Global context:

Venture capital funds are present in France and commonly invest in technology start-ups, thus contributing to the development of the eco-system for innovation.

The NCVA model is not used, per se, in France since it is based on common law practices which are not in use in France.

While there is no exact French equivalent to the NCVA, there are still third-party actors who provide good practices guides and, sometimes, document templates. They are, nevertheless, not as standard, or ubiquitous as NCVA is in the US.

In particular, there is an organization, called France Invest, which carries out broadly similar activities to NVCA, providing a forum and guidance for entrepreneurs and venture capitalists. France Invest often publishes positions on regulatory and practical topics and also aims to influence policies in a favorable manner to the venture capital ecosystem.

There are other key actors such as a dedicated association of Business angels (France Angels – Fédération Nationale des Business Angels) which operates as a national network of business angels in France, an association dedicated to asset management (Association Française de la Gestion d’Actifs or AFG) which assists players in the field of asset management including venture capital funds, France Fintech which represents the sector of fintechs and innovative players in the finance industry, Finance Innovation which is another association which provides assistance to startups in the field of banking, insurance and investment and payments, or the Galion project which assists start-up founders in their entrepreneurial journey and also maintains an important network of entrepreneurs in France.

While this ecosystem is more disparate than its US counterpart, there is a typical structure for venture capital (and more generally investment fund) backed start-ups stemming from usual market practices.

Typical investors:

The injection of venture capital into technology companies tends to happen at their inception or during

the early phase of their growth. Other types of private equity funds are also present in the start-up eco system, although growth-oriented funds usually intervene at a later stage of the company’s development, sometimes acting as a purchaser from venture capital funds. Finally, state-backed funds, notably through the Public Investment Bank (Banque Publique d’Investissement) play a non-negligible role in the financing of start-ups.

Investment funds may take many legal forms, a number of which benefit from subsidies or tax regimes geared toward technology or innovation.

In France, venture capital funds are often structured under the form of “fonds professionnel spécialisé” (FPS) or “fonds professionnel de capital investissement” (FPCI), which are only open to professional investors. These funds are quite flexible and do not require authorization from the Autorité des marchés financiers (French market regulatory authority) to be created. Nevertheless, France has specific legal structures which allow retail investors to invest in start-ups, and which are designed for start-up financing. These are the “fonds communs de placement à risque” (FCPR) and “fonds communs de placement dans l’innovation” (FCPI) which have specific tax regimes allowing them to offer tax advantages if the fund invests in specific types of assets. The FCPI’s portfolio companies are almost necessarily start-ups as their investment ratio is designed specifically to cover early-stage innovative high-tech companies. Finally, the “Société de Libre Partenariat” (SLP) should also be highlighted. It is a fund similar to the FPS, except that it is structured as a company and an open-ended fund.

All of the fund structures dedicated to start-ups provide tax benefits to investors. The FPS/SLP, the FPCI and the FCPR grant investors tax advantages on capital gains (the capital gains are subject to a flat tax (30%). The FCPI structure also provides tax reductions to investors which are cumulative with the tax advantage related to capital gains. Nevertheless, all these tax advantages are only granted to investors if certain conditions are fulfilled related to the retention of fund units (during a period of five years) by the investors and regarding the composition of the portfolio.

The FCPI has particularly stringent conditions regarding the composition of their portfolio which must contain shares of innovative small and medium-sized enterprises (SME). The FPCI, the FCPR and the FPS/ SLP need to invest 50% of the portfolio in securities issued by unlisted companies to allow investors to receive the tax benefits.

Venture capital funds usually opt for minority investments in start-up companies since their goal is not to acquire control of the company but to exit, after a given duration, with a maximum return on investment. They are generally fixed term. While French law does not impose any limit in terms of duration, the average length of such investment is generally 4 to 7 years, and the investment funds usually negotiate exit or liquidity provisions (see below) to guarantee this outcome.

The investment is usually implemented through a share capital increase (though a share purchase is possible) reserved to the investor. Concurrently with the investment, the company may also issue share options or convertible bonds allowing the investment funds to increase their stake before the exit and to maximize their return. As detailed below, a shareholders’ agreement is also normally entered into between the investors and the founders.

