Coronavirus: impact of French measures on M&A transactions

Out-Law Guide | 14 Apr 2020 | 4:28 pm | 7 min. read

Measures introduced by the French government to support companies affected by the repercussions of the coronavirus pandemic will impact on the mergers and acquisitions (M&A) process.

Emergency legislation in France provides for the suspension of legal, regulatory and contractual time limits, as well as time limits for administrative decisions to be made. Buyers may be seeking additional assurances as part of an ongoing transaction, or even considering whether the pandemic triggers a material adverse change (MAC) clause.

Here, we look at some of the ways in which the current circumstances may affect ongoing transactions and transactions that have already been completed.

Suspension of time limits in sanction clauses

On 25 March 2020, the French government adopted ordinance no. 2020-306 on the extension of time limits and adaptation of legal procedures during the period of the public health emergency (link to ordinance in French). Article 4 of the ordinance provides for the suspension of legal, regulatory and contractual time limits.

The ordinance covers only the suspension of time limits during a 'reference period' of the duration of the public health emergency plus one month. French law no. 2020-290 dated 23 March retroactively set the period of the public health emergency from 12 March to 24 May, subject to potential prorogation. The ordinance, therefore, only covers time limits expired between 12 March and 24 June.

In the event that the pandemic was considered as a termination cause under a negotiated MAC clause, we believe that this could only be accepted if a materiality threshold on the negative effects imposed on the target company is provided under the share purchase agreement.

In contractual matters, periodic penalty payments (astreintes), penalty clauses (clauses pénales), termination clauses (clauses résolutoires) or any clause providing for a forfeiture of enforceable rights are suspended until the reference period ends. The suspension applies where any remaining contractual obligations are not performed during any contractual grace period which expires during the reference period. Astreintes and clauses pénales which were effective before the reference period began will be effective again one month after the reference period ends, assuming the default has still not been remedied at this date.

Particular impacts on M&A transactions include:

  • late interest could be considered as astreintes, and therefore may be suspended during the reference period;
  • MAC clauses that are drafted in such a way that they may be considered as conditions subsequent to the undertaking of purchase may be suspended during the reference period;
  • failure to comply with the time limits for notification of claims under the terms of 'locked-box' transaction or warranties and indemnities provisions resulting in the forfeiture of rights for indemnification may be suspended during the reference period;
  • break-up fee provisions when considered as clauses pénales sanctioning failure to meet the conditions precedents within the contractual time limit may be suspended during the reference period.

Suspension of statutes of limitation for tax and social charges matters

Article 10 of ordinance no. 2020-306 provides for the suspension of statutes of limitation in relation to tax audit matters.

Limitations which started running before 12 March are suspended as of 12 March until the end of the reference period, and limitations which were due to start during the reference period are postponed until the end of the reference period. This provision only covers limitations that were to expire on 31 December 2020 at the latest.

The same provisions apply to French social administration (URSSAF) audit matters under article 4 of ordinance 2020-312, without limiting such provisions to limitations that were to expire by 31 December 2020.

Particular impacts on M&A transactions include:

  • duration for warranties and indemnities in relation to tax matters which are defined with reference to statutes of limitation are extended by the term of the reference period, assuming that the limitations were to expire by 31 December 2020;
  • duration for warranties and indemnities in relation to social matters which are defined with reference to statutes of limitation are extended by the term of the reference period;
  • negotiations regarding ongoing transactions shall not provide for a fixed term regarding warranties and indemnities in relation to tax and social matters.

Foreign investments in sensitive sectors and merger control

Article 7 of ordinance no. 2020-306 provides for the suspension of time limits during which an administrative decision, agreement or opinion may or shall be granted or is deemed to be implicitly granted and that do not elapse between 12 March and the end of the reference period. The starting point for time limits of this nature which should have started running during the reference period is postponed until the end of the reference period. The same rules apply to time limits at the end of which the French administration is bound to confirm the completeness of a filing or to require complementary information or documents.

Among other things, these provisions apply to prior approval of foreign investments in France in sensitive sectors (as amended since 1 April 2020 by French décret no. 2019-1590 and a French arrêté dated 31 December 2019.

