases notified in 2017, the Authority opened in-depth investigations (second phase).19
It is also important to note that the Competition Authority is breaking new ground in the way it deals with cases. In an unprecedented move, it has closed a litigation procedure against La Poste, and on the same day cleared a merger between the latter and Suez involving the same activity.20 In both cases, the identified concerns involved, on the one hand, a risk of using competitive advantages that could not be reproduced by competitors, linked to the universal postal service, and on the other, price setting by La Poste of offers or services for the collection of non-hazardous office waste at prices below costs. The Competition Authority accepted two series of similar commitments made by the parties in each case.
Recently, and for the first time, the Competition Authority had to issue a decision on a merger involving two online platforms.21 To do so, it had to take into account network cross-effects and address multi-homing practices, and take an interest in the importance of data in this transaction. In this regard, the Competition Authority opened an in-depth investigation to evaluate the capacity of current and potential competitors to stimulate competition in the face of the merger of two of the main operators in the French online real estate advertising market, Concept Multimedia (Logic-immo.com) and Axel Springer Group (SeLoger.com). It conducted an online questionnaire on more than 30,000 real estate agencies, and eventually gave an unconditional clearance.
i Application of the new merger control guidelines of 10 July 2013
On 10 July 2013, new guidelines on merger control were adopted by the Competition Authority, revising the previous guidelines of December 2009 and taking into account the Authority's experience since.
The 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. The 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.
The GUPPI test was last used by the Competition Authority in its decision of 27 July 2016 authorising the acquisition of the Darty company by the Fnac group.22 In this decision, the Authority, for the first time in France and Europe, considered the market for the retail distribution of certain domestic electronic products to include both online and in-store sales. The Authority then based its analysis of horizontal effects on the GUPPI test to conclude that a post-merger price increase by the new entity was likely. The Authority also noted that the transaction would lead to a risk of the stores not being incentivised to propose price discounts or punctual promotions that would likely enhance local competition. To meet the identified concerns, the Fnac group has committed to divest six stores to one or more retailers of electronic products. Consequently, the Authority cleared the acquisition, considering that this divestiture will guarantee sufficient competition in the market of retail distribution of electronic products in Paris and its suburbs.
ii Substantial penalties can be imposed for gun-jumping
When French thresholds are met, a pre-merger filing is mandatory. This applies to all concentrations, including foreign-to-foreign transactions, even in the absence of an overlap between 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.
An example of sanction for the first type of gun-jumping (i.e., for failing to notify) can be found in Case No. 13-D-22.23 On 26 December 2013, the 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 before closing the transaction on 6 May 2011. It was only in September 2011, in the context of the examination of another acquisition, that this merger was reported to the Authority by a third party. On appeal, the fine was reduced to €3 million on the grounds that the transaction was notified shortly after the Authority's request and that Castel Frères did not intend to bypass the competition rules.24
Regarding the second type of sanction for premature implementation, the Competition Authority imposed a fine for a breach of the standstill obligation for the first time in 2016. In 2014, Altice, active in the French telecom market through its subsidiary Numericable, notified the planned acquisition of SFR and OTL, which was authorised by the Authority in October 2014. In April 2015, the Authority conducted a dawn raid on the premises of Numericable, SFR and OTL, and found evidence that Altice was involved in SFR's business and strategy prior to the clearance, notably in approving the participation of SFR in a public tender, assisting SFR in renegotiating a network sharing agreement with Bouygues Telecom, determining the prices of SFR internet retail offers and coordinating with SFR in the context of OTL's acquisition. As a result, on 8 November 2016, the Competition Authority imposed a fine of €80 million on the Altice Group for implementing two transactions prior to obtaining merger control clearance.25 This is one of the highest fines worldwide ever enforced for such a practice.