Typical legal structure of venture capital backed start-up companies.

Technology start-ups almost systematically take the form of a simplified joint-stock company (société par actions simplifiée) which grants the founders a lot of leeway as regards to the drafting of the bylaws, requires little starting share capital, has no minimum number of shareholders and is subject to very little underlying law. Its main drawback is that it cannot be publicly listed.

Other types of French companies with limited liability often appear too rigid due to being subject to a large amount of mandatory legal rules.

By exception, in the context of an IPO, it may be relevant to transform an existing simplified joint-stock company into a joint-stock company (société anonyme) to allow for its public listing. There are other types of French companies which have unlimited shareholders’ liability and are considered unsuitable for this type of investment.

The main structure documents of the company include its bylaws as well as, usually, a shareholders’ agreement.

While the bylaws must necessarily include a number of key structural clauses, there are many provisions that may, to a degree, be shifted between the bylaws and the shareholders agreement. Both are equally enforceable but have different advantages and flaws.

Bylaws provide better third-party information while shareholders’ agreements provide more confidentiality and are easier to amend by agreement of the parties. Bylaws provide more general and abstract rules whereas the shareholders’ agreement can provide specific rights and obligations for a specific party (whereas doing so in the bylaws requires going through a specific procedure (“procédure des avantages particuliers”) involving a third-party auditor. Finally, shareholders agreements are more versatile and may also include contractual clauses not strictly limited to the organization of the company (e.g., related to the conduct of the business, undertakings by the founders, put and call options…).

The company may also issue preference shares granting specific rights to their owner (such as price sharing priority, priority dividends, specific information rights, veto rights), usually for the purpose of protecting the investment fund’s rights although they can also be used as a way to remunerate the founders. The company can also issue share options allowing their holder to purchase more shares subject to certain triggers (either as an incentive for the founders or as an anti-dilutive tool for the investment funds).

Deferred access to the capital may also be granted to a party through call or put options included in the shareholders’ agreement although this is more usual at the acquisition stage.

As mentioned earlier, venture capital funds usually practice minority investments. As a result, the typical governance structure is to leave the operational management of the company to the founders and other key people, while the investment funds usually only have a supervisory role. Executive positions and legal representation are left to the founders, while the investment funds representatives sit on a board or strategic committee and benefit from veto rights.

Typical clauses intended to protect investment funds usually include said veto rights (regarding the company’s structure, creation or closure of branches, acquisition or divestments of key assets, key operational decisions above certain thresholds), commitment to a business plan, undertakings by managers key people to retain their functions (along with exclusivity and non-compete clauses), exit and liquidity provisions (including drag along and organized sale processes, price sharing mechanisms, no warranty undertakings), restrictive covenants regarding the transfer of shares, IP protection clauses, anti-dilutive mechanisms, reinforced information or audit rights.

Conversely, typical clauses and mechanisms intended to incentivize founders include share options (see question 7), retrocession of part of the investment funds capital gains in case of an exit event, bad leaver clauses in case the founders leave their functions (as either employees or legal representatives) or breach their key undertakings.

Call or put options are not systematic at this stage since venture capital funds are not usually interested in acquiring 100% of the company. They are rather generally implemented in the context of partial buyouts (see question 2).

There are various types of acquisitions or exits possible for venture capital backed start-ups. A large number of transactions are industrial acquisitions by operational companies in the same field, in a bid to consolidate their technological assets or their market share. An approximately equivalent number are acquisitions by more growth oriented, and less risk prone, investment funds looking for a more mature target than venture capital. A materially smaller proportion are management buyouts where the founders and key people re-acquire the stake of the investment funds (sometimes in conjunction with an industrial purchaser). IPOs (not within the scope of this article) are also a possible, albeit less frequent, outcome. Finally, it should be remembered that a significant number of venture capital-backed start-ups simply fail and are not subject to acquisitions, except in court order insolvency proceedings.

Most start-up acquisitions take the form of share deals.

Asset purchases are less common due to: (i) not allowing the automatic transfer of contracts with key clients, (ii) making it harder for investment funds to cash out, (iii) making it harder to retain key people or to share ownership with them, (iv) leading to the payment of higher stamp duties and (v) additional regulatory constraints.