The French Ministry of Economy and Finance has indicated orally that the departments in charge of these investigations do not contemplate implementing these time limit suspensions for the time being and that they intend to carry out due diligence in the usual legal and regulatory time frames to the extent possible. However, delays should be anticipated as the due diligence process requires the cooperation of several other administrative departments that may be locked down.

In the context of merger control filings, the French Autorité de la Concurrence published a statement on 27 March in relation to the adjustment of its merger control process (link to statement in French). The authority indicated that the timing for due diligence and answers on merger control filings will be suspended as of 12 March until the end of the reference period. However, the authority will do its best efforts to deliver, to the extent possible, its opinions and decisions without delays and without waiting for the expiration of the additional time limits provided under these provisions.

Particular impacts on M&A transactions include:

  • for ongoing negotiations, the long-stop date should be considered carefully;
  • cooperation clauses to carry out merger control filings should be enhanced in order to assist the buyer in obtaining these prior approvals and therefore to enable the French administrations to reduce the time needed to deliver their approval, without generating any confusion in the responsibilities borne by each party in these processes.

Price structure

Buyers are likely to prefer adjustment of the purchase price based on completion accounts due to the uncertainty of the current circumstances.

Where sellers push back on such a price structure, a price structure combining both a locked-box mechanism and adjustment on completion accounts may be considered, so that the price based on locked-box accounts may be adjusted if either the net cash position or the working capital requirement falls below a materiality threshold agreed between the parties.

Depending on the circumstances and the involvement of the sellers in the conduct of the business of the target company post-completion, a significant fraction of the consideration may be shifted towards 'earn out'.

MAC clauses and force majeure

Whether the Covid-19 pandemic is a reason to implement a MAC clause will depend on the wording of the clause and, notably, on any exclusions contained in them. The idea remains that these clauses can only be enforced by buyers because of the occurrence of unforeseeable circumstances having a significant adverse effect on the conduct of the business of the target company.

For executed MAC clauses in which a change in market conditions has not been excluded, the reluctance of French courts to approve the enforcement of such clauses should result in the fact that knowledge by the buyers for the past several weeks of the adverse effects of the pandemic will ruin the effectiveness of these clauses.

It is now market practice to exclude the Covid-19 pandemic as a reason for termination of contract for breach of contract. This exclusion is justified as we are now well aware of the negative impact of the pandemic on the economy. In the event that the pandemic was considered as a termination cause under a negotiated MAC clause, we believe that this could only be accepted if a materiality threshold on the negative effects imposed on the target company is provided under the share purchase agreement (SPA).

Force majeure as defined under article 1218 of the French civil code may apply to SPAs and guarantees. However, the enforcement of force majeure to avoid the implementation of an obligation to pay a sum of money is challenged in French doctrine. Force majeure will only exempt the debtor (i.e. the buyer for the payment of the consideration) from its obligation if the event, which is out of the debtor's control, was reasonably unforeseeable at the date of execution of the SPA.

While the pandemic is certainly beyond the debtor's control, the unforeseeable part of the test is more difficult. From now, parties to SPAs executed or to be executed after 12 March, or at least from the first external signs of the French government's response, will not be able to take advantage of unpredictability. In our opinion, it is advisable to provide for a contractual definition of force majeure in ongoing transactions in order to avoid the application of the general definition in the French civil code.

Hardship

Article L. 211-40-1 of the French Code monétaire et financier excludes sales of financial instruments, notably shares issued by French 'sociétés anonymes' and 'sociétés par actions simplifées' from the scope of French hardship provided under article 1195 of the French civil code.

Consequently, hardship does not seem to be particularly relevant as a reason to withdraw from an M&A transaction, except if the transaction relates to sociétés à responsibilité limitée, sociétés en nom collectif and sociétés civiles, which do not fall within the scope of the exclusion.

Undertakings between signing and closing

The current circumstances may lead the buyer to reinforce its control over the conduct of the business of the target company during the interim period between signing and closing.

However, buyers should be careful not to interfere excessively in the conduct of the business of the target company during this interim period so as not to incur too much liability in the event of further difficulties if the conditions precedents are not met and completion does not occur.

Financing

Current circumstances are likely to make debt financing more complicated than in the past.

The provisions of any condition precedent related to financing should be considered carefully.

In addition, it may be worth negotiating a condition precedent in relation to the absence of an event of default of the target company regarding its finances.