Negotiating SPAs under English or French law does it matter
07 October 2022
07 October 2022
Parties to a sale and purchase agreement (SPA) featuring an international element, such as where the seller and the buyer are not incorporated in the same jurisdiction or the underlying business, target or assets are in another jurisdiction, can agree the governing law of the contract.
In general, each party is likely to prefer a governing law with which it is familiar. Sometimes the parties default to a governing law that is viewed as neutral or 'standard' depending on the deal parameters, exemplified by the popularity of English law in certain regions of the world. However, it is not uncommon to be resisted in instances where one of the contracting parties perceives this as advantageous to the party making such request .1
But how much does this actually matter? The choice of governing law by the parties will by definition have an effect on their respective rights and obligations under the SPA, with respect to the interpretation of the express terms as well as the potential implied terms under such chosen governing law. We discussed some of these key underlying implications in a previous article.2
This article focuses on some of the key points where French law (and French market practice) deviate from English law (and London market practice) with regards to SPAs relating to the sale and purchase of a business as a going concern, where both parties are limited companies.
The French Civil Code provides for an obligation to negotiate in good faith. English law, by contrast, does not incorporate such a principle and in fact case law indicates that even enforcing contractual obligations to negotiate in good faith can be problematic.
A recent reform of the French Civil Code confirmed that this good faith requirement applies both in pre-contractual and contractual stages. This means that the disclosure of information to a prospective buyer along with the conduct of negotiations and their potential termination with a non-successful bidder must be dealt with carefully if the transaction documents are governed by French law, particularly when the transaction is conducted by way of an auction process.
That being said, the level of damages awarded for the breach of duty to negotiate in good faith is usually limited to putting the affected party into the position it would have been in, had the negotiations not taken place. In other words, it will cover damages for incurred costs and expenses, rather than for the loss of opportunity. For this reason, and despite the mandatory good faith "protection" applicable at law, it is not uncommon to negotiate a break fee clause in the documentation in order to add an additional layer of certainty. However, this break fee clause should not be drafted as a penalty, which under French law is not necessarily unenforceable (as is the case under English law) but can be adjusted by a tribunal or court.
It is also important to bear in mind that, under French law, a preliminary agreement such as a term sheet, letter of intent, heads of terms or memorandum of understanding may be construed as a binding agreement if it contains key terms such as the price and details of the underlying business, target or assets, unless it is made abundantly clear that the parties do not intend to be legally bound by it.
Therefore, it is essential to use clear, unambiguous language to state which provisions are legally binding (if any) and which are not, and to add specific provisions beyond the usual "draft" and "subject to contract" if the document is intended to be entirely non-binding.
In order for a sale agreement to be valid under French law, it is a requirement that the consideration (or consideration mechanics) be agreed and set at the time of the sale agreement in certain terms. While English law also requires certainty about the consideration, it is less prescriptive in this regard. In comparison, French law does not preclude price adjustment or earn-out provisions, but the price calculation mechanism must be clearly agreed upfront in a way that gives sufficient certainty to both parties as to their exposure.
Particular care needs to be given to the drafting of earn-out clauses to avoid arguments that the price is, at least partly, at the discretion of one of the parties or will require further agreement between them.
For this reason, it is also market practice to include a third-party expert determination mechanism, the outcome of which will be binding on the parties.
In addition, if the consideration is nominal or very low, the contract may be deemed to be void and French law does not offer the option to execute the contract as a deed to dispense with the need for consideration - the concept of deeds, in contrast to English law, does not have a comparable iteration under French law. As such, it is important to document the rationale for a consideration that may be nominal or very low in the contract itself, particularly if it is due to the fact that the seller will retain obligations or liabilities.
In practice, conditions precedent (CPs) in French law-governed SPAs are, as under English law, often limited to those required by law, namely regulatory or mandatory clearances. It will be a matter of negotiations between the parties whether specific seller protection mechanisms, such as the repetition of some of the seller's warranties on closing or provisions relating to material adverse events, will be structured as CPs or specific termination rights. The seller's compliance with interim covenants is not by default structured to fall under CPs.
If the parties decide to add specific CPs to their SPA, particular care should be taken with regard to conditions the satisfaction of which may only be within the control of one party to the contract (e.g. approval by the board of directors of one of the parties or, potentially, confirmatory due diligence to the satisfaction of the buyer), as such conditions (known as "conditions purement potestatives") are deemed void and of no effect under French law.
One of the key maxims of English contract law is "caveat emptor": a common law doctrine that places the burden on buyers to reasonably examine property before making a purchase.
As a consequence, unless the sale process is highly competitive or there are specific deal parameters (for example in an insolvency/distressed sale situation), the scope and terms of the seller warranties are generally heavily negotiated and set out in great detail. Taking place in parallel, the buyer’s remedy is usually limited to a claim for damages unless it is agreed otherwise, such as by way of an indemnity which addresses a specific potential liability identified as part of the buyer's legal due diligence exercise.