Sales of assets may still be relevant to avoid taking on liabilities, especially if their extent cannot be fathomed with certainty.

If the purchaser does not want to purchase the entire company but just a branch (or alternatively the whole company minus a branch), a spin-off/carve out, followed by a share deal, is usually preferred to an asset deal.

In the context of a share deal, the acquisition may take the form of a partial or total buyout. Partial buyouts (with usually the faculty to acquire the remainder of the share capital at a later date) are a common approach as they provide the strongest leverage in order to retain the key people for a period of time (although other tools are available to the same end, even in the case of a total buyout, such as earn outs clauses, or undertakings to remain in office).

In the event of a total buyout, the structure is usually limited to a share purchase agreement. Such acquisitions require a more comprehensive set of representations and warranties since it is the purchaser’s only recourse. A total buyout is not incompatible with the founders remaining in function and being subject to earn-out and bad leaver clauses, but the purchaser’s leverage is more limited since there are no remaining founders’ shares to purchase.

In the event of a partial buyout, the purchaser typically acquires all of the investment funds’ stake (allowing them to cash out) but only a part of the founders’ shares, in order to keep them in the company’s share capital while still providing them with an immediate cash input. In this context the purchaser may either initially acquire a minority stake or a majority stake (the latter case being mostly in the event of industrial acquisition).

In the event of a partial buyout call and put options are generally entered into, regarding the remaining founder shares (unless purchaser is another investment fund which may not be interested in taking full control of the company). Such options are generally exercisable after a number of years with the founders remaining in function as a condition precedent. The aim being to keep the founders involved for an interim period in order to grow and transition the company before total takeover.

In the context of a partial buyout, a new shareholders’ agreement (with clauses similar to the former agreement) must be entered into in order to regulate the relations between the purchaser and the remaining founders. Differences may mostly stem from the purchaser having a majority stake or its end goal being a total buyout.

During the interim period following a partial buyout, founders usually remain in operational control with supervision or veto rights granted to the purchaser. Nevertheless, it is not unusual for industrial purchasers to co-appoint representatives in executive positions to balance the power, and get their in-house personnel involved. It is, however, very uncommon for purchasers to entirely take over the management while the founders are still present.

In either a total or partial buyout, investment funds usually opt-out of warranty or indemnification provisions which are entirely borne by the founders. Investment funds usually negotiate no warranty clauses during the initial investment phase to ensure that they will not have to grant such undertakings later on. If the founders’ indemnification undertakings are not sufficient for the purchaser, R&W Insurance may be a way to offset this issue (see question 15).

Letters of Intent (LOI) are quite common as a mechanism to provide a framework during the negotiation of a binding agreement, and they are almost systematic if the acquisition has complex parameters or involves a due diligence.

LOIs are usually non-binding as regards to the actual entering into the transaction but provide a framework for good faith negotiations, set up the main terms and conditions of the negotiations process (such as an audit process, key condition precedents, milestones for discussions) and often provide for an exclusivity period.

It is common to include some terms and conditions of the future transaction in the LOI. The level of detail varies significantly from deal to deal, ranging from a few key items to a full-fledged detailed term sheet. While said term sheet is usually not strictly binding, the principle of good faith during negotiations does not leave excessive leeway for renegotiation and this term sheet may, therefore, already include most of the building blocks of the final long form documents.

Deposits or break-up fees are sometimes used but are more common in the context of binding offers or call or put options than at the LOI stage.

Finally, even though the LOI itself is typically non-binding, some specific clauses, such as exclusivity, confidentiality, and litigation provisions, which must be enforceable even if the transaction fails to go forward, usually are.

In the context of open bid processes, mutually agreed LOIs may be replaced by process letters from the sellers and non-binding offers from the purchasers, which will include substantially similar provisions to a LOI.

Using buyer equity as consideration is an existing possibility but fairly uncommon.

