Mergers in France

This practice note is reproduced from Practical Law with the permission of the publishers

This Practice Note summarises the proceedings to be implemented under French corporate law for French domestic mergers and cross-border mergers involving France.

This Note briefly details the main issues to consider in a merger and then briefly addresses the differences between a domestic merger and an asset purchase or a share purchase (see What is a Merger under French law?). It then addresses the possibility of a cross-border merger with a company established in a different EEA member state (see Cross-border merger between a French legal entity and a non-EEA legal entity).

The Note then provides an overview of the proceedings to be implemented under French law for a merger by absorption (see Merger by absorption), a merger by formation of a new company (see Merger by formation of a new company) and a simplified merger (see Simplified merger).

Any French company, regardless of its legal form, may participate in a merger (article L.236-2, al.1, Commercial Code). For more information on the types of companies commonly used in France, see Practice Note, Trading vehicles: overview (France).

Directive (EU) 2017/1132 has been recently amended by Directive (EU) 2019/2121 of 27 November 2019, adding a cross-border transformation and demerger component to the existing cross-border merger component. This new directive must be transposed by EU member states before 31 January 2023. For further information, see Legislation Tracker, Company Law package: cross-border conversions, mergers and divisions and Practice note, Cross-Border Mergers Regulations: Reform and Company conversions, mergers and divisions: publication of amending directive in Official Journal.

The new directive, once transposed into national law, would allow:

• Cross-border transformations: the transfer of the registered office from one EU member state to another with the continuity of the legal person.

• The realisation of cross-border demergers and, by analogy, the possibility to carry out of partial contributions in kind of assets legally placed under the regime of demergers. These specific contributions in kind would make it possible to carry out:

• A universal transfer of assets.

• Cross-border partial contributions of assets.

This new regime, if confirmed, would enable transfers of complete and autonomous sectors of business activity (branche complète d’activité) from one EU member state to another EU member state. For now, such partial contributions of assets transactions are not permitted by Directive (EU) 2005/56/EC of 26 October 2005 as amended in 2017 (Directive (UE) 2017/1132 of 14 June 2017).

CMS Francis Lefevre Avocats has successfully completed a partial contribution of assets by a Spanish company to a French company: the submission of this regime was in response to the concern to place the transaction under the regime of the universal transmission of assets and liabilities and therefore to effect an automatic transfer of contracts (with the exception of contracts concluded intuitu personae) without having to require and seek the agreement of each of the co-contractors concerned (assigned co-contractor). This transaction is a “legal incongruity” as the law stands, but it was nonetheless carried out. The new directive transposed into domestic law would enable to carry out such transactions.

What is a Merger under French law?

In France, a merger is a consolidation of two companies that are distinct legal entities into one single legal entity that holds the combined assets and liabilities of the two original companies. In the most common type of merger (merger by absorption) in France, a company (the “transferring company”) transfers all of its assets and liabilities including its rights and obligations to another company (the “receiving company”) by dissolving, but without liquidating, in exchange for the issuance (or delivery) of shares in the receiving company to the shareholders of the transferring company (article L.236-3, I Commercial Code) (except in the case of simplified merger; see Simplified merger). The transferring company ceases to exist as a separate entity. See Merger by Absorption.

In the less common type of merger in France (merger by formation of a new company), each transferring company is dissolved without going into liquidation and on dissolution transfers all of its assets and liabilities to a receiving company formed for the purposes of, or in connection with, the merger (article L.236-3, I Commercial Code). See Merger by Formation of a New Company.

Typically, mergers are carried out to reorganise the structure of a group, reduce operational costs, expand into new markets, increase revenue and profits and usually involve companies that are similar in terms of size and scope.

Advantages of mergers

• A merger often enables a parent company to reorganise the structure of its group by merging subsidiaries.

• Post-merger, the transferring company is dissolved without the need to wind it up, which is an easier process if parties wish to restructure.

• A merger can be simpler than an asset sale since the transferring company is in effect assumed by the receiving company.

