M&A transactions in France offer companies attractive opportunities to tap into new markets, drive growth or strengthen their market position. At the same time, the legal framework in France differs in many respects from the structures familiar in Germany. Anyone planning to buy or sell a business in France should take these specific features into account at an early stage.
Due diligence plays a crucial role in this regard. It serves to comprehensively examine the target company and identify potential risks before the transaction is finalised. Particularly in the context of M&A in France, specific features relating to company law, employment law or contractual matters can have a significant impact on the purchase price, the drafting of contracts and subsequent liability.
Below, you will learn about the pitfalls that arise particularly frequently during due diligence under French law and what companies should bear in mind when undertaking M&A in France.
Why due diligence in M&A in France requires particular attention
Due diligence forms the basis for well-informed decisions when buying or selling a business. The aim of the due diligence process is to identify potential risks, liabilities and legal particularities of the target company at an early stage. The findings are then taken into account in the purchase price negotiations and the drafting of the sale and purchase agreement.
However, when it comes to M&A in France, it is often not sufficient to carry out due diligence in accordance with the standards familiar from Germany. Whilst both legal systems pursue similar objectives, the legal frameworks and practical implementation differ in numerous areas. This applies, for example, to company law, employment law and existing contractual relationships.
Furthermore, certain risks only become apparent following an in-depth analysis. Unclear provisions under company law, obligations under employment law or ongoing legal disputes can have a significant impact on a company’s economic value. If such aspects are not adequately taken into account during the due diligence process, there is a risk of unexpected costs or legal disputes arising after the transaction has been completed.
A thorough review, taking into account the specific features of French law, is therefore a key factor in the success of cross-border transactions. It creates transparency and makes it possible to assess risks at an early stage and to mitigate them appropriately through contractual arrangements.
Our Alaris solicitors specialising in contract law, employment law and commercial law are well versed in all key aspects of M&A in France. Get in touch now!
Examine the specific features of company law relating to French companies
Even when examining the corporate law framework, differences between German and French companies often become apparent. As these aspects can have a direct impact on the validity of a transaction, they should be examined with particular care as part of the due diligence process.
Gesellschaftsform & Vertretungsbefugnisse
A key focus is on the analysis of the target company’s legal form. In France, the Société par Actions Simplifiée (SAS) and the Société à Responsabilité Limitée (SARL) are among the most commonly chosen legal forms. Depending on the legal form, different requirements apply with regard to corporate governance, representation and the transfer of shares.
As part of the due diligence process, it should therefore be checked who is legally authorised to represent the company and whether additional approvals are required for certain decisions. Errors in checking the powers of representation may result in resolutions or contracts being challenged at a later date.
Articles of Association, Shareholders’ Agreements & Resolutions
Unlike many German companies, French companies often have very individually tailored articles of association and supplementary shareholders’ agreements. These may contain provisions that make the sale of shares more difficult or subject it to certain conditions.
For example, there may be requirements for the consent of other shareholders, pre-emption rights or restrictions on transfer. If such provisions are not identified in advance, this can significantly affect the timetable for a transaction or even jeopardise its completion.
Shareholding and Group Structures
Furthermore, the shareholding structure of the target company should be analysed in detail. In the case of corporate groups in particular, there are often interdependencies under company law that are not apparent at first glance. These include, for example, shareholdings in subsidiaries, joint ventures with third parties or intra-group obligations.
A comprehensive review helps to identify potential liability risks and financial dependencies at an early stage. At the same time, it provides the necessary transparency to enable a realistic assessment of the company’s true value.
Employment law risks as a common stumbling block in M&A transactions
Alongside corporate law issues, employment law is one of the areas requiring particular attention in M&A transactions in France. As French employment law is regarded as comparatively employee-friendly, existing obligations and risks can have a significant impact on the transaction.
As part of the due diligence process, all employment relationships, remuneration models and employment contract provisions should be reviewed. It should be borne in mind that, in France, in addition to statutory provisions, collective agreements and company-specific regulations often apply, which may give rise to additional rights and obligations.