It may, in some cases, be of interest to founders, especially in contexts where the transaction is meant to lead to a merger or integration into a larger group. This may be a way to hold on to key people, especially in regulated companies, such as fintechs or biotechs, where their presence might be necessary to preserve the existing approvals and permits. However, even in those limited cases, investment funds, especially venture capital, will typically prefer consideration in cash.

Earn out clauses are very common, and almost systematic, in one form or another, in the context of the acquisition of technology start-ups (and tech companies in general), notably due to the fact that growth is a key aim of such acquisitions and that retaining key people for the purpose of retaining or developing IP, know-how, regulatory permits or approvals, key clients and the market share is essential.

In the case of total buyouts, earn out clauses may be included as an additional price payable at a later date. They are usually, but not always, linked to the founders keeping operational positions within the company.

Often, the earn out is used in the context of a partial buyout and included in a shareholders’ agreement in the context of call or put options on the remaining shares held by the founders (which can be cumulated with an additional price on the first tranche of shares).

Earn-out provisions are usually based on the performance of the company during a period of time following the initial closing. Such performance is usually calculated based on multiples of financial indicators such as EBITDA, turnover, or net profit. There is usually a cumulative condition related to the continued involvement of the founders during said post-closing period.

An alternative to earn-out clauses may be the granting of share options to the founders (such as stock options, BSPCE, etc..).

Both net cash/debt adjustments (i.e., adjusting the base purchase price on the basis of a net cash/debt position at the closing date) and locked box adjustments (i.e., adjusting the base purchase price on the basis of certain outgoing cash flows only) are common in France. It is extremely rare for material acquisitions not to feature one or the other.

Within our practice, net cash/debt adjustments seem more common as they provide a more accurate and up-to-date value for the company shares.

Locked boxes, while simpler to implement, necessitate to already factor some key debt and receivable items in the purchase price and the capacity to foresee short-term cash flows in order to avoid any unexpected variations in value that would not be factored in the price.

French law offers a lot of flexibility in the context of issuing securities (shares, options, bonds). The terms and conditions of such securities may be heavily negotiated and customized, as contractual mechanisms between the company and the beneficiaries. They are often used as a way to incentivize key employees and managers.

Beyond the available flexibility, there are certain types of options which are regulated and provide tax benefits if they comply with certain legal conditions, such as stock options or BSPCE (which are similar to stock options but limited to recently created companies).

The use of BSPCE is particularly suited to startups considering they are only available to companies less than 15 years old with 25% of the share capital held by individuals and most startups fit these criteria. They can be issued by a listed company if its market capitalization is less than €150 million. If issued after 15 February 2025, BSPCE are subject to the newly implemented French management packages tax rules described in question 9 below.

These options allow to incentivize both existing shareholders (whether they are employees or legal representatives) or key people that hold no shares yet.

Free shares may also be granted to employees or managers, subject to certain conditions, provided that this does not result in any shareholder’s holding exceeding 10% of the share capital.

Retaining key people (employees or managers) is a particularly important aspect of acquiring technology companies, in order to retain know-how, technological knowledge, permits, and client relationships. There are various means to this end.

When the key person is a founder, earn-out clauses and call/put options on their remaining shares are the main incentive. These are often assorted with good/bad leaver clauses. However, recent case law has weakened the effectiveness of bad leaver clauses for employees as it can now, sometimes, be voided on the ground that it constitutes a financial penalty. Therefore, the clauses have to be drafted carefully in order to avoid this scenario.

Employee/manager equity (see question 6 above) is another common approach. The equity may be granted through options or through directly selling or freely granting existing shares to said employees. Options are generally subject to the key person remaining in functions and existing shares are often subject to call options exercisable in case such functions cease.

Finally, improving their financial or other employment conditions may also be used as an incentive.

France has extensive employment regulations and works councils play a very significant role in M&A transactions in France.

A company which has at least 11 employees, for more than a year, must establish a works council. Its powers are significantly extended if the company reaches 50 employees, at which point the works council must be consulted before any transaction or restructuring.

Venture capital-backed start-ups often reach the 11 employees’ threshold. This has a moderate impact as the works’ council does not need to be consulted. It is, nevertheless, customary to notify it of the transaction.

