Legal services

1. There are at least two ways of buying a business in France:
2.  
3. 1) the purchase of a majority stake in a company

2) the purchase of the business as a going concern

In the latter case the purchaser buys the assets and the business, known in France as a “fonds de commerce”, without purchasing the shares of the company operating the business; this purchase may occur after an interim period during which the purchaser operates the business under an operating lease arrangement (“location gérance”).

In the share acquisition scenario, the purchaser takes control of the company’s shares which represent both the assets and the liabilities. The business of the company itself is unchanged by the change of control and consequently the purchaser takes over, within the company, liabilities incurred prior to the purchase.

The important difference between the two kinds of transaction is that the purchaser of a business takes over only assets (or such liabilities as he accepts to assume). The sale of a business usually includes the following assets: the customer base, the trade name, logo, commercial fixtures and fittings, equipment and machinery, inventory, related intellectual property rights (patents, licenses, trademarks, drawings and models….) Only employment contracts, leases, insurance and publishing contracts are automatically transferred with the business. Other contracts have to be specifically included in the conveyance in accordance with the special conditions required for each type of contract. The purchaser will need to review which other assets and contracts are required for the business.

The purchase of a business gives rise to a series of formalities the object of which is to guarantee that the purchaser is properly informed about the business and also to protect the vendor’s creditors.

For this reason the sales contract contains a certain number of mandatory elements relating to the business and guaranteed by the vendor, over and above a non-compete provision and a guarantee against undisclosed liabilities or defects which would prevent the purchaser from operating the business as intended.

In addition, there is a mechanism whereby part of the sales price is blocked and information concerning the sale gazetted so liabilities and the vendor’s creditors, including the tax and social security authorities, may be paid off. For more than three months the vendor receives no part of the sales price or, if he does, the purchaser runs the risk of paying it twice!

On the face of it, a share purchase may seem more straightforward than that of a business. In fact there are several stages to a share purchase, each requiring documentation. Even during the initial stages, that is before any final contract is entered into, the parties are required to act in good faith and, on pain of an action for damages, not to break off negotiations in an abusive manner.

The initial negotiations are generally followed by “due diligence” in the form of various audits to identify any areas of risk in the target company and also to validate the price for the shares.

As the basic legal guarantees given to the purchaser only apply if the company has lost the essence of its underlying business or if the vendor has been fraudulent, the purchaser will require that the vendor provide other guarantees in the form of declarations and warranties, the object of which is to indemnify the purchaser (and/or the target company) against liabilities,  the cause of which was prior to the acquisition but which only come to light subsequently, such as a tax or social security audit, commercial claims, liability suits etc.

These may take the form of:

-a straightforward guarantee whereby the vendor undertakes to pay off creditors or reimburse the company in the amount which it pays out to creditors only appearing after the sale, or

-or a price revision clause, whereby the vendor undertakes to repay to the purchaser the difference between the price actually paid and the undisclosed liability, the result being a reduction in the purchase price.

From a taxation point of view, the sale of a business is subject to registration duty at 5% assessed on that part of the sales price in excess of 23,000 euros, whereas the sale of shares bears duty at the rate of 1.1% with a ceiling of 4,000 euros except in the case of so called “personal” companies (SARL, SNC, civil companies and companies, irrespective of their form, whose assets are made up principally of real property) where the 5% rate applies to that part of the price in excess of 23,000 euros.

If the purchaser of a business subsequently wishes to contribute it to a company in formation the transaction is fiscally neutral if accompanied by an undertaking to retain the shares received in return for at least three years.

For more information please contact François Bernard

A person wishing to set up a business in France may choose between several different structures.

The simplest is the sole proprietorship by which the entrepreneur carries out his activity in his own name. There is no separation between his individual and professional assets and creditors may seize his personal assets as well as those jointly owned (except for his principal residence, if he has taken the appropriate legal steps to protect it).

Apart from this case, the business will generally be conducted in the framework of a company made up of at least two associates, although a “Single Shareholder” company is also available.