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.
iii Diversification of remedies that can be imposed by the Competition Authority
Regarding commitments and injunctions, in its new merger control guidelines, the 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 tends to confirm such trend. For instance, in 2016, in five cases out of six, the Authority conditioned its approval only on behavioural remedies. However, 2017 was a more balanced year, as in half of its cases, the Authority cleared the transaction subject to structural and behavioural remedies,26 and conditioned its approval only on behavioural remedies for the other half.27
An illustration of such behavioural remedies can be found in the Authority decision dated 13 November 2017 relating to the absorption of Coopérative agricole des Agriculteurs de la Mayenne (CAM) by Terrena.28 In the markets of agricultural supplies, and especially in the market of conventional and non-organic seed distribution, the Competition Authority identified several possible anticompetitive effects in one geographic area. In view of a high market share and of the supply obligations provided by the terms of the cooperative (i.e., Terrena affiliates had to purchase 100 per cent of their supplies from the cooperative, whereas CAM affiliates were not subject to any similar quantified targets), the new entity could have used its market power to increase its prices. Another anticompetitive risk was identified in the market for the collection of cereals, protein and oilseed crops in the same area, insofar as the affiliates would have had to sell their entire production to the new entity. To address those competition concerns, Terrena committed to modify its terms to reduce the contribution obligation of the new entity's affiliates and the obligation to get supplies from the new entity to a minimum of 55 per cent. Consequently, the Authority cleared the acquisition subject to the enforcement of these commitments.
It is important to note that the 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 companies is central to the process of French merger control. 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.29 The Authority withdrew its approval on the ground that Canal Plus Group did not fulfil several commitments that were attached to the authorisation decision.
If such non-compliance with 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, in 2017, the Competition Authority fined the Altice and SFR Group €40 million for its non-compliance with commitments made when SFR was taken over by Numericable.30
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.
iv Contemplated changes in the French merger control regime
The Competition Authority launched an initiative on 20 October 2017 to modernise and simplify the merger law. Three topics have been proposed for consideration:
- the simplification of merger procedures (especially the current 'simplified procedure');
- the need to define new criteria triggering control in order to enable the Competition Authority to review operations that could lead to competition problems and that are not currently covered by merger control procedures, in particular through the introduction of limited ex post control by the Competition Authority or the reintroduction of a market share threshold; and
- the role of trustees in merger control.
At least 20 contributions have been received from stakeholders. Following this first informal consultation, the Competition Authority officially launched a public consultation on 7 June 2018, for which stakeholders' responses are expected by 28 September 2018.
i Strengthening of the Foreign Investment Regulation
During the course of 2017, the French Foreign Investment Regulation was subject to certain technical amendments, and the European Commission has presented a proposal to establish a framework to examine foreign direct investments into the European Union. At the end of 2017 and the beginning of 2018, an inquiry commission was created by the National Assembly to examine the state's decisions relating to industrial policy matters, as well as measures that are likely to protect France's national industrial leaders. The commission most notably looked into three major transactions, namely the acquisition by General Electric of Alstom's power division, Alcatel's acquisition and merger with Nokia, and the acquisition of STX France by Fincantieri. Moreover, the commission criticised the loss of sovereignty in companies deemed strategic for France's national interests, and pointed out the political context in which these transactions were authorised by the former government. The government has announced its intention to strengthen the applicable regulation. If, for the time being, they are only proposals, such reform would have an impact on foreign investments as follows:
- the sectors in which foreign investments require a prior authorisation would be extended to include new strategic sectors such as the artificial intelligence, robotics, spatial, financial infrastructures and data storage sectors;
- monitoring tools would be created to verify whether foreign investors comply with their commitments;
- a new penalty system would be implemented, providing for more progressive sanctions, including injunctions, remedy measures orders, and financial penalties of €5 million or 10 per cent of the target's turnover;
- 'golden shares', which would consist of shares with specific rights to the benefit of the state, allowing the state to block any transfer of assets, intellectual property or delocalisation in companies deemed strategic, would be introduced; and
- a defence and national security council would be established to quickly react to takeovers of strategic assets.
ii Promoting the growth and transformation of companies
A draft law relating to an action plan for corporate growth and transformation will be discussed before the end of 2018. The aims of this reform are, among others:
- enhancing the creation of new companies by reducing administrative procedures costs, creating a single register for the publication of information on companies or even creating more flexible duties for entrepreneurs;
- supporting the financing of companies, in particular by making stock markets more accessible to SMEs (see Section III.iv) and directing French people's savings towards companies;
- fostering investment in French companies by protecting inventions and expanding R&D;
- involving employees in companies' results, and developing employees savings and employee ownership;
- facilitating exportation through the establishment of a single exportation counter; and
- simplifying takeovers of companies by their employees.
iii General Data Protection Regulation 2016/679 takes effect
Two years after its adoption, the provisions of the General Data Protection Regulation (GDPR) finally became applicable across the Europe Union on 25 May 2018. GDPR, which replaces EU Data Protection Directive 95/46/EC, is meant to facilitate the flow of personal data within Europe by harmonising the rules that govern how the data can be collected and used. The new law introduces a number of changes to the previous data protection regime, including:
- increased transparency and accountability obligations imposed on entities that process personal data;
- extraterritorial application of the law to parties outside the EU that offer services or target EU consumers;
- a one-stop shop mechanism for enforcement; and
- significantly increased sanctions for breaches.
