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Recent Developments in French Private Equity

Benjamin Aller and Pierre-Louis P‚rin, SJ Berwin


2004 has been an eventful year for the French private equity industry. At the same time that France confirmed its position as one of the leading destinations in Europe for private equity investing, a number of key legislative and regulatory changes are contributing to the development of the French private equity sector. This article takes a brief look at the current state of the market and analyses three legal developments that are likely to affect the French private equity industry in the years ahead: (a) changes to the law on securities, (b) new rules on financial solicitation and (c) new rules on financial investment advisors.

Market Overview

According to recent statistics published by the Association Fran‡aise des Investisseurs en Capital (AFIC) and the European Private Equity & Venture Capital Association (EVCA), France continues to have the largest market for private equity in continental Europe. Figures for the first half of 2004 suggest that the French private equity market is growing much more quickly than the rest of the economy.

In 2003, private equity investment in France amounted to ?4.2 billion or 0.274% of France's GDP, which was largely in line with the European average and far in excess of the percentage of GDP invested in Europe's largest economy, Germany. During the first six months of 2004, private equity investment in France amounted to ?1.8 billion, representing a 9% increase in funds over the same period in the previous year. Leveraged buy-out transactions accounted for roughly two-thirds of total private equity investment.

French private equity houses raised approximately ?2 billion in 2003. In the first six months of 2004, funds raised amounted to ?865 million, representing a 7% increase over the same period last year. Banks remain the largest investors in the French private equity market, committing 36% of the new funds in 2003. Funds of funds represented 11% of the total funds raised, while pension funds and insurance companies amounted to just 24% of the overall fund raising.[1]

The role of insurance companies is set to change substantially under an agreement entered into in September 2004 between the Finance Ministry and representatives of the French insurance industry. This non-binding three-year agreement commits French insurers to invest approximately 2% of their total assets under management in small and medium-sized companies whose shares are not listed on a regulated market. The current ratio is around 1.4% and this should result in additional private equity investment of approximately ?6 billion by the end of 2007. The agreement does not limit investments to French or European companies; however, it suggests that such investments will be made either directly or through common French fund vehicles like the fonds communs de placement … risque (FCPR).

Securities Law Reform

France's environment for corporate securities has recently undergone substantial reform[2]. This reform seeks to achieve two main goals: simplification of the securities issue regime and modernisation of French securities law. These new rules apply to stock corporations (mainly soci‚t‚s anonymes (SA) and soci‚t‚s par actions simplifi‚es (SAS), both being allowed to issue stock with limited liability for shareholders. The main difference is that the SA can be listed on a stock market unlike the SAS. However, the SAS benefits from far greater freedom in setting up its own governance rules).

The changes thereby introduced in securities law are of special importance to the private equity industry since they are likely to allow the French practice to provide for mechanisms closer to the benchmark inspired by the US and UK practices.

Preferred shares

Before last June's reform, in order to implement most of the preferential rights needed in current private equity deals, lawyers had to juggle between those which could be granted pursuant to an extra statutory shareholders agreement, or to a particular class of shares or, finally, granted personally to a given shareholder, but not transferable as such.

Under the new regime, restrictions on the rights that can be attached to a class of preferred shares are very limited. Such rights as liquidation preference, information rights, specific voting rights and specific rights to dividends, can now easily be dealt with by the issue of a class of preferred shares (actions de pr‚f‚rence).

Furthermore, specific conversion rules of preferred shares into other class of shares can be drafted enabling the implementation of efficient anti-dilution or equity-kicker mechanisms. This feature will be of the utmost interest for financial investors willing to adjust their percentage ownership on the basis of the valuation of the portfolio company at the time of a liquidity event.

The main restrictions still remaining post-reform are linked to voting rights. Whereas voting rights can now be temporarily or definitively suppressed for a class of shares, multiple voting rights remain limited to two voting rights per share. In order to implement more substantial adaptation to the voting rights, the shareholders can elect for the soci‚t‚ par actions simplifi‚e, a corporate form which offers a wider range of possibilities and flexibility than the more traditional soci‚t‚ anonyme.