• A merger can be carried out without the consent of all shareholders (it will often require a two-thirds majority or a simple majority) whereas a share sale will require the consent of all shareholders. For more information on general meetings of shareholders and shareholders’ rights see Practice Note, General Meetings in France: Overview and Practice Note, Shareholders’ rights and responsibilities: Overview (France).

Disadvantages of mergers

• A merger requires several steps to be completed and can be quite costly.

• In a merger, the transferring company ceases to exist as a distinct legal entity. Consequently, some contracts may be automatically terminated, and the purchaser may need to obtain third party consents before the completion of the merger to avoid being in breach of contract (see Universal Transmission of Assets and Liabilities (Transmission Universelle du Patrimoine).  

Mergers versus an Asset Purchase

A merger entails the transfer of all assets and liabilities of the transferring company to the receiving company as they exist on the date when the merger is carried out (Article L.236-3 I, Commercial Code).

An asset purchase involves buying the underlying assets and rights of the target business, rather than the legal entity which owns them.

The question of exactly which assets, rights and liabilities of the target business are transferred to or assumed by the buyer as part of an asset purchase is a matter for the parties to negotiate, subject to certain exceptions under French law.

Any unwanted assets, rights and liabilities will remain with the seller on completion of the transaction, including historical environmental non-compliance or contamination involving the target business (whereas a merger entails the transfer of all assets and liabilities of the transferring company to the receiving company as they exist on the date when the merger is finally completed). (For more information, see Practice Note, Acquisition structures: comparing asset and share purchases (France).) Assets purchases are also governed by specific rules (such as drafting requirements and registration duties).

Advantages of an Asset Purchase over a Merger

• The purchaser has flexibility in acquiring some, but not all of the assets of a target business.

• Unwanted assets, rights and liabilities of the company will remain with the seller on completion.

Disadvantages of an Asset Purchase over a Merger

• The parties will need to identify the individual assets, rights and liabilities comprised in the target business, and ascertain which of them will be transferring to, or assumed by, the buyer, and which will remain with the seller. Particular care will be required around the definitions of assets, both included and excluded, and (where relevant) of liabilities for which one of the parties has agreed to accept responsibility and perhaps indemnify the other.

• It will be necessary to comply with the individual legal formalities required to transfer title to the purchased assets (or responsibility for any assumed liabilities) to the buyer. The applicable transfer formalities will vary depending on the type of asset, right or liability concerned and, in practice, it is likely that a variety of different transfer documents will have to be produced.

As an asset purchase involves transferring a collection of individual assets and rights to the buyer, there are likely to be several third parties (such as customers and suppliers) who will be affected by the transfer, and whose co-operation, consent or waiver may be required.

Mergers versus a Share Purchase

In a share purchase, the buyer acquires ownership of the shares issued by the company which is carrying on the target business (the target company). This is achieved by purchasing shares in the target company from its shareholders. The seller(s) in a share deal are the shareholder(s) in the target company, rather than the company itself.

As the target company has a separate legal personality from its shareholder(s), ownership of the underlying assets and rights, and responsibility for the liabilities of the target business will not usually change as a result of a share deal. This means that, generally, the buyer will take over the target company with the benefit of all its assets and rights, and subject to all its liabilities and obligations (whether past, present or future).

Advantages of a Share Purchase over a Merger

• A share purchase delivers a clean break from the target business and its associated liabilities.

• The liabilities and obligations of the target business (including its tax liabilities) are undisturbed (save for agreements containing a change of control provision) by a share purchase, and they will continue to reside with the target company after the shares are transferred to the buyer.

Disadvantages of a Share Purchase over a Merger

• The target company is acquired with its liabilities. As a result, in circumstances where the target company has significant exposure to actual or contingent liabilities that cannot be addressed to the buyer’s satisfaction through a price reduction and/or specific representations and warranties and/or indemnity cover, the buyer may insist on structuring the transaction as an asset purchase.

• The buyer will usually expect to acquire 100% of the issued share capital of the target company. To achieve this, the buyer will need all the target’s shareholders to agree to sell their shares.

Mergers: Issues to Conside

When considering a merger (whether domestic or cross-border), the following issues should be considered.

Negative Net Equity

Should the net equity of the transferring company be negative, the merger will not be possible unless the net equity is restored as a priority (by way of a share capital increase).