Furthermore, even though this does not directly involve the works council, in the case of a majority buyout, employees must be consulted individually to determine whether they want to submit a purchase offer for the company to the sellers. The employees have a two-month period to answer, which they may waive.

Some Venture capital-backed start-ups may reach the 50 employees’ threshold, although it often happens at a later stage of the company’s development.

This has a much more material impact on the transaction. In this case, the works’ council must be consulted before entering into any binding agreement. The process requires one month (which may be extended to 2 months if the works council requests an expert’s intervention). Failing to comply is a misdemeanor, pursuant to French law, which makes this consultation a key step in the sale process. This may create a confidentiality issue since the information must be provided to the works’ council before the parties’ consent is finalized (while the works’ council is supposed to uphold confidentiality this has limited enforceability).

Many start-up founders use the tax deferral mechanism provided for in Article 150-0 B ter of the French General Tax Code. This allows founders to contribute their shares to the capital of a holding company and automatically benefit from a tax deferral regime. Capital gains realized will not be taxed during the year of the contribution, but during the year in which the event terminating the tax deferral occurred. However, the capital gains tax rate will be the one that would have been applicable if taxation had been levied for the year of the initial contribution. The tax deferral ends in the event of the sale of the holding company’s shares, or in the event of the sale of the start-up shares contributed to the holding company within three years of the contribution, unless there is a commitment to reinvest at least 60% of the sale price of the latter.

Since the 2025 Finance Act, capital gains on shares granted to employees and company executives in return for their services, whether subscribed at a favorable price or free of charge, are taxed under a general regime applying to all transfers taking place on or after 15 February 2025.

Capital gains realized on these shares will only be taxed under the capital gains taxation regime for the portion of the net gain not exceeding a certain threshold, intended to represent the company’s financial performance (marginal tax rate of 34%).

For the portion of the net gain exceeding this threshold, the capital gain will be taxed under the salaries regime, and therefore at the progressive income tax rate (marginal tax rate of 59%).

Such clauses are almost ubiquitous in technology M&A in order to secure the cooperation of the key people, at least until the purchaser has acquired full control of the company, and sometimes beyond.

Founders retaining shares or functions in the company, for a period after closing, or benefiting from an earn-out, are almost always subject to an exclusivity clause.

Non-compete and non-solicit clauses are also standard during such holdover periods and are very commonly prolonged for a period thereafter. Such clauses must be proportionate in their duration and geographical range to be valid. Furthermore, if the relevant key person is an employee, the non-compete undertaking must be compensated.

In some cases, exceptions are carved out from such clauses if a founder already has specific plan for a new parallel business (with occasionally the opportunity for the purchaser to invest) but it is important that it does not affect the founder’s involvement in the company nor competes with it.

The acquisition of a venture capital-backed start-up can be subject to conditions precedent similar to most typical M&A transactions.

The target being a venture capital-backed company means that there is most likely an existing shareholders’ agreement as well as, possibly, preference shares or other categories of securities (ratchet share options, etc.) issued to the benefit of the investment funds.

As a consequence, conditions precedent linked to dealing with such existing securities as well as complying with the transfer and exit clauses of the existing shareholders’ agreement are likely.

Including a material adverse effect clause in M&A contracts subject to conditions precedent is common, although not systematic. The exact wording may vary but such clauses usually take the form of a condition precedent pertaining to the absence of any event having a materially adverse impact on the company’s continued existence, the continuity of its activities or its financial situations or perspectives. The wording may be more restrictive and target specific events such as the loss of administrative authorizations or termination of key agreements. When the wording is broad, it is not uncommon to exclude causes related to known current events.

a. Is deemed disclosure of the dataroom common?

The deemed disclosure of the Data Room is a contractual matter which is negotiated on a case-by-case basis. It is, however, generally included unless there is a material issue with the Data Room or the audit process.

In some cases, the Data Room may not be reliable, or the information provided therein may not be sufficiently clear, thus providing ground for refusing the deemed disclosure of the Data Room, although such exclusion is often fiercely disputed.

More commonly, there is a deemed disclosure with qualifiers specifying that the disclosed risks and liabilities must have been obvious and unambiguous for a sufficiently qualified and diligent reviewer.

