Financial assistance

Article L. 225-216 of the French Commercial Code prohibits a company from advancing funds, granting loans or providing security with a view to a third party subscribing for or buying its own shares. The prohibition covers sociétés anonymes and extends to sociétés par actions simplifiées through the cross reference in article L. 227-1. It does not apply to the ordinary operations of credit institutions and financing companies, or to transactions intended for the acquisition of shares by employees. The chairman, directors or chief executives who carry out a prohibited transaction on behalf of the company face a fine of €150,000 under article L. 242-24. In a leveraged buyout, the rule prevents the target from guaranteeing the holding company’s acquisition debt or pledging its assets in the holding company’s favour. Case law interprets the text strictly because it is a criminal provision: it covers only the advances, loans and security that the target grants with a view to the acquisition of its shares. On 12 June 2019 (appeal No. 16-25.025), the Cour de cassation held that a sale of assets carried out after the acquisition did not constitute prohibited financial assistance. French law kept the prohibition after the 2006 European directive, which allows financial assistance up to the limit of distributable reserves. Structures that use the target’s assets to repay the acquisition debt require an analysis of each case.

A holding company borrows €80m from a debt fund to buy 100% of a distribution SAS. The fund asks the SAS to guarantee the loan and pledge its business (fonds de commerce). Article L. 225-216 prohibits this guarantee for the part of the loan that finances the price of the shares. The agreement limits the target’s security to the financing of its own needs. The fund takes as security a pledge that the holding company grants over the shares of the SAS.

• The security and guarantees requested from the target and the use of the funds they cover
• The legal form of the target: société anonyme or SAS
• The timing of transactions after the acquisition, merger or asset sale
• The pledge over the target’s shares granted by the holding company