In a simplified merger, the merger can be completed even if the net equity of the transferring company is negative.

Ongoing Dissolution of the Transferring Company

The merger will only be possible once all the assets of the transferring company have been dissolved.

Merger Auditor and Contribution Auditor Report

See Merger Auditor Report: Exchange Ratio and Contribution auditor report.

If the common draft terms of merger are signed more than six months after the latest closing date, interim financial statements should be drawn up (with cut-off dates of less than three months before the execution date of the draft common terms of merger). See Inspection of documents by shareholders and third parties.

Notarisation of the Common Draft Terms of Merger

Notarisation of the common draft terms of merger by a French notary is required if the merger involves the transfer of ownership of a French real estate asset.

Publication and Timing

• The common draft terms of merger must be filed with the commercial and companies’ registry at least one month, and in practice at least 45 days, before the shareholders’ general meeting.

• The commercial and companies’ registry must publish the particulars of the merger in the BODACC. This publication must occur at least 30 days before the general meeting (French legal requirement) (Article R.236-2 al.3, Commercial Code). This publication is not compulsory when the company publishes on its website the common draft terms of merger during a continuous period of 30 days before the shareholders’ general meeting (Article R.236-2-1, al.1, Commercial Code).

See Prepare Common Draft Terms of Merger.

Minority Members and Creditors

The protection of the creditors in the merger proceeding implies a right to demand a security or early repayment of their debt (through a judicial opposition). See Creditor Approval.

Cross-Border Mergers and Brexit

As well as domestic mergers, French companies can merge with companies domiciled in other countries. However, as a result of Brexit, cross-border mergers between a French company and a company incorporated in the UK can no longer benefit from Directive 2017/1132/EU of 14 June 2017 on cross-border mergers and therefore it is no longer possible to carry out a cross-border merger with a UK company under that regime.

In France, no specific laws apply to cross-border mergers with non-EEA companies. A cross-border merger can be achieved between a French legal entity and a non-EEA legal entity where there is compatibility or consistency of the mandatory provisions of the jurisdictions’ internal laws, in particular:

• Recognition of the concept of “merger” (dissolution without liquidation).

• Universal transmission of assets and liabilities (transmission universelle du patrimoine).

• Declaration of regularity and conformity: the merging companies must file post-merger with the commercial and companies’ registry a declaration of regularity and conformity (déclaration de régularité et de conformité) in which they detail all the acts carried out in connection with the merger and confirm that the merger has been carried out in compliance with applicable laws and regulations (Article L.236-6, al. 3 and R.236-4, Commercial Code). This formality only applies to cross-border mergers.

Usual Timeline for a Cross-Border Merger

The usual timeline for a cross-border merger to be completed under French law is approximately three to four months (including creditors’ opposition) when companies have no social and economic committee to be consulted in connection with the cross-border merger and four to five months if any prior information or consultation of social and economic committee is applicable.

The following list sets out an example of a timeline for a cross-border merger between two EEA companies (with the French company acting as the surviving entity), assuming the transferring company is a fully owned subsidiary:

• 31 December: end of the latest fiscal year on both merging companies (both transferring and receiving entities).

• 1 January: effective date of cross-border merger (tax and accounting effect) (both transferring and receiving entities).

• Closing of documents: closing of accounts of transferring and receiving companies; audit by statutory auditors of each company (both transferring and receiving entities).

• Beginning of March: preparatory stage: due diligence; drafting of corporate documents (common draft terms of merger, management reports, draft shareholder resolutions); prior authorisation or approval from regulatory or third parties (if required) (both transferring and receiving entities).

• Mid-April-end of April: finalisation of corporate documents; execution of common draft terms of merger (before 30 June, otherwise interim financial statements must be drawn up) (both transferring and receiving entities).

• Mid-May: filing or publication of common draft terms of merger; making legal documents available for display on company website (receiving entity only) (30 days before the general meeting of shareholders of the receiving entity).

• End of May: convening general meeting (shareholders and statutory auditors) (receiving entity only).

• Mid-June: general meeting of shareholders of receiving entity.