Given the financial and reputational consequences for non-compliance with the GDPR, it is anticipated that data privacy and security issues will become increasingly prominent issues in M&A transactions.
1 Didier Martin is a partner at Bredin Prat.
2 Financial data extracted from Mergermarket, 'Trend Reports Q1–Q4 2016 and 2017 (France)'.
3 Financial data extracted from Mergermarket, 'Trend Report Q1–Q4 2017 (France)' and 'Deal Drivers EMEA FY 2017'.
4 Financial data extracted from Mergermarket, 'Trend Report Q1–Q4 2017 (France)' and 'Deal Drivers EMEA FY 2017'.
5 Financial data extracted from the Observatoire des offres publiques 2018 report and the Ledouble Analyse des offres publiques 2017 report.
6 Orders No. 2017-1385 to No. 2017-1389 dated 22 September 2017; Order No. 2017-1718 dated 20 December 2017.
7 These provisions of the Hamon Act do not apply to companies that are subject to insolvency proceedings.
8 The guidelines that have been published by the French Ministry of Labour for the implementation of the Hamon Act confirm this approach.
9 Decree No. 2017-1819 dated 29 December 2017, Article 1.
10 Paris Court of Appeal, 6 July 2017, No. 14/02741.
11 Constitutional Council, 30 September 2016, No. 2016-571 QPC, Sté Layher SAS.
12 Law No. 2016-1918 of 29 December 2016.
13 Council of State, 8th and 3rd chambers, 27 June 2016, No. 399024, Association française des entreprises privées (AFEP) et al.
14 CJEU, 17 May 2017, Case C68/15, X v. Belgium and CJEU, 17 May 2017, Case C365/16, AFEP et al v. France.
15 Council of State, 8th and 3rd chambers, 7 July 2017, No. 399757, Société de participations financière.
16 Constitutional Council, 6 October 2017, No. 2017-660 QPC, Société de participations financière.
17 Law No. 2017-1837 of 30 December 2017, Article 37.
18 CJEU, 8 March 2017,C-14/16, Euro Park Service.
19 Case No. 18-DCC-18.
20 Case No. 17-D-26 and Case No. 17-DCC-209.
21 Case No. 18-DCC-18.
22 Case No. 16-DCC-111.
23 Situation of the Castel Group in light of Article 430-8 of the Commercial Code, decision dated 20 December 2013, Case No. 13-D-22.
24 Judgment of the Supreme Administrative Court dated 15 April 2016, Appeal No. 375658.
25 Situation of the Altice group with regard to Section II of Article L 430-8, decision dated 8 November 2016, Case No. 16-D-24.
26 Acquisition of Anios by Ecolab, decision dated 31 January 2017, Case No. 17-DCC-12; acquisition of MédiPôle-Partenaires by Elsan, decision dated 23 June 2017, Case No. 17-DCC-95; acquisition of the Bricorama group by ITM Equipement de la Maison, decision dated 18 December 2017, Case No.17-DCC-215; acquisition of stores owned by the Tati group (Tati, Fabio Lucci, Giga Store) by Gifi (GPG group), decision dated 18 December 2017, Case No. 17-DCC-216.
27 Merger by absorption of Ecofolio by Eco-emballages, decision dated 3 April 2017, Case No. 17-DCC-42; acquisition of Totalgaz SAS by UGI Bordeaux Holding SAS, decision dated 3 July 217, Case No. 17-DCC-103; merger by absorption of Coopérative agricole des Agriculteurs de la Mayenne by Terrena, decision dated 14 December 2017, Case No. 17-DCC-210; creation of a full-function joint venture between La Poste and Suez, decision dated 21 December 2017, Case No. 17-DCC-209.
28 Case No. 17-DCC-210.
29 Case No. 2012-280 further to a request for a preliminary ruling on a question of constitutionality.
30 Case No. 17-D-04.