World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).

The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.

This chapter covers France. View the full guide.

FRANCE

Soulier Avocats

1) In your jurisdiction, which sectors do venture capital funds typically invest in?

In 2018, the global amount of investment by venture capital funds reached EUR 1,619 million[1] in France.

The key sectors attracting venture capital investment in France include the IT and digital sectors (EUR 836 million[2]), healthcare and biotechnologies (EUR 413 million[3]), industrial goods and services and the chemical sector (EUR 112 million[4]), as well as consumer goods and services (EUR 103 million)[5].

2) Do venture capital funds require any approvals before investing in your jurisdiction?

a. With regard to venture capital funds established under French law, we distinguish between two main categories of vehicles depending on the type of investors to which they are open:

i. the retail private equity funds, which are open to non-professional investors and include several types of funds, each of which has its own specific strategy:

- Retail Private Equity Investment Funds (Fonds Communs de Placement à Risque or “FCPRs”),

- Retail Venture Capital Funds (Fonds Communs de Placement dans l’Innovation or “FCPIs”),

- Retail Local Investment Fund (Fonds d’Investissement de Proximité or “FIPs”), etc.

In terms of regulatory framework, the creation of retail private equity funds requires the prior authorization of the French Financial Market Authority (Autorité des Marchés Financiers or “AMF”) as these funds are open to non-professional investors. The AMF also monitors these funds throughout their lifetime.

i. the professional private equity investment funds, which are dedicated to professional investors and include inter alia:

- Professional Private Equity Investment Funds (Fonds Professionnels de Capital Investissement or “FPCI”),

- Venture Capital Firms (Sociétés de Capital-Risque or “SCR”).

In terms of regulatory framework, these professional private equity investment funds, which are reserved for professional investors (as defined by the AMF regulations) do not require any prior authorization by the AMF. However, they must be declared to the AMF within the month following their creation. The AMF also monitors these funds throughout their lifetime.

a. As for venture capital funds governed by a foreign law, they do not require any specific approvals for merely investing in France, except when investing in sensitive sectors, as detailed in question 3 below. By contrast, the marketing and retail of these offshore venture capital funds in France would be subject to the AMF regulations and require necessary approvals.

3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?

As a general rule, foreign investments in France are unrestricted.

However, foreign investments in sensitive sectors are subject to specific authorizations from the Minister of Economy and Finance prior to their completion.

In practice, foreign investments must be authorized by the Minister of Economy and Finance if the following three conditions are cumulatively met:

a. condition relating to the origin of the considered investment: the investment comes from a country other than France, and

b. condition relating to the nature of the considered investment: the forms of foreign investments subject to authorization are as follows:

i. the acquisition of a controlling stake – within the meaning of Article L.233-3 of the French Commercial Code – in a company that has its registered office in France,

ii. the acquisition of all or part of a branch of activity of a company that has its registered office in France,

iii. the acquisition of 25%[6] of the share capital or voting rights in a company that has its registered office in France (this sub-condition does not apply to Member States of the European Union), and

c. condition relating to the nature of the target company’s activities: the French foreign investment control applies to business sectors related to public order, public authority, public security or the interests of national defense.

The authorization request shall be sent by the investor to the Ministry of Economy and Finance prior to the closing of the considered transaction, and a failure to comply may result in the agreement giving rise to this foreign investment to be held null and void, in addition to a potential civil fine on the foreign investor (up to a maximum of EUR 5 million for legal entities and EUR 1 million for natural persons) and possible criminal sanctions.

4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?

Venture capital investments may be required to undergo an antitrust analysis when they trigger a change of control of the target company and provided certain turnover thresholds are met by the parties to the concentration.

Depending on these thresholds, the transaction may fall under the scope of either French or European Union merger control mechanisms, as described hereafter.

a. French merger control

Venture capital investments resulting in a change of control of the target company must be notified to the French Competition Authority (Autorité de la Concurrence) when the following three conditions are cumulatively met:

i. the aggregate worldwide pre-tax turnover (achieved during the previous financial year) of all the parties to the concentration exceeds EUR 150 million, and

ii. at least two of the parties to the concentration each achieved individually, during the previous financial year, a pre-tax turnover in France exceeding EUR 50 million, and

iii. the transaction does not fall under the European Commission's jurisdiction (normally described as not having a so-called “EU dimension”).

Reduced thresholds will apply wherever:

- at least two of the parties are active in the retail trade sector, or

- at least one of the parties run(s) its/their activity or part of it in one or more French overseas departments or French overseas territories.

There are specific rules for calculating the turnover in sectors such as banking and finance, insurance, leasing, travelling, advertising, franchising, and for state-owned companies.

b. European Union merger control

The European Commission only examines larger mergers with an EU dimension, meaning that the concerned parties reach certain turnover thresholds. In a nutshell, one of the minimum thresholds to be met is a worldwide turnover of all the parties to the concentration over EUR 2.5 billion.

5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?

Venture capital funds usually invest in venture capital deals by way of subscribing for ordinary shares (actions ordinaires) and/or preferred shares (actions de préférence). Preferred shares, which can grant their owners specific rights (such as multiple voting rights, prior access to information, priority dividend rights, etc.), are widely used in practice. However, the issuance of preferred shares can prove (i) costly, as an independent statutory auditor will have to be appointed, and (ii) complex insofar as special meetings of preferred shares’ holders shall be convened to approve any modifications related to the preferred shares.

It is also common for venture capital investors to subscribe to hybrid securities of the target company in addition to ordinary and/or preferred shares. Hybrid securities have developed considerably over the last years in France.

In addition to subscriptions for ordinary or preferred shares, investments often also take the form of subscriptions for convertible bonds (obligations convertibles) or bonds redeemable in shares (obligations remboursables en actions).