• End of June: delivery of pre-merger certificates (both transferring and receiving entities).

• Mid-July: legal scrutiny certificate (receiving entity only).

• 31 July: legal completion date of the cross-border merger.

The timetable for a cross-border merger between an EEA company and a non-EEA company would usually be very similar to the one presented above. However, certain steps, such as the pre-merger certificate (Article 127, Directive (EU) 2017/1132) and the legal scrutiny certificate (Article 128, Directive (EU) 2017/1132) would not be required.

  Types of Mergers in France

A French domestic merger can occur through absorption of the merging companies or by incorporation of a new company.

Merger by Absorption

A French domestic merger by absorption is defined as the operation by which a company (the “transferring company”) transfers to another company (the “receiving company”) by dissolving, but without liquidating, all its assets and liabilities including its rights and obligations, in exchange for the issuance of shares in the receiving company to the shareholders of the transferring company (Article L.236-3, I, Commercial Code).

As well as receiving shares in the receiving company, the transferring company shareholders can also receive a cash adjustment providing it does not exceed 10% of the nominal value of the shares allotted (Article L.236-1, al.4, Commercial Code).

Merger by Formation of a New Company

This is an operation in which:

• There are two or more companies but at least one must be a French company.

• Each transferring company is dissolved without going into liquidation and on dissolution transfers all of its assets and liabilities to a French receiving company formed for the purposes of, or in connection with, the operation (Article L.236-3, I, Commercial Code).

• The consideration for the transfer is shares or other securities representing the capital of the receiving company and, if agreed, a cash adjustment which may not exceed 10% of the nominal value of the shares allocated (Article L.236-1, al.4, Commercial Code).

Simplified Merger

French domestic simplified mergers are mergers of limited liability companies (SA, SAS and SARLs), which are not required to comply with all legal formalities and requirements usually applying to mergers by absorption or mergers by formation of a new company (as detailed in Article L.236-11 and L.236-11-1, Commercial Code).

Before 2019, simplified mergers were limited to mergers between a parent company and its subsidiary, in which the parent company held either all the shares or at least 90% of the voting rights of the subsidiary.

From 21 July 2019, the simplified merger regime applies to:

• Mergers between sister companies, when the same parent company holds 100% of the share capital or at least 90% of the voting rights of the transferring and the receiving company (Articles L.236-11 and L. 236-11-1, Commercial Code).

• Demergers of a company to the benefit of several sister companies, when the demerged company and the beneficiary companies are all wholly owned subsidiaries of the same parent company (Articles L.236-2, al. 4 and L. 236-11, Commercial Code).

• Partial contributions of assets, when the transferring company holds 100% of the capital of the receiving company and, inversely, when the receiving company holds 100% of the share capital of the transferring company (Article L.236-22, al. 2 and 3, Commercial Code).

In simplified mergers, the following are not required:

• Shareholder resolutions to approve the merger for the receiving and transferring entities (unless one or more shareholders of the receiving company holding at least 5% of the share capital applies to the courts to appoint an agent to convene the extraordinary general meeting of shareholders to approve the merger). See Convening of shareholders’ meeting.

• Governing body reports. See Governing body report.

• Intervention of a merger auditor or a contribution auditor (in certain circumstances). See Merger Auditor Report: Exchange Ratio and Contribution auditor report.

(Articles L.236-11, al.1, and L. L.236-11-1, al.1, Commercial Code.)

Procedure Governing a Merger by Absorption

The following sections set out in detail the steps involved in the French domestic merger by absorption process.

Prepare Common Draft Terms of Merger

The management or administrative body of each merging company must draw up a draft of the proposed terms of the merger (Article L.236-1, Commercial Code). An authentic instrument (a notary deed) is required if real estate assets are transferred. See Practice Note, Executing contracts in France: Authentic instrument.

The draft of proposed terms (the “common draft terms”) must include:

• The type, corporate name and registered office of each of the companies involved in the merger.

• The reasons, purpose and conditions of the merger.

• The designation and evaluation of the assets and liabilities transferred.

• The terms of allotment of shares or other securities in the receiving company.

• The date at which these shares shall give right to participate in the benefits and any related terms.