The CSE procedure: An essential consultation prior to signing
A serious and potential pitfall lies in the participation rights of the French works council, the Comité Social et Économique (CSE). For companies with, as a rule, more than 50 employees, French law prescribes a strict information and consultation procedure. This procedure must be fully completed before the purchase agreement is signed. If this obligation is neglected or carried out incorrectly, the transaction is legally vulnerable. Furthermore, there is a risk of severe penalties for obstructing the work of the works council. The timing of this procedure must therefore be taken into account from the outset during the due diligence process.
Working time models & the hidden risk of millions associated with “forfait-jours“
Despite the statutory 35-hour working week, many managers and employees in France organise their working hours autonomously on the basis of an annual flat-rate system for working days (Forfait-Jours). In practice, however, these contractual agreements often prove to be formally invalid during HR due diligence, for example because the employer has not kept the legally required records of working hours and rest periods properly. If such an agreement is invalid, employees can claim back pay for overtime, including premium rates, retroactively for the last three years. For larger workforces, this risk quickly adds up to substantial claims for back pay, which significantly reduce the company’s value.
Mandatory sectoral collective agreements
Unlike in Germany, where adherence to collective agreements often depends on membership of a trade association, in France almost every company is bound by a sectoral collective agreement based on the business’s actual main activity. As part of the due diligence process, it is essential to meticulously check whether the target company has correctly classified its employees. Incorrect classifications regularly lead to undiscovered entitlements to minimum wages, special payments or longer holiday periods, which the buyer must settle after the deal.
Ongoing employment disputes
Particular attention should also be paid to pending employment law proceedings and potential disputes with current or former employees. Outstanding disputes can entail significant financial risks and should therefore be carefully assessed.
In addition to ongoing legal proceedings, undocumented disputes, recurring complaints or breaches of employment law may also provide indications of future risks. A comprehensive analysis of the employment law situation helps to identify such risks at an early stage and to take them into account appropriately when structuring the transaction.
Carefully analyse contracts and business commitments
In addition to aspects relating to company and employment law, the review of existing contractual relationships is one of the most important components of due diligence. Many of a company’s financial risks do not arise from its balance sheets, but from ongoing obligations towards customers, suppliers, landlords or distribution partners.
The pre-contractual duty to provide information under the Civil Code
Since the reform of French contract law, Article 1112-1 of the Civil Code has imposed a strict pre-contractual duty of disclosure on the parties. Each party must inform the other of all circumstances the knowledge of which is decisive for consenting to the contract. If, during the due diligence process, the seller withholds material or value-reducing information, a standard contractual warranty is often insufficient to protect the buyer. In the worst-case scenario, such a breach can lead to the entire sale contract being set aside on the grounds of fraudulent misrepresentation, even years after completion.
Customer, Supplier and Partnership Agreements
Firstly, the company’s key commercial contracts should be analysed. This involves, amongst other things, contract terms, notice periods, exclusivity agreements and specific provisions regarding performance and liability.
Particular attention should be paid to so-called change-of-control clauses. Such provisions may stipulate that, in the event of a change of ownership, contracting parties are granted certain rights or may even terminate contracts. If these clauses are overlooked during the due diligence process, this can have significant financial consequences once the transaction has been completed.
Commercial tenancy agreements & location issues
Commercial tenancy agreements should also be carefully reviewed. In particular, production sites, storage facilities or business premises may involve long-term commitments that are of great significance to the future development of the business.
In addition to the terms of the agreements, factors such as renewal options, termination provisions or obligations to maintain the leased premises play an important role. These factors can have a direct impact on the value of the business and should therefore be taken into account in the valuation.
Commercial Agents & Sales Systems
If the company has commercial agents or an extensive distribution network, a detailed analysis of the relevant contractual relationships is recommended. French law provides for protective mechanisms for commercial agents in certain cases, which may give rise to financial claims in the event of contract termination.
Furthermore, it should be examined whether distribution agreements are legally valid and whether they could give rise to long-term obligations or liability risks. An early assessment of these business matters helps to avoid any surprises after the transaction has been completed.
Compliance, Liability & Ongoing Legal Disputes
Another key aspect of due diligence concerns the assessment of potential liability risks and compliance with legal and regulatory requirements. Breaches in these areas can have significant financial consequences and have a lasting impact on a company’s value.
