In one of our previous articles, we presented the two main techniques for acquiring a business in France. Today we will approach this issue from the international perspective. In particular, we will give practical advice to foreign companies and entrepreneurs wishing to acquire a French on-going business (fonds de commerce).
As we explained, acquiring the assets, rather than the shares of a company, can offer substantial interests: higher flexibility and lower liability, to name just these two. It is indeed a more flexible method of small and medium-sized enterprises acquisition, as it allows to negotiate which assets will be included in the deal. It also entails lower liability, as one avoids taking over the debts.
Helping foreign companies to buy a French business on a regular basis, we decided to share some practical advice on the subject.
1. Some recommendations relating to the internationality of the deal
Any cross-border transaction should be treated as such: an economic relationship involving several legal systems. We can only recommend that you first ask yourself the question of the jurisdiction that would be called upon to rule on potential disputes (1.1.) and the law(s) that would apply to the contract (1.2.). The language in which the deeds are drafted is also important (1.3.).
1.1. Which judge?
For an entrepreneur, this approach may seem counter-intuitive. Does it not amount to anticipating potential conflict, even before beginning to negotiate the obligations of the parties? It is nonetheless essential.
Without going into too much detail, designating the competent tribunal is a fundamental step. There are no rules set in stone here. It is possible to refer to the ordinary commercial courts (on either side of the border) or to resort to private arbitration. The latter option is especially relevant when the amounts at stake are high, when certain confidentiality is required, or when the parties do not agree on any of the state courts. Generally speaking, it seems logical to align the applicable law, the competent jurisdiction and the administration which will have a say after the sale. This avoids the risk of incompatibility or inconsistency, as well as excessive judicial costs (translation, legal opinions, etc.) should a litigation arise.
1.2. What law?
Prior determination of the applicable law is just as important. Firstly, substantial differences may exist between legal systems. This is particularly the case between French law (which is fairly regulated in the area of business transfers) and English law (which leaves plenty of room for contractual freedom). Depending on whether one chooses one law or the other, certain clauses may prove totally indispensable or frankly superfluous. This can radically affect the course of the negotiations.
To avoid misunderstandings and to make negotiations as effective as possible, it is thus necessary to agree on the legal framework from the get-go. French courts have long accepted that traders may choose, by means of a special clause, the law applicable to their contract, when the transaction is indeed international. Secondly, the acquisition of a French business necessarily gives rise to a number of administrative and tax formalities (see below). Indeed, beyond the private relationship of the parties, it will be necessary to facilitate the fulfilment of these formalities. In general, we recommend sticking to the nationality of the target business. Thus, with some exceptions, an international acquisition of a French on-going business should be subject to French law.
Theoretically, one could envisage all sorts of clever solutions regarding the applicable law. This is the case, for example, of the “panachage“, whereby the clauses of a contract are governed by several laws. Except in specific cases where it might be useful, such complexity should usually be avoided.
1.3. What language?
In French law (as in common law), deeds are only valid if they express the full, complete and unvitiated consent of their signatories. How, then, can a document drafted in a language that some of its signatories do not speak be considered as validly expressing their consent? We have already seen that, as far as wills are concerned, this question is far from negligible.
In order to facilitate the Parties’ understanding of their rights and obligations resulting from the purchase of an-ongoing business, we usually recommend that the contract be drafted both in English and in French. It is always possible (and often preferable) to indicate that one version shall prevail over the other, in the event of discrepancy, contradiction, imprecision or insufficiency. This is, in our opinion, the safest solution. It also avoids having to produce certified translations before the administration or the courts, or having the latter deform the intention of the parties, by misunderstanding their contract.
2. Some recommendations for the conduct of negotiations
Business acquisitions are important transactions. They involve large sums of money and a transfer of ownership with many repercussions. This is why the negotiation phase is decisive and must be conducted according to the book.
2.1. Sign a letter of intent
For international transactions, we recommend signing a letter of intent. This document, which, with a few exceptions (eg. confidentiality and exclusivity clauses), is not binding, provides a framework for the discussions. Without obliging the parties to make the deal, it helps to reassure them of their serious intentions and to outline the main features of the future contract.
This document is useful for several reasons:
- It can lock the negotiations into a time frame;
- It can determine which elements fall under the category of confidential information in order to restrict their circulation;
- It allows to grant the potential buyer an exclusive right to negotiate;
- It can define the scope of due diligence; and
- It can significantly advance the negotiations, by having the parties agree on the main features of the future deal.
Whether your letter of intent contains such clauses or not, it is important to make sure that it does not bind you. That is why its wording should be chosen very carefully.
2.2. Negotiate in good faith
Art. 1112 of the French Code civil leaves the initiative, conduct, and breaking off the negotiations to the Parties. However, this freedom, referred to as liberté contractuelle, has an imperative limit: bad faith. Right from the stage of negotiations, the Parties must demonstrate their good faith (art. 1104 and art. 1112 of the same Code). For instance, engaging in pre-contractual negotiations without any intent to conclude the contract is considered as bad faith. Such is also the case when a party suddenly breaks off negotiations that were already quite advanced, to the detriment of its counterpart.