• The date from which the operations of the transferring company are considered, from an accounting and tax point of view, as being performed by the receiving company.

• The dates on which financial statements of the transferring companies were adopted.

• The share exchange ratio and the amount of adjustment in cash if any.

• The amount of the merger premium (prime de fusion).

• The rights granted by the receiving company to the shareholders of the transferring company holding special rights and to holders of securities other than shares as well as any special benefits.

(Article R.236-1, Commercial Code.)

The common draft terms must be signed by duly authorised representatives of each company and filed with the commercial and companies’ registry of each company (Article L.236-6 al.2, Commercial Code) and with a French legal gazette and with the BODACC (Bulletin officiel des annonces civiles et commerciales). These formalities must be carried out at least 30 days before the date of the general shareholders meeting called to resolve on them (Article R.236-2, al.3, Commercial Code). The BODACC filing can be replaced by filing and maintaining the same information on the merging companies’ websites, where the common draft terms of merger will be available, free of charge, for the period from 30 days before the date of the shareholders’ meeting until the end of the shareholders’ meeting (Article R.236-2-1, al.1, Commercial Code).

Before signing the common draft terms of merger, the parties will have to comply with French labour law requirements and obtain an opinion (favourable or not) of the social and economic committee of each company (if applicable). See Employment: Works Councils and Employee Contracts.

Governing Body Report

Unless decided otherwise by unanimous consent of the shareholders of the merging companies, the governing body of each merging company drafts a detailed written report explaining the common draft terms of merger and setting out the legal and economic rationale for such an operation, the exchange ratio, the valuation methods used and the valuation difficulties (Articles L.236-9 and R.236-5, al. 1, Commercial Code).

Merger Auditor Report: Exchange Ratio

Unless decided otherwise by the unanimous consent of the shareholders of the merging companies, a merger auditor (commissaire à la fusion) is appointed by court decision (Article L.236-10 I, Commercial Code) to explain the methods used to determine the ratio for exchanging the shares between transferring and receiving company (exchange ratio).

The merger auditor’s report includes:

• The method(s) used for the determination of the proposed exchange ratio.

• The adequacy of these methods as well as the value resulting from these methods and an opinion as to the importance given to these methods in determining the value adopted.

• The difficulties in evaluating (if applicable).

(Article L236-10, al.2 and 3, Commercial Code.)

The merger auditor must ensure that the relative values assigned to the shares of the merging companies are appropriate and that the exchange ratio is fair.

Contribution Auditor Report

If the French domestic merger includes a contribution in kind, the merger auditor, or if no such merger auditor has been appointed, a contribution auditor (commissaire aux apports) appointed by unanimous consent or by court decision drafts a report on the contributions in kind (Article L.236-10, III, Commercial Code). The contribution auditor ensures that the total value of the net contributed assets is at least equal to the amount of share capital issued to the transferring company shareholders, together with the amount of the merger premium (Article R. 22-10-8, Commercial Code) and to the share capital increase of the receiving company (Article R. 236-7 al. 1, Commercial Code).

Inspection of Documents by Shareholders and Third Parties

The following documents must be made available for inspection by shareholders at the merging companies’ registered offices:

• The common draft terms of merger. See Prepare common draft terms of merger.

• The governing body report. See Governing body report.

• The merger auditor’s report (if applicable). See Merger Auditor Report: Exchange Ratio.

• The contribution auditor’s report (if applicable). See Contribution auditor report.

• The financial statements and the management reports of the merging companies for the last three financial years (Article R.236-3 al.1, 3°, Commercial Code).

• The interim financial statements (Article R.236-3 al.1, 4°, Commercial Code) where applicable. Interim financial statements are drafted if the latest financial statements relate to a financial year which ended more than six months before the date of the common draft terms of merger. The date on which the interim financial statements are drawn up must not exceed three months before the date of the common draft terms of merger.

The documents must be available for inspection at the merging companies’ registered offices 30 days before the date of the shareholders’ meeting and can be reviewed by shareholders of each company (Article R.236-3, al.1, Commercial Code). Instead of the information being available for inspection at the merging companies’ registered offices, this information can be made available on a website, maintained by and identifying the merging companies, where the draft terms of merger will be available, free of charge, for the period from 30 days before the date of the shareholders’ meeting until the end of the shareholders’ meeting (Article R.236-3, al.1, Commercial Code).

