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Reorganization, insolvency and distressed M&A in France. July 2009 Reid Feldman Kramer Levin Naftalis & Frankel LLP 47, avenue Hoche 75008 Paris, France telephone: + (33) 1 44 09 46 00 fax: + (33) 1 44 09 46 01 firstname.lastname@example.org. Topics covered. Legislative context and recent reforms
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Reorganization, insolvency and distressed M&A in France July 2009 Reid Feldman Kramer Levin Naftalis & Frankel LLP47, avenue Hoche75008 Paris, Francetelephone: + (33) 1 44 09 46 00fax: + (33) 1 44 09 46 email@example.com
Topics covered • Legislative context and recent reforms • Reorganization/ insolvency process • Goals and principles • Available procedures • Comparative table • Selected issues for distressed M&A lenders and investors • Risks of liability • Debt-trading issues • Key scenarios • Note: This outline is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Legal advice should be sought in assessing the impact of any of the matters mentioned herein.
Legislative context and recent reforms • Prior law (dating from 1985) was considered unsatisfactory because not favorable enough to reorganizations • Of over 51,000 insolvency proceedings in 2005, 88% resulted in straight liquidations. • Significant reform was adopted in 2005 (Law n° 2005-845 of July 26, 2005) • maintained the goals and principles of prior law • created two new insolvency procedures: • conciliation (based on former règlement amiable procedure) • safeguard (sauvegarde) procedure, inspired by US Chapter 11 • Further reform adopted in late 2008/early 2009 included measures to encourage use of the safeguard procedure (Ordinance n° 2008-1345 of December 18, 2008, and Decree n° 2009-160 of February 12, 2009)
Reorganization/insolvency processGoals and principles • Goals • 1st priority: continue the business • 2nd priority: maintain employment • 3rd priority: settle liabilities to creditors • Principles • Control over the process • exercised by court-appointed officials and supervising judge (and debtors, in safeguard proceeding) • not exercised by creditors • Right to information • In theory creditors and the public have some right to information • In practice the process is often not transparent • Standards for decision are subjective
Reorganization/insolvency processAvailable procedures • Ad-hoc mediation (mandat ad hoc) • Conciliation (conciliation) • Safeguard (sauvegarde) • Judicial reorganization (redressement judiciaire) • Judicial liquidation (liquidation judiciaire)
Reorganization/insolvency processComparative table - 1 *Provisions relating to reorganization and insolvency are codified in the Commercial Code; references herein in the form L____ or R____ are to articles in the Commercial Code.  Unless indicated otherwise, “L.” = articles of the C.Com and “D.” = articles of decree n° 2005-1677.
Reorganization/insolvency processComparative table - 2  Unless indicated otherwise, “L.” = articles of the C.Com and “D.” = articles of decree n° 2005-1677.
Reorganization/insolvency processComparative table - 3  Unless indicated otherwise, “L.” = articles of the C.Com and “D.” = articles of decree n° 2005-1677.
Reorganization/insolvency processComparative table - 4  Unless indicated otherwise, “L.” = articles of the C.Com and “D.” = articles of decree n° 2005-1677.
Issues for distressed M&A investors and lendersRisks of liability • Managers whether de jure (such as board members or general manager) or de facto (such as shareholders exercising effective control) can be held liable for shortfall in assets caused in whole or in part by management error (C. Com. art. L.651-2). • Lenders, suppliers and other creditors can become liable for artificial support of debtor in cases of fraud or clear interference (immixtion caractérisée) in the management of the debtor or if security interests taken in connection with the credit are disproportionate (C. Com. Art. L.650-1). • Credit institutions can cancel an indefinite-term credit facility only with prior notice (60 days unless longer period agreed in writing) except if the borrower acts in a “gravement répréhensible” manner or its situation is “irrémédiablement compromise” (C. Mon. & Fin. arts. L.313-12 & D.313-14-1).
Issues for distressed M&A investors and lendersDebt-trading issues • Procedures for purchase of debt • Documentation should deal with classic issues, such as: identification of assigned debt; price/payment; obligations assumed; representations, warranties and covenants re supply of information and other matters; indemnification; etc. • Assignment should be valid under the law applicable thereto and also comply with requirements of French law, i.e. be notified by process server on the relevant debtors and guarantors (C. Civ. art. 1690) or be made by bordereau to a French securitization vehicle (an FCC) or to a credit institution (cession Dailly) or by subrogation (quittance subrogative). • Due diligence • Review of terms, conditions and validity of credit and security interests. • Compliance with French legal and regulation requirements (taux effectif global, annual notice to guarantors, regulatory issues, consumer protection rules, etc.) • Regulatory issues • Purchase or sale in France of uncontested unmatured debts, if done “habitually”, is a credit operation subject to the French banking monopoly, which can be carried out only by French or “passported” EEA credit establishments (C. Mon. & Fin. arts L.311-1, L.313-1 & L.511-5). • In case of violation, administrative and penal sanctions are possible, but contract should not thereby be voided. • Pay-off of disputed claims (retrait litigieux) • Purchase of a claim which is being litigated can give the debtor the right to pay off the claim at the price paid by the purchaser (retrait litigieux) (C. Civ. art. 1699). • Exceptions include purchase in set-off of a preexisting debt in a greater amount owed to the purchaser; purchase of a claim as part of a broader assignment dealing with other assets and rights as well (if the price paid for the contested claim cannot be determined); and purchase of a claim against a debtor in liquidation, reorganization or safeguard proceedings (see Cass. com. 12 October 2004 n° 03-11.615).
Issues for distressed M&A investors and lendersKey scenarios • Acquisitions of businesses out of reorganization or liquidation procedures • Investments in companies in safeguard proceedings • Investments/acquisitions of companies not on the verge of insolvency but with some prospects of insolvency
Reid Feldman Kramer Levin Naftalis & Frankel LLP47, avenue Hoche75008 Paris, Francetelephone: + (33) 1 44 09 46 00fax: + (33) 1 44 09 46 firstname.lastname@example.org Questions?