Pending court and arbitration proceedings
As a first step, it should be investigated whether there are any ongoing court, arbitration or administrative proceedings against the target company. In this context, it is not only proceedings already pending that are relevant, but also potential disputes that could develop into legal disputes in the future.
Depending on their scope and the amount in dispute, such proceedings may pose significant risks to the planned transaction. A thorough analysis makes it possible to assess any potential impact on the company’s value at an early stage.
Data protection & regulatory requirements
Furthermore, it should be checked whether the company complies with the statutory requirements applicable to its activities. This includes, amongst other things, data protection obligations, sector-specific regulations and regulatory approvals.
For companies operating internationally in particular, breaches of regulatory requirements can lead to fines, regulatory action or reputational damage. Such risks should therefore be identified and assessed as part of the due diligence process.
Corruption prevention & internal compliance systems
Particularly in the case of larger companies, the review of existing compliance structures is also becoming increasingly important. This involves examining whether internal processes and control mechanisms are in place to prevent legal breaches and ensure compliance with statutory requirements.
A lack of, or inadequate, compliance measures can lead to significant liability risks. A comprehensive review provides clarity on existing weaknesses and enables the necessary measures to be planned well before the transaction is finalised.
French investment controls
For foreign investors, the French investment control exercised by the Ministry of the Economy represents a significant hurdle. France takes a very restrictive approach to protecting sensitive key industries. The list of sectors subject to authorisation has been continuously expanded and, in addition to defence and energy, now also includes areas such as cyber security, AI, critical infrastructure and biotechnology. If the target company falls within this scope, state authorisation (Autorisation IEF) must be included in the contract as a condition precedent (Condition Suspensive), as the transaction is invalid without it. This usually delays the timetable by several months.
Identifying tax and financial risks at an early stage
In addition to the legal aspects, tax and financial risks should also be carefully examined as part of the due diligence process. It is often only through the combination of various audit findings that risks emerge which may have a direct impact on the purchase price or the structure of the transaction.
These include, for example, outstanding tax claims, ongoing tax audits or liabilities that have not yet been identified. Existing financing agreements should also be reviewed to determine whether they contain any specific obligations or restrictions that could become relevant following a change of ownership.
Furthermore, it is advisable to analyse provisions, receivables and existing contingent liabilities in detail. It is not uncommon for financial burdens to emerge in this process that are inadequately documented in the company’s records or whose actual extent is initially difficult to assess.
Close coordination between legal and tax due diligence is therefore crucial. Only by bringing together all relevant findings can the company’s financial position be realistically assessed. At the same time, this lays the foundation for a well-founded determination of the purchase price and an appropriate allocation of risk within the transaction.
Incorporating the results of the due diligence into the company purchase agreement in a legally compliant manner
Due diligence only fully serves its purpose if the findings are incorporated into the drafting of the contract. Identified risks should therefore be taken into account when drawing up the company purchase agreement and mitigated through appropriate provisions.
Depending on the outcome of the due diligence, for example, warranties, indemnities or specific liability provisions may be agreed. In this way, known risks can be clearly allocated between the buyer and the seller, thereby reducing the potential for disputes following the completion of the transaction.
Particularly in cross-border M&A projects, careful alignment between the parties’ commercial objectives and the requirements of French law is essential. Differences in company law, employment law or contract law can have a direct impact on the drafting of the agreements.
Early legal advice helps to correctly interpret the findings of due diligence and translate them into legally sound contractual clauses. This enables risks to be addressed in a targeted manner and lays the groundwork for a successful acquisition or sale of a business in France.
Fazit: Eine fundierte Due Diligence schafft Sicherheit bei M&A in Frankreich
The success of M&A in France depends largely on careful preparation and comprehensive due diligence. Specific features of company law, obligations under employment law, existing contractual relationships and potential liability and compliance risks should be examined at an early stage in order to avoid unpleasant surprises once the transaction has been completed.
A structured analysis provides clarity on the target company’s actual situation and forms the basis for well-informed decisions. At the same time, it enables the risks identified to be taken into account appropriately when determining the purchase price and drafting contracts.
As a Franco-German law firm based in Paris, we at Alaris Law assist companies with cross-border transactions and advise them on the specific features of French law. Thanks to our experience in French company law and our German-language support, we help clients identify risks at an early stage and implement M&A projects in France in a legally sound manner.