Convening of Shareholders’ Meeting

Once the documents referred to above have been prepared, shareholders of each merging company approve the merger. See Practice note, General Meetings in France: Overview: Requirements to Hold an Extraordinary General Meeting (EGM) and Practice note, General Meetings in France: Overview: Shareholders’ Meetings in an SAS for information on voting requirements.

Unless otherwise provided in the common draft terms of merger, legally speaking the merger takes effect on the date of the last shareholders’ meeting approving the merger (Article L. 236-4, 2°, Commercial Code).

Legal Filings Post-Merger

Minutes of the Shareholders’ Meetings

The minutes of the shareholders’ meetings of the transferring and the receiving’s entity are filed with the commercial and companies’ registry of their respective registered offices one month after the merger decision (Article R.123-66, Commercial Code), together with the amended articles of association as amended of the receiving company.

Transferring Entity Dissolution

Specific formalities for the dissolution have to be carried out, namely publication of the dissolution without liquidation in a legal gazette (journal d’annonces légales and online press services) and in the BODACC (Bulletin official des annonces civiles et commerciales) one month after the merger decision (Articles R.123-66 and R.210-9, Commercial Code).

Receiving Entity Constitutional Amendments

The articles of association of the receiving company are amended as a result of the approval of the merger to reflect the share capital increase and the change of corporate purpose (if applicable) and corporate name. The formalities relating to the amendment of the articles of association and to the share capital increase have to be carried out.

Completion

The French domestic merger is effective on the date of the last shareholders’ meeting approving the merger. The common draft terms of merger may provide for another date which can be no later than the closing date of the current financial year of the surviving entity (delayed effect) or earlier than the closing date of the last closed financial year of the transferring entity (retroactive effect).

Creditor Approval

Within 30 days of the public notice of the common draft terms of merger, the creditors of each merging company whose claims arose before the date of the public notice in the BODACC (Bulletin official des annonces civiles et commerciales) of the common draft terms of merger may object to the merger (Article L.236-14, Article R. 236-8, Commercial Code). Further to such objection, the court may either reject the objection, order the repayment of the claims or grant security interests to the relevant creditors if the receiving offers security interests and if the security interests are deemed sufficient. The creditor’s objection will not prevent the merger from being completed.

Procedure Governing a Merger by Incorporation of a New Company

The French domestic merger by incorporation of a new company is rare in France. It entails dissolution of the two transferred entities simultaneously to the incorporation of the Newco. The corporate form of the Newco is to be chosen by the parties to the French domestic merger.

The parties will have to comply with all formal conditions applicable to the corporate form chosen for Newco.

The articles of association of Newco need to be approved by a majority of shareholders or by an extraordinary general meeting of the shareholders of each of the transferred entities. The contributions to the Newco are approved on the basis of a special report prepared by a contribution auditor appointed in this respect. For more information on general meetings of shareholders, see Practice Note, General Meetings in France: Overview.

Apart from the above additional formalities, the procedure is the same as for French domestic merger by absorption, and the timeframe is similar to that of the merger by absorption.

Consequences of a Merger

Universal Transmission of Assets and Liabilities (Transmission Universelle du Patrimoine)

The merger entails the transfer of all assets and liabilities of the transferring company to the receiving company as they exist on the date when the merger is finally carried out (Article L.236-3 I, Commercial Code). The receiving company receives and benefits from all the assets and rights and assumes all liabilities and obligations of the transferring company (including any liability not expressly detailed in the common draft terms of merger). However, there are exceptions to this principle:

• Agreements which include non-transferability clauses or contracts where the person of one or both of the contracting parties is an essential term of the contract (intuitu personae) are not transferred.

• Certain assets (such as real estate, patents) require specific formalities to be carried out for the transfer to the transferring entity to be enforceable against third parties.