The imperative of behaving in good faith is a matter of public policy. Its disrespect engages one’s liability. This bona fide principle, which is fully enshrined in French law, must really be borne in mind and respected, right from the negotiation stage. Beyond French law, this principle underlies international trade in general.
2.3. Communicate all information relevant to the consent of your counterpart
Art. 1112-1 of the French Code civil imposes yet another obligation of public policy: the Party that possesses information directly related to either the content of the contract or the quality of the Parties must communicate it. The disclosure covers elements that the other party is legitimately unaware of, in a context of mutual trust. Foreign actors entering into commercial negotiations in France must understand that this is a legal obligation.
3. Some information on the contractual phase
Let us now discuss some of the legal (3.1.) and financial (3.2.) specificities of the acquisition of an on-going business in France.
3.1. The French (contractual and legal) framework
It is quite frequent that the definitive deed of sale is preceded by a promise to sell (wherein the Seller is legally bound to go on with the sale should the Buyer exercise this option) and/or buy (wherein the Buyer is legally bound to go on with the purchase should the Seller exercise this option). This first deed can just as well be an actual asset purchase agreement, but conditional on the completion of several events (conditions suspensives in French). If no condition precedents are necessary (e.g. there is no need to take out a bank loan), the sale can be recorded in a single deed which confirms the transfer of ownership by effect of the payment of the price.
Insofar as the concept of fonds de commerce is fairly broad, it is essential to define precisely all the elements of which it is composed and which are transferred to the purchaser. The tax authorities will also want to know. Beyond this definition, the buyer can require the seller to make all sorts of representations (concerning the origin of ownership, the absence of litigation, the previous turnovers…). Fundamental obligations, such as non-competition, can also be enshrined in the deed.
French law grants, by default, 2 legal warranties to purchasers for all sales, whether or not these warranties have been stipulated by the parties. Firstly, the Seller is obliged to guarantee the Buyer against partial and complete eviction (art. 1626 of the French Code civil). In practice, it means that the Seller can be held liable for behaviours troubling the « peaceful enjoyment » of the purchased business. Secondly, pursuant to art. 1641 of the same Code, the Seller is liable for any hidden defects in the thing sold, when these defects render it unfit for its intended use, or so diminish the use that the Buyer would not have acquired it, or, alternatively, would have given a lesser price, if he had known about them.
Let us remember that these warranties are of public policy. As such, they can be neither waived, nor excluded by the Parties. However, it is possible to extend them beyond the standard protection provided by the French law, especially by way of representations.
3.2. Solidarity of the purchaser & price of the French business
The effects of the transfer of an on-going business with regard to third parties under French law are worth knowing. Firstly, the seller’s creditors, having been informed of the transfer and its price by the publicity measures, may oppose the payment of the price by the purchaser directly to the seller. They can indeed exercise a right of pursuit against the purchaser to have their claim settled. The period within which creditors can notify their opposition is 10 days from the last of the compulsory advertising measures (see below).
In addition, under Art. 1684, 1. of the General Tax Code, the purchaser may be sued for payment of certain direct taxes owed by the seller, up to the amount of the sale price of the French business. In principle, this tax solidarity lasts for a maximum of 5 months and a half (165 days) from the day of the sale, to the extent that the purchaser can be challenged for a period of 90 days from the day on which the seller files a tax return for which he is responsible.
In practice, this double exposure of the buyer obliges the latter not to pay the sale price directly to the seller, but rather to require that it be held in escrow (by one of the lawyers involved in the transaction), until the applicable time limits expire. All foreign buyers should be aware of this rule, as direct payment to the seller does not protect them from these claims.
4. Don’t forget the formalities after the purchase of the French business
Buying a business in France involves complying with certain tax and administrative formalities on which the effectiveness of the transaction depends. Most of them are uncumbent upon the Seller at his/her own expense and within certain time limits once the purchase act has been signed. Depending on the situation, these formalities may vary. By default, and in order of completion, these are:
- The “tax registration” of the sale with the local service départemental de l’enregistrement. This must be done within 15 days (for private deeds) following the signing. This registration gives rise to the payment, by the purchaser, of duties, calculated by applying a rate to the sale price. They must therefore be anticipated in the acquisition plan;
- Publication in a medium authorized to receive legal announcements. This must also be accomplished within 15 days;
- Publication in the Bulletin Officiel des Annonces Civiles & Commerciales (BODACC), within 3 days following the previous publication.
Buying an on-going business in France is quite a regulated process. Being accompanied all the way through the operation will allow you to avoid putting it at risk by overlooking some of the imperatives involved.
Although we have done our best to provide comprehensive information, feel free to contact us if you have any questions or want to learn more about acquiring an on-going business in France.
Article written by Me Simon Deceuninck (lawyer) and Anastasia Kartasheva (intern) on 21 March 2023