In order to limit disputes as to the admissibility of the Data Room, it is advisable to use a reliable and reputable data room provider capable of tracking and certifying all data room operations (uploads, downloads, etc….) as well as providing a detailed index.

b. Are “knowledge” qualifiers common? Is it common to make representations that are “risk shifting” (e.g., where sellers cannot completely validate the accuracy of such representations)?

Knowledge qualifiers are common in most, if not all, acquisition agreements. Their extent is negotiated on a case-by-case basis, depending on the specificities of the company, the structure of its management and other factors.

Knowledge qualifiers are typically applied for representations where the seller is objectively not able to ascertain the absence of a risk even with a normal level of diligence (such as the existence of third parties’ actions) but are less relevant for representations where the seller should be able to confirm or deny the existence of the risk after a sufficient level of investigation.

However, on a case-by-case basis, depending on many operational factors, as well as the bargaining power of the parties, knowledge qualifiers may be applied to either a broader or narrower scope of representations than usual.

The definition of what constitutes “knowledge” is important. It may refer to actual or theoretical knowledge and refer to the knowledge of specific individuals within the company. The usual standard is to include both the actual knowledge of the relevant key person(s), as well as the knowledge they should have had, had they been normally diligent.

a. Coverage (fundamental, specified, general reps, covenants, shareholder issues, pre-closing Tax, specific indemnities, employment classifications, etc.)

The indemnification coverage is based on a set of representations and warranties given by the sellers to the purchaser. Indemnification is due whenever a loss is caused by a breach or inaccuracy of such representations. Their scope is subject to negotiations between the parties.

These representations almost systematically include “fundamental” representations, even in transactions described as “without warranty”. These fundamental representations concern the good standing and legal capacity of sellers, the existence and good standing of the target company as well as the sold shares and their ownership by the sellers.

Most transactions include a larger, general body of representations (including usually, accounts, off-balance sheet commitments, tax, employment, real estate, IP, data protection, insurance, environment, etc.). The exact scope, and the potential qualifiers to each representation, vary from agreement to agreement depending on the nature of the target, and the bargaining power of the parties.

Some of these representations are more or less important depending on the nature of the target. In technology companies, IP and data are often essential.

Further to the representations, indemnification provisions also often cover increases in liability or decreases in assets, in comparison to the values identified at closing.

If a specific legal risk or breach of the representations is identified before closing, specific indemnities are often implemented, whereas the parties acknowledge the existence of the risk, and the sellers undertake to indemnify all losses resulting therefrom. They are often uncapped in their amount and unlimited in time (or at least subject to raised limitations).

b. Liability limit

The liability limits vary significantly depending on the parameters of the transaction. The bargaining power of the parties is a key factor here.

An indemnification cap of 10% to 20% of the purchase price is common although very different percentages (both above and below that range) often exist.

There are often a de minimis and threshold or deductible amount, requiring a minimum amount of loss, both individually and in the aggregate to trigger the indemnification clauses.

Some representations are usually excluded from these limitations or are subject to a raised cap (such as 100% of the purchase price).

This is almost always the case of fundamental representations. In some instances, some specific representations, or categories thereof, are also excluded from the limitations either because they are particularly important in the context of the transaction or because of a material risk that the due diligence process has not allowed to clear (which is common with chains of intellectual property rights transfers). Uncapping IP representations may be prudent in technology acquisitions, although this is usually strongly opposed by sellers.

Specific indemnities are also usually excluded from the above limitations due to them being precisely identified.

c. Survival periods

Survival periods also vary from case to case depending on the parameters of the transaction and the bargaining power of the parties.

It is usual to have a 2 to 3-year duration for most representations (whereas the legal statute of limitation is usually 5 years) although shorter and longer periods are not uncommon). Fundamental representations, as well as tax and employment representations usually have an extended duration equal to the applicable statute of limitation.

As with the indemnification cap, it is not uncommon for key representations to have their survival period extended to long durations or the expiration of the statute of limitation. Again, IP is a prime candidate for this treatment in technology acquisitions.

French law, through both statutes and case law, provides a general and fairly comprehensive framework for contractual liability, which overarches indemnification clauses in acquisition agreements.