Before 25 November 2020, French case law held that Article 121-1 of the Criminal Code, under which one can only be held criminally liable for its own actions, prevented the receiving company from being prosecuted for acts committed by the transferring company before the merger transaction. Since 25 November 2020, a receiving company may now, under certain conditions, be held criminally liable for an offence committed by the transferring company before the merger and for which it had not been convicted (only for fines and confiscation sanctions) (Cass. Crim. 25 November 2020, n°18-86.955). This case law applies to public limited companies and private companies such as sociétés anonymes and sociétés par actions simplifiées. For more information on this case, see Video, France reverses position on corporate successor criminal liability.

Dissolution Without Winding up of the Transferring Company

The dissolution of the transferring company is enforceable against third parties from the date of publication with the commercial and companies’ registry (Article L.237-2, al.3, Commercial Code).

Exchange for Issuance by the Receiving Company of Shares to the Shareholders of the Transferring Company

The shareholders of the transferring company receive shares of the receiving company and can also receive a cash adjustment which may not exceed 10% of the nominal value of the shares allocated (Article L.236-1, al.4, Commercial Code).

Accounting Aspects

The common draft terms of merger must specify the reference accounts used to determine the terms of the merger (Article R.236-1, Commercial Code). This includes reference accounts and interim financial statements if necessary. Depending on the type of merger, the value of the assets retained will differ.

The assets and businesses of the transferring are usually valued:

• At net book value where the merger companies are under common control.

• At fair market value where the parties involved are non-related parties or in the event where, following the completion of the operation, the beneficiary is sold to a third party.

(Article 743-2, Regulation ANC n° 2017-01 amending Regulation ANC n° 2014-03 (PCG).)

Employment: Works Councils and Employee Contracts

Information and Consultation of the Works Council

The employers of each merging company must inform and consult their works council (if any), called the social and economic committee (comité social et économique) (CSE) before the managers can approve the common draft terms of merger.

The works council of companies employing more than 50 employees must be informed and consulted on “the modification of the economic and legal organisation of a company” (Article L.2312-8, Labour Code).

The works council issues an opinion (positive or negative) on the proposed merger before the managers make any final decision (and before signing the common draft terms of merger). The works council may appoint an expert to assist in the review of the contemplated merger.

The information and consultation process may last up to two months. At the end of the two-month consultation period, if the works council has not rendered an opinion although it has received sufficient information on the merger, the employer may consider the opinion is negative and may proceed with the transaction.

Non-compliance with the obligation to consult the works council constitutes a criminal offence of obstruction. It attracts the following penalties:

• Initial offence: maximum fine of EUR7,500 for the legal representative (EUR37,500 for the legal entity).

• Repeat offence: maximum fine of EUR15,000 (multiplied by five for the legal entity).

In addition, the Conseil d’État has recognised the right for the works council to challenge a merger clearance decision rendered in a context where the receiving works council had not been properly informed and consulted before the signature of the merger and the filing before the competition authorities (CE, Section, 9 March 2021, 433214).

Consequences of the Merger on Employment Contracts

• All rights and obligations linked to the employment contracts existing at the time of the merger are automatically transferred to the new employer (Article L. 1224-1, Labour Code).

• The new employer cannot change the terms of these contracts without the prior consent of the transferred employees (Article L.1224-1, Labour Code).

• The merger cannot constitute itself a valid ground for implementing a redundancy.

• Employees cannot opt-out or refuse their transfer.

• As per Article L. 2261-14 of the Labour Code, all collective agreements of the transferring company continue to apply during a temporary “survival period” of up to 15 months after the merger. Meanwhile, the new employer must negotiate with the staff representatives to try to reach an agreement allowing for the harmonisation of the benefits and status of all its employees. When a “harmonisation agreement” is reached, the survival period terminates immediately, and the new provisions become enforceable.

• If no agreement is reached at the end of the survival period, the collective agreements of the former employer cease to apply. In this case, the remuneration received by the transferred employees during the last 12 months must be maintained.

  Tax Aspects

The valuation rules to be satisfied for accounting purposes (see Accounting aspects) also apply for tax purposes. However, regardless of the accounting aspects, the French tax consequences of the merger primarily depend on the application or non-application of the favourable tax regime set forth in French tax law.