By contrast, French law traditionally provides buyers with comparably more statutory protections regarding the nature and extent of the assets and liabilities acquired (e.g. through the doctrine of "garantie des vices cachés").3
For that reason, French law-governed corporate SPAs formerly used to include a more limited set of warranties than English law-governed corporate SPAs. However, they also used to include an umbrella warranty as to the absence of undisclosed liabilities called a "garantie de passif" (i.e. a “balance sheet warranty”), given on an indemnity basis.
Under this warranty (which is occasionally used in other countries, including the United States), the seller undertakes to hold the buyer harmless in the event of an increase in the net liabilities of the target company, and sometimes also in the event of a decrease in value of its assets, which would result from an event pre-dating the relevant pro forma accounts but would otherwise be unknown to the buyer prior to entering into the SPA.
A recent reform of the French civil code has reinforced the duty for a party to disclose decisively important information to its counterparty.
That being said, given the limited nature in practice of the statutory protections available to the buyer under French law (including following the recent 2016 and 2018 reforms of the French civil code), and the influence of international practice, it is not uncommon for the respective liability packages in French law and English law governed SPAs to look largely alike.
While it may still be somewhat less unusual to find a "balance sheet warranty" in French law governed corporate SPAs than in its English law governed counterparts, the reality is that, although the drafting language will differ, the practical effect of such a warranty may not necessarily be all that different from that of a solid warranty package covering the accuracy and/or fairness of pre-agreed pro forma accounts.
A specific feature of French law governed SPAs is that they may (and should) include an express waiver of the hardship regime applicable at law when this regime is not disapplied at law (e.g. when the target is a "société anonyme"). Similarly, it may be relevant to include an express waiver of the force majeure regime applicable at law in certain cases, e.g. if the seller agrees to provide certain transitional services to the buyer following completion.
Ultimately, the key variations between English law and French law governed SPAs now tend to be concentrated in three areas, namely:
Notwithstanding the above variations, it is important to bear in mind that a number of key points will be equally driven by tax, regulatory and contractual requirements and considerations, which will to a large extent be a function of where the underlying business or assets are located, how they are structured and public policy rules that may apply depending on the sector involved, regardless of the governing law chosen by the parties. For example:
There are some differences between the requirements relating to the signing of SPAs under English law and French law. However, contrary to popular belief, the French law requirements are not more onerous than those under English law.
In particular, French law SPAs are not in principle subject to specific signing requirements involving third parties such as notaries.
Furthermore, signing mechanics applicable to a French entity that is party to an SPA will not necessarily involve board approval (as would be the norm under English law) given that under French law, a company executive would typically have authority to bind a company without the need for board approval, but bearing in mind that this will be subject to some legal exceptions (e.g. board approval is required at law if a company guarantee is given as part of the transaction) and the relevant provisions of the constitutional documents of the said party.
French law governed SPAs are not in practice signed in counterparts. Although this is not strictly prohibited under French law (the French Civil Code does not require "wet ink" signing of the same originals as a condition of validity of commercial documents), it is still standard practice (or was prior to the global pandemic and the development of digital signing processes) for the parties to meet and sign and date the same documents, with an original being distributed to each party (and additional originals sometimes being signed for registration purposes) due to French law rules of evidence.
It is also not uncommon under French law and practice for the parties to initial each page of the transactional documents (including exhibits unless these are rigidly bound), which can be a time-consuming process, and must be taken into consideration as part of the signing mechanics and underlying time required, unless a specific bundling/initialling technique (such as Assemblact) is used.
If the transaction involves the signature of documents governed by English law, which need to be executed as deeds, this will not trigger specific formalities or requirements for entities registered in France under French law because, as mentioned above, there is no equivalent to deeds.
The approach to negotiating and drafting SPAs and ancillary documentation may vary depending on the underlying choice of governing law. Differences in English law and French law governed SPAs offer a prime illustration of this. While some differences are inherent to the civil law–common law dichotomy, other differences have more to do with customs and common practices. A good knowledge of the key pressure points, local practices and the parties' respective backgrounds and expectations can greatly assist with negotiations and ensure that the agreed commercial principles are effectively reflected in the legal documentation, despite a choice of governing law with which one or more of the parties may not initially be familiar
The author would like to thank Claudia Cicone, Charles-Douglas Fuz, Michael Zamecnik, Anne Reffay and Noam Ankri for their contributions.
Author: Yann Alix, Partner
1 The language of the SPA is not necessarily a determining factor as it is common to find SPAs drafted in English and governed by French law when the parties agree to refer to French law but wish to use English as the language of the contract (although this may create difficulties in practice if the contract needs to be interpreted at a later stage)
3 French law is sometimes on that account perceived as more buyer-friendly than English law.