6) Is there any restriction on rights available to venture capital investors in public companies?

The primary purpose of venture capital funds in France is not to invest in listed companies but to finance the creation or start-up phase of technology-intensive companies.

In this respect, it should be recalled that the venture capital activity is carried out mainly through dedicated investment vehicles such as FCPRs, FCPIs, FIPs, etc. (see question 2 above) that benefit from preferential tax regimes in return for restrictive investment rules, mainly regarding of the structure of their asset portfolio and in particular with regard to unlisted securities. For example, at least 50% of the assets of a FCPR must be made up of unlisted companies. This percentage is set at 70% minimum in FCPIs and FIPs and non-compliance with these thresholds entails a tax penalty.

As such, restrictions on investment in listed companies by venture capital investors take primarily the form of investment quotas.

7) What protections are generally available to venture capital investors in your jurisdiction?

Venture capital investors usually rely on the protection granted by the articles of association of the target company and the transactional documents, including inter alia the share transfer agreement and the shareholders’ agreement.

Venture capital investors are also granted representations and warranties (garantie d’actif et de passif) in connection with the shares being sold, and related indemnity protection.

To secure its indemnification obligations under the representations and warranties agreement, the seller is usually required to provide a guarantee, in the form of a first demand bank guarantee or joint guarantees provided by the seller or a bank. Apart from these guarantees, an alternative solution usually consists of placing a portion of the sale price in an escrow account.

8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?

Although the use of warranty and indemnity insurance (“W&I insurance”) has significantly developed over the last years, this type of insurance is not as widely used as other guarantees implemented to secure representations and warranties agreements, as detailed in question 7 above (first demand guarantee, joint and several guarantee, etc.). W&I insurance may either be effected by the buyer (typically) or the seller, or cumulatively effected by both of them. Given its specificities, W&I insurance is generally considered by the investor as a tool to complement the guarantees mentioned in question 7 above, not as a substitute for them.

9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?

In venture capital transactions, investors are expected to exit in the short or medium term. Several exit routes are available to venture capital investors:

- trade sale,

- transfer to the management team (known as “management buy-out” or “MBO”),

- sale to another investment fund (known as secondary “leveraged buy-out” or “LBO”),

- initial public offering (“IPO”).

Trade sale is the most common exit channel. The main issue in this type of exit is the proper alignment of the financial interests of the venture capital investor and those of the other selling shareholders so that none of them are adversely affected by the sale.

The second most common exit channel is the transfer of the company to the management team. The main challenge is to raise the necessary financing to pay the purchase price. In addition to obtaining a bank loan, the purchasing manager(s) often applies to an investment fund that will participate in the acquisition alongside while remaining a minority shareholder.

A third option is for the venture capital investors to sell their shares to another investment fund via a secondary LBO. One of the main difficulties arises from the divergence of financial interests that may exist between the venture capital investors, who wish to maximize the value of their investment when exiting the company, and the remaining shareholder(s), who seek(s) a new financial partner who shares the same vision for the development of the company.

Finally, an IPO is a well-known exit strategy. In practice, however, it is rarely implemented. This is partly due to the fact that the holdings of venture capital investors in France are almost exclusively made up of start-ups and small- and medium-sized businesses. The complexity, constraints and costs associated with an IPO are often difficult to reconcile with the profile of these companies.

10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?

IPO exits only accounted for 4% of the amounts related to the main divested businesses in the venture capital sector between 2009 and 2018[7]. This type of exit strategy is therefore not (yet) very common in practice. IPO exits are also highly regulated as they are subject to the control of the AMF.

When considering an IPO exit strategy in France, the investors shall first identify the listing venue for share trading: Euronext Paris regulated market or multilateral trading facilities (systèmes multilatéraux de négociation or “SMNs”).

a. Euronext Paris regulated market

The Euronext Paris regulated market is divided into four capitalization segments organized according to market capitalization: Compartment A for companies with capitalization over EUR 1 billion / Compartment B for companies valued between EUR 150 million and EUR 1 billion / Compartment C for companies valued below EUR 150 million / A professional Compartment (for admissions by French or foreign companies without a prior public offering of securities).

Rules for admission on Euronext Paris regulated market require that the following conditions to be met:

- a minimum distribution of at least 25% of the issuer’s capital, or 5% if this represents at least EUR 5 million,

- three years of audited accounts and the most recent reviewed half-yearly accounts if admission takes place more than nine months after the close of the financial year,

- the use of IFRS accounting standards, and

- a prospectus previously approved by AMF.

IPOs are subject to strict transparency requirements covering inter alia performance, financial positions, and major changes to the shareholding structure. Listed companies are also required to publish without delay any information that may have a material impact on their share price.

b. Multilateral trading facilities

Alongside the regulated market, there exist multilateral trading systems which include inter alia Euronext Growth, an organized SMN dedicated to small and medium-sized businesses.

Rules for admission on Euronext Growth are less stringent than those applicable to the Euronext Paris regulated market.

[1] 2018 Key figures, French Venture Capital Guide (Chiffres clés 2018, Capital-Innovation français), published by France Invest.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] In the wake of COVID-19 pandemic, Decree no. 2020-892 dated July 22, 2020 temporarily (until December 31, 2020) lowered the threshold triggering the foreign direct investment screening mechanism to 10% of the voting rights of French listed companies operating in sensitive sectors.

[7] 2018 Key figures, French Venture Capital Guide (Chiffres clés 2018, Capital-Innovation français), published by France Invest.

Contributors

Soulier Avocats
Jean-Luc SOULIER
jl.soulier@soulier-avocats.com

Florence Grangerat
f.grangerat@soulier-avocats.com

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