Corporate Income Tax: no Favourable Tax Treatment

If it is not subject to the favourable tax regime (see Corporate Income Tax: Favourable Tax Treatment), a merger has the same tax consequences as a termination of business activity, that is, corporate income tax (CIT) at a standard rate on:

• The ordinary profits not yet taxed.

• The recapture of outstanding provisions.

• Latent capital gains on the assets of the transferring company.

Furthermore, should the receiving company be a shareholder of the transferring company, the merger may trigger a merger profit at the level of the receiving company (boni de fusion), which is taxed as distributed income.

Outstanding net operating losses of the transferring company cannot be transferred to the receiving company.

Corporate Income Tax: Favourable Tax Treatment

French companies can apply for a favourable tax regime available under Article 210 A of the Tax Code, which provides for the tax-neutrality of the transaction if the following conditions are met:

• The companies involved in the merger are subject to CIT.

• The transferring company must transfer all its assets and liabilities to the receiving company.

• In consideration for the transfer, the transferring company’s shareholders receive shares in the receiving company and a cash payment not exceeding 10% of the nominal value of the shares received.

With respect to cross-border mergers, the favourable tax regime is applicable if specific legal conditions are met:

• The foreign transferring or receiving company is in the EU.

• The foreign company is in a state having concluded a tax treaty with France. The tax treaty provides that should the French company be the transferring company, transferred French assets should be affected to a French permanent establishment of the receiving company.

The main advantages of this tax regime are.

• No CIT applies to capital gains on fixed assets.

• Should the receiving company be a shareholder of the transferring company, the potential merger profit realised at the level of the receiving company (boni de fusion) is tax exempt.

The election for the favourable tax regime is conditioned on certain commitments to be taken by the receiving company, including:

• The assets and the liabilities transferred are booked in the accounts of the receiving company based on their net book value, or the receiving company commits to compute future gains on those assets based on their net tax value at the level of the transferring company.

• The receiving company must include in its own balance sheet the provisions made by the transferring company.

(Article 210 A, Tax Code (Code Général des Impôts).)

In principle, the transferring company’s losses cannot be offset against the receiving company’s profits, except when a special ruling from the tax authorities is granted. This ruling can only be obtained when the merger is carried out under the favourable regime and where certain conditions regarding the transferred activities are met, and only applies for French domestic tax purposes: French tax law does not provide for the transfer of French tax losses to a foreign tax jurisdiction, or foreign tax losses to a company subject to French corporate tax in France.

Registration Duties

The merger of two companies must be registered with the French Tax Authorities. However, the registration is in general performed for free (Article 816, Tax Code).

A transaction that is eligible to the favourable tax regime of mergers for CIT purposes will not necessarily be eligible to the favourable tax regime of mergers for registration tax purposes.

Regulatory Restrictions

Banking and Insurance

If a company (either French or foreign) wishes to acquire, directly or indirectly, alone or in concert, more than 10%, 20%, one-third or 50% of the voting rights of a French financial institution (établissement de crédit), it must file a request for authorisation with the French banking regulator (Autorité de Contrôle Prudentiel et de Résolution (ACPR)). The ACPR is responsible for performing a first assessment and submitting a draft proposal decision to the European Central Bank (ECB) to ultimately decide (non-objection).

Regarding insurance companies, when the above thresholds are crossed or if the insurance company otherwise becomes a subsidiary of the acquirer, the authorisation must be obtained from ACPR only.

Foreign Investment Control

France has a foreign investment control regime. Under French foreign investment rules, prior authorisation from the Ministry of Economy is required for foreign investments in certain sensitive sectors. For more information on the French foreign investment control regime, see Practice Note, Foreign Investments in France.

Competition Law

If the turnover of the combined businesses is greater than certain specified amounts both worldwide and within the EU, the transferring company must request approval from the European Commission. The Commission will examine the proposed merger’s impact on competition in the EU. If the merger is deemed to significantly restrict competition it would be rejected. Sometimes mergers are approved with certain conditions attached, for example, they may commit to selling part of the combined business, or to license technology to another market player. For more information on competition law, see Practice Note, Competition: private acquisitions (France).