The purpose of the indemnification clauses in said agreements is not so much to deviate from this legal framework than to provide more in-depth implementation details, where the law might be silent or ambiguous, as well as to expressly re-state what derives from case law rather than statute.

The indemnification clauses grant the parties the opportunity to fine tune a significant number of parameters. Such key parameters warranting special attention include the definition and scope of indemnifiable loss (the management of claims, management of third-party litigation, all time and amount limitations).

It should be noted that French law prohibits the contractual exclusion of some forms of liability (fraud, willful misrepresentation, criminal liability…).

Warranty & Indemnity or Representations and Warranties Insurance exist in France but remain fairly uncommon due to cost (the premium is a certainty whereas liability is merely a possibility) and complexity of implementation (the indemnification clauses need to be negotiated and validated in parallel with the insurer which delays the signing).

They can be relevant in the context of large-scale transactions where the cost of the premium is not excessive proportionally to the purchase price, which is rarely the case with start-ups.

Nevertheless, they may be relevant in the context of some sellers, in particular investment funds, which are not willing to take on off balance sheet commitments. While this is usually resolved by the funds not giving guarantees, a warranty and indemnification insurance policy may be a good alternative.

There is a merger control regime applicable to French transactions which, if relevant, must be complied with between signing and closing as a condition precedent. Merger control is applicable if the parties involved exceed certain turnover thresholds, both individually and in the aggregate. The control may be exercised either at domestic (by the French competition authority) or European level (by the European Commission) depending on the thresholds exceeded.

In case the transaction is subject to merger control, the relevant competition authorities may either authorize the transaction (as the case may be subject to conditions precedent) or forbid it.

Technology startups are usually sold before reaching such thresholds and it is uncommon for them to be subject to the merger control regime. However, if multiple large corporate groups form a joint-venture to purchase a start-up, the creation of such joint-venture may, by itself, be subject to merger control regime.

There does not seem to be increased scrutiny of tech companies per se. However, recent case law has considered that transactions not subject to merger control may still be challenged, after the fact, on the basis of antitrust regulations and abuse of dominant position. This could be relevant in the case of “killer acquisitions,” where major market players acquire innovative companies, to appropriate their market share and prevent them from becoming competitors.

The foreign investment regime in France used to be more comprehensive and to require filings for every foreign investment if only for statistical purposes.

As of today, an authorization by the ministry of the economy is only necessary when a foreign investor takes control of a French entity operating a strategic activity. Such strategic activities are listed in a decree. However, the definitions therein are broad and leave some uncertainty as to whether a given company is concerned (a rescript procedure is available to determine in advance whether the company’s activity is subject to such control).

The filing for authorization is to be done between signing and closing as a condition precedent. The authorities have 30 business days to determine whether the activity is subject to authorization and, if so, 45 further business days in order to determine whether they authorize the transfer or not. The authorization may sometimes be granted subject to certain conditions or restrictions.

While there is not a focus on technology companies, as such, said companies may have activities that often overlap with security or infrastructure matters and may, in those cases, be deemed strategic. In particular, some activities linked to IT security and cryptology are listed as expressly listed as strategic.

A wide array of regulatory regimes may be applicable to technology companies in consideration of the fact that their activity may overlap with matters of public interest such as environment, health, infrastructure security, defense or other similar concerns. Such regimes depend on the specific activity of each company.

The acquisition process of technology companies may imply securing the continuation or transfer of existing approvals or permits.

A particularly current and relevant example is that of technology companies operating in the financial field. France has specific regulatory regimes for digital assets service providers, payment service providers, investment firms, credit institutions and other regulated financial entities. Any changes in the ownership of regulated fintech, companies comprising more than 10% of their share capital or voting rights (and in particular changes of control), are subject to notification or prior authorization by the competent authorities (Autorité des marchés financiers et Autorité de contrôle prudentiel et de resolution) which will review whether the new shareholders are fit to acquire such stake.

IP (and by extension know-how) is usually the key asset of tech start-ups and requires special attention in the context of an acquisition. A buyer must ensure that the IP rights generated by people performing a creative mission (including employees but also legal representatives, interns, as well as external service providers) are duly transferred to the company.

