Buying a company in France: how does the buyer protect itself?

1. Approaching the target: confidentiality before any information

Nothing circulates before a non-disclosure agreement is signed. The seller insists on it, but the buyer also benefits from a precise text: purpose limited to reviewing the transaction, duration, fate of documents if talks end, and an undertaking not to poach the target’s staff. Where the buyer is a competitor, commercially sensitive information goes only to a small team kept away from day-to-day operations.

2. The letter of intent from the buyer’s side

The letter of intent sets the indicative price, the price mechanism, the timetable and the conditions of the offer: satisfactory due diligence, financing obtained, any required clearances. What the buyer mainly wants is an exclusivity period long enough to complete due diligence and negotiate the agreement, without committing to buy. The letter must state clearly what binds the parties from signing (exclusivity, confidentiality) and what remains open. Breaking off negotiations only gives rise to liability in the event of fault, for instance an abrupt termination after assurances were given (Article 1112 of the French Civil Code). Compensation then covers neither the loss of the benefits expected from the contract nor the loss of the chance of obtaining them.

3. Acquisition due diligence: useful scope and use in negotiation

Due diligence covers legal matters (shares, articles, general meetings, material contracts and their change-of-control clauses, litigation), accounting and finance, tax, employment and, depending on the business, real estate, intellectual property or regulatory compliance. Its purpose is not only to spot risks: every finding has a place in the negotiation. It may justify a price reduction, a specific indemnity, or a remedy required before completion.

Watch the data room. If the agreement provides that everything in it is deemed known to the buyer, the buyer loses the warranty on whatever it failed to read. The scope of this “disclosed information” is negotiated just like the price.

4. Setting the price: locked box or completion accounts

With a locked box, the price is fixed on accounts drawn up at a past date, the reference date. The seller undertakes that no value leaves the target between that date and completion: no dividend, no exceptional remuneration, no payment to the seller or its related parties, except permitted and listed leakage. Any leakage is repaid euro for euro. The point most often missed is the period covered: it runs from the reference date, not from signing.

With completion accounts, the price paid at completion is provisional. It is adjusted afterwards on the basis of accounts drawn up at the completion date, usually on net debt and working capital. The agreement sets out who prepares these accounts, the time limit for disputing them and recourse to an expert in case of disagreement.

A locked box suits a stable target with recent, reliable accounts. Completion accounts suit cases where the latest accounts are old or the business is seasonal. Part of the price may also depend on future results: this is an earn-out.

5. Conditions precedent and managing the target until completion

Between signing and completion, the conditions precedent must be satisfied: merger control or foreign investment clearance where the transaction requires it, financing, consent of counterparties with a change-of-control clause, release of existing security, approval under the articles. Each has a long-stop date. If the party who had an interest in a condition failing prevents it from being fulfilled, the condition is deemed fulfilled (Article 1304-3 of the French Civil Code).

During this period, the seller remains in charge of the target. The agreement requires it to run the business in the ordinary course and makes major decisions subject to the buyer’s consent: distributions, borrowing, asset disposals, hiring or departure of senior managers. The buyer does not, however, take control before completion, which would breach merger control rules where they apply. A material adverse change clause only works if the triggering event is precisely defined.

6. The warranty from the buyer’s side

The warranty rests on the seller’s representations: accounts, tax, employment, contracts, litigation, title to assets, compliance. Any inaccuracy gives rise to compensation within the negotiated limits: de minimis, threshold, cap, and a duration aligned with the tax and social security limitation periods. Risks identified in due diligence fall outside the general warranty. They are most often covered by a specific indemnity, outside the de minimis and threshold.

The phrase “to the seller’s knowledge” narrows the warranty: the agreement must define whose knowledge is meant and what enquiries are expected. Finally, a warranty is only worth what can be paid under it. Escrow of part of the price, a first-demand bank guarantee or set-off against a vendor loan: the security is negotiated together with the warranty.

7. Financing the acquisition: acquisition holding company and acquisition debt

The acquisition usually goes through a holding company that buys the shares, borrows, and repays its debt out of the target’s dividends. The bank takes a pledge over the shares acquired. The target, on the other hand, may neither lend to the buyer nor guarantee its loan for the purchase of its own shares (Article L. 225-216 of the French Commercial Code, which applies to SAS companies through Article L. 227-1). The structure is built around this prohibition.

A vendor loan, under which the seller agrees to deferred payment of part of the price, reduces the bank financing needed. For the buyer it has a further advantage: amounts due under the warranty can be deducted from the outstanding balance, if the agreement so provides.

8. After completion: integrating the target into the group

Completion is not the end of the file. The share transfer must be recorded, new directors appointed, the amendment filings made with the Trade and Companies Register, the beneficial ownership filing updated and the transfer deed registered. Next come the agreements between the holding company and the target (services, cash management), which are put in place following the formalities required for agreements between related companies. The contractual deadlines must also be tracked: notification of warranty claims, calculation and payment of any earn-out. The firm stays on board for all of this.

Frequently asked questions

See also: does a letter of intent oblige you to sell? ; what does a French warranty cover? ; escrow or first-demand guarantee: securing warranty claims ; how does an earn-out work?

This information is general and does not constitute legal advice. Every transaction calls for its own analysis.