Unfortunately, the enthusiasm of French lawyers for this long awaited change in securities law is tempered by disappointment at the cumbersome and time consuming procedure to be applied to the issue of preferred shares. Such procedure should not, however, jeopardise the promising future developments of this new instrument.

Redeemable shares

The new reform also introduces the possibility of issuing redeemable shares. In non-listed companies, the initiative to redeem or reimburse such shares only belongs to the issuing company. However, in listed companies, the by-laws can provide for the redemption of such shares at the initiative of their holder.

Redemption remains subject to certain restrictions resulting from other provisions of the Commercial Code (holding by a company of its own shares, opposition of the creditors when a reduction of the share capital is not caused by outstanding losses) and from the applicable tax regime.

Other main aspects of the reform

Standardisation/Consolidation of securities issue rules: a substantial simplification of the rules applicable to the issuance of securities (shares, bonds, warrants) has been carried out. Previously rules for the issue of specific securities had amassed into a somewhat complex and sometimes incoherent regime; the new regime now seeks to consolidate the issue procedures. New rules also redefine the protection granted by law to the holders of rights giving access to the share capital of a company.

Flexibility in the issue of securities: wider powers are granted to the board of directors or management board, as the case may be, to issue new securities. For instance in the absence of statutory limitations, the board can now freely issue simple bonds. Furthermore, extended delegation mechanisms in favour of the board now allow it to be more responsive in the issue of new securities. However, any issue decided by the board must remain within the prior authorisation granted by the shareholders general meeting, and the concept of authorised capital is not yet recognised under French law.

Tracking stocks: Tracking stocks by which a parent company could issue securities giving access to the capital of its subsidiary already existed in the French legal system. Now , their use has been extended and a subsidiary can proceed in the same way with respect to the capital of its parent company

New Rules on Financial Solicitation

In September 2004, the French Government published a long-awaited decree implementing new rules on financial solicitation activities (called "d‚marchage"). These rules are of great importance to private equity houses as they determine the manner in which domestic and foreign private equity investment funds may be promoted and marketed in France.

The French Monetary and Financial Code, as amended in 2003, defines d‚marchage as:

  • "any unsolicited contact, by whatever means, with either an individual or a body corporate, in order to obtain from such person an agreement in connection with, inter alia the conclusion of transactions relating to 'financial instruments', banking operation or any ancillary operations (as defined under French law) or the provision of an investment service or any ancillary services"; and
  • "the visiting of an individual's place of work or any other place not intended to be used for the marketing of products, financial instruments or financial services for the same purposes by any persons."

The definition of direct solicitation has also been modified to include new electronic means of communication, such as the internet.

Under French solicitation rules, the authority to promote and market French private equity funds (including FCPR's) in France is granted only to registered financial investment advisors, credit institutions, investment and insurance companies of sufficient standing and any equivalent institution or company approved in another member state of European Union and authorised to act in French territory. Where marketing of an FCPR is limited to "qualified" institutional investors, the new solicitation rules do not apply.[3]

The rules on marketing foreign private equity investment funds tend to be more restrictive. The French Autorit‚ des March‚ Financier (AMF) has generally taken the position that interests in foreign limited partnerships cannot at all be subject to d‚marchage because they do not qualify as "financial instruments". However, as d‚marchage is now clearly defined as an "unsolicited contact", it may be assumed that so-called "passive marketing" is still permissible. Therefore the selling of interests in a limited partnership may fall outside the definition of d‚marchage if it is restricted to potential investors who are not solicited or cold-called but who, on their own initiative, request information regarding interests in the fund.[4]

The AMF is expected to provide additional guidance in this area when it publishes the relevant section of its General Rules (RŠglement G‚n‚ral) over the next few months.

New Rules on Financial Advisors

September 2004 also saw the publication of a decree implementing new rules on "financial investment advisors" (conseillers en investissement financier or "CIF"). These rules will apply to a broad range of investment professionals whose activity has never before been subject to regulation. Investment advisory companies, placement agents, family offices, "gatekeepers", "finders" and other private equity professionals operating in the French market (whether based in France or not) will need to review their status to determine whether they are subject to this new legislation.