Clauses pertaining to the transfer of IP rights must be included in the agreements between such people and the company and be properly drafted to ensure their full effect (taking into consideration legal requirements and detailing the scope in as much detail as possible). As regards to software developed by employees, there is a legal devolution regime which provides a modicum of protection to the employer in any case (unless otherwise stipulated in the employment agreement). For other IP rights (such as patents and copyrights), the drafting of such clauses is even more significant.

One must also ensure that the founders (or other creative people) do not actively register IP rights in their own name.

It is also necessary to ensure that the company is not breaching third-party rights, notably from the inclusion of pre-existing developments in IP produced by the company. One must ensure that such pre-existing developments do not infringe third parties’ rights or that they do not preclude the commercialization of the company’s products (for example in the case of use of open-source components in the context of developing software, which may be detrimental to the future independent R&D of the company, as the open-source license would force sharing new derivative developments with the open-source community).

Reviewing the above issues is a key matter in the context of a purchaser due diligence and appropriate representations and warranties must be included accordingly in the acquisition documentation.

When founders remain in the company after the transaction, undertakings may also be included in a shareholders’ agreement in order to ensure compliance with the above in the future.

Data protection in France is currently in line with the GDPR European Regulation but includes additional national requirements (e.g. regarding the processing of health data).

Due to the high number of requirements, it is common for smaller French companies not to be fully compliant with data protection regulations. Remediation covenants should, in this case, be included in the acquisition documentation to ensure future compliance.

Tech start-ups, however, due to their field of activity, are more likely than average to be compliant in that regard.

In addition to potential administrative, civil and/or criminal sanctions, breaches to the data protection regulations may be punished by a penalty of up to the highest of €10 million or 2% of the worldwide turnover for procedural or organizational breaches, or €20 million or 4% of the worldwide turnover for core breaches. Such drastic penalties remain uncommon for start-ups, but precedents of significant penalties nevertheless exist.

In addition to the primary processing of personal data, a start-up’s capacity to reuse data for secondary purposes (for example to feed AI-based technologies) has significant value and should be taken into account in the context of an acquisition.

All the issues relating to employment (such as issues with work duration, invalid clauses in employment agreement, etc.) common in general M&A are also susceptible to be present in tech start-ups which are similar, in this regard, to any operating company.

A more specific issue is the necessity to ensure that the transfer of IP rights generated by employees in the context of their work is properly implemented (as discussed in more detail in question 19).

Furthermore, start-ups often outsource certain services to external providers in order to limit payroll. If some of those providers are used with excessive regularity and the conditions of their missions are controlled too tightly by the company, said providers may, in some cases, claim to be permanent employees of the company.

Acquisition documents, in France, are usually subject to the jurisdiction of French commercial courts.

If the acquisition is between professionals, the parties may freely choose the court of a specific location. Considering the first degree of commercial courts in France is not comprised of professional judges, it can be advisable to choose a court with a reputation for reliability (such as Paris), rather than the headquarters of the target.

Contracts usually include a provision providing for a mandatory negotiation phase before any formal litigation.

Arbitration remains uncommon in the context of purely French acquisitions due to its cost and complexity.

Finally, it is not uncommon to contractually refer the resolution of certain technical disputes (such as the determination of final shares price) to an expert rather than a judicial decision.

Following an acquisition in France, both tax and corporate formalities usually have to be performed.

From a tax perspective, the purchase of shares is subject to registration with the tax of authorities and the payment of stamp duties. For a non-real estate simplified joint-stock company, the rate is 0.1% of the purchase price (higher rates may be due for other types of companies or in the case of asset transfers). The registration must be performed within a month of the transfer.

From a corporate perspective, most formalities are performed with the clerk of the local commercial courts (and involve, notably, the updating of the targets’ registration extract, the amendment of its bylaws, the change of legal representative, the change of beneficial owner, etc.). They should be performed as soon as possible after completion of the transaction in order to inform third parties.

In the case of a transfer of assets through the transfer of business regime, specific legal publications are also required.

Further to this, depending on the structure of the acquisition and the activity of the company, additional tax and regulatory formalities may be required.