One generally distinguishes between commercial and civil law companies. In the “commercial” category a distinction is drawn between companies where the strong personal bond between the individuals is permanent (“sociétés de personnes”) and joint stock companies (“sociétés de capitaux”). Amongst the “Sociétés de personnes”, the “société en nom collectif” (SNC) is characterised by the fact that all the partners have a “trader” status with joint and several liability for the company’s debts.

The “société en commandite simple” (SCS) is characterised by the fact that it is made up of two categories of partners: the managing partners (“Associés commandités”) and silent partners (“Associés commanditaires”). The managing partners are like those in the SNC whereas the silent partners are not jointly and severally liable for the company’s debts and are not entitled to participate in the company’s management.

Taking into account the risks of the company encountered by the partners, the corporate activity is generally conducted in the framework of a form of company where the associates’ liability is limited to their capital contribution.

The principal “sociétés de capitaux” are: the joint stock company (“société anonyme”, SA), the “société par actions simplifiée” (SAS), the limited liability company (“société à responsabilité limitée”, SARL). We could also mention the European company.

The operation and organisation of the S.A form is subject to relatively strict rules and regulations. The simplified SA, the SAS, as the name implies, offers a much simpler and less “bureaucratic” structure and operating framework, the founders being given great latitude in the drafting of the by-laws. For this reason, the SAS form of company is enjoying considerable success at the present time.

While also subject to mandatory operating rules and regulations, the SARL offers greater operational flexibility and less “red-tape” and is often the appropriate vehicle for small start-up businesses, with no minimum capital, unlike the other joint stock forms of company.
Civil companies make up the other category of legal entities; they can carry out only “civil” (as opposed to “commercial”) operations: these include real estate construction, agriculture, or the exercise of liberal professions. The partners are jointly and severally liable, without limit, for the company’s liability to the extent of their respective shareholdings.

When considering the choice of a structure, one must consequently take into account all these characteristics and constraints.

The company founder’s employment and social security status may be compared to that of a non-salaried person in the framework of a sole proprietorship, if he is the sole partner of a EURL or the associate of a SNC or a manager with a majority stake in an SARL. His status is comparable to that of a salaried employee if he is a manager with a minority stake or 50% stake in an SARL, Chairman and Managing Director or simply Managing Director of an SA, President or Manager of an SAS.

Finally, tax also plays an important role in the choice of a structure. Profits made by a sole proprietorship are subject to personal income tax (“impôt sur le revenu”, IR) in the name of the entrepreneur in the relevant category corresponding to its activity. Losses resulting from the professional activity may come in deduction of the tax basis.

The profits of “sociétés de capitaux” are, in general, subject to corporate tax (“impôt sur les sociétés”, IS), either by law (for the SA, SAS, SARL), or on election (EURL).

The profits of companies made up of individuals are taxable at the personal income tax rates in the associates’ names, either in the BIC (industrial and commercial profits) or BNC (non commercial profits) categories. Similarly, the profits of civil companies are, with some exceptions, taxable at the personal income tax rates in the names of the partners.

For more information please contact François Bernard

A recent law introduced a new employment contract (Contrat Nouvelles Embauches), which is a new category of unlimited term employment contract that allows companies with fewer than 21 employees to terminate employment more easily during the first two years of service, by registered letter with acknowledgment of receipt without having to give any justification ( the first 2 years can be thus assimilated to a  2 year probation period in lieu of generally 1 to 3 months for a normal unlimited term employment contract).

In the event of a dismissal during the first two years of employment, the employee benefits from specific rights:
- a notice period of 2 weeks from the second to the sixth month of employment (no notice during the first month) and 1 month afterward;

- severance compensation (free of income tax and social charges) equal to 8% of the remuneration accrued during the contract (for a normal unlimited term employment contract, dismissal compensation is granted only when the employee has completed 2 years of service);
- a fixed sum granted by the public unemployment Fund,
- specific assistance from the public unemployment Service in helping the person concerned to seek an other job. 

The company has to pay the public unemployment Service a charge of 2% of the remuneration accrued during the contract. After 2 years of service, the normal rules apply to dismissal: notice period, formal procedure, justification of a fair dismissal, statutory severance compensation, etc.

For more information please contact François Bernard