The French Monetary and Financial Code, as amended in August 2003, defines a "financial investment advisor" as an individual or company whose regular professional activity consists of giving advice on any of the following: transactions involving "financial instruments" (that is, securities), banking transactions, the supply of "investment services", certain operations involving annuity contracts or certain passive real estate investments. The AMF estimates that these new rules will cover between 1,000 and 2,000 persons. These rules will not apply to those whose activity is already subject to specific regulation in France (for example, banks, insurance companies and portfolio management companies).

Anyone wishing to act as a financial investment advisor must register with one of the French industry associations that are specifically licensed by the AMF for such purposes. Such industry associations will verify that the financial investment advisor (or each of its managers in the case of a company) meets basic requirements in respect of age, personal integrity and professional competence. Any person convicted of a crime or other serious offence in the last ten years will be not be able to register. The industry association will also ensure that the financial investment advisor has adequate professional liability insurance cover.

Membership of an industry association is a matter open to the public. Every financial investment advisor will receive an individual registration number which must be communicated to all existing and potential clients and which must appear on all documents issued by the financial investment advisor. Failure to register as a financial investment advisor could have severe/harsh consequences: anyone caught rendering unauthorised investment advice in France faces up to five years in prison and/or a ?375,000 fine.

Registering with an industry association will require the financial investment advisor to adhere to specific rules of professional conduct that are agreed and approved by the AMF. These rules will generally require the advisor to deal fairly and act in the best interest of its clients at all times. Financial investment advisors will be subject to "know your client" rules requiring them to enquire about their clients' financial situation, investment experience and objectives before giving any investment advice. In addition, the association rules will set mandatory minimum standards of professional competence, due diligence and disclosure. They will also require financial investment advisors to have adequate internal resources and procedures to render the services they are called upon to provide. Finally, financial investment advisors will be prohibited from receiving any client money, unless such money is intended for payment of the advisor's services.

Registered financial investment advisors must take their new obligations seriously. Failure to comply with applicable rules of professional conduct may lead to disciplinary proceedings before the AMF. Possible sanctions include fines and/or withdrawal of the financial investment advisor's registration.

Although the general regulatory framework has been adopted, it is still too early to know how all these rules will be applied in practice by the AMF and by the relevant industry associations. Over the next few months, the AMF will publish the relevant sections of its RŠglement general setting out more specific rules in this area. Many players in the French private equity business will be waiting attentively to see what is in store.

About the authors

Benjamin Aller is a partner in the Paris office of SJ Berwin, specialising in private equity fund formation and related transactions. His experience in this area includes the formation of French fonds communs de placement … risque (FCPR) and the structuring of off-shore limited partnerships. Benjamin often advises funds-of-funds and other institutions investing in private equity funds.

Pierre-Louis P‚rin is a partner in the Paris office of SJ Berwin specialising in venture capital and private equity transactions. His experience also covers mergers and acquisitions and corporate law matters. Pierre-Louis has written a reference book on the French soci‚t‚ par actions simplifi‚e (SAS), as well as numerous articles on the same subject and on private equity.


[1] Private individuals remain less active in France (8% of the funds invested in 2003) and mainly contribute to the growth of the French private equity market by investing through fonds communs de placement dans l'innovation (FCPI) that provide special up-front tax benefits.

[2] Ordonnance nø2004-604 June 24, 2004, modifying the French Code de Commerce (Commercial Code)

[3] The French Monetary and Financial Code defines a "qualified" institutional investor as a legal entity having the ability and resources required to understand the risks that are inherent in the financial markets. Individuals are excluded from this definition. A decree sets out a list of all entities that are deemed to be "qualified" investors. This list includes banks, insurance companies and most other regulated financial institutions. It also includes commercial companies whose total consolidated assets are greater than ? 150 million and who elect to have this status. Foreign investors in an equivalent category in their country of establishment may be considered "qualified" investors.

[4] Such an exception does not apply when the promoter physically goes to the domicile, office, or other place where financial products are not usually proposed. In such a case, the solicitation is always subject to financial solicitation rules, even though the client requested such a meeting.