Loi Hamon: more trouble ahead for French private equity?

The second half of 2014 in France certainly had a late-2012 feel to it, with the usually tense relations between the government and the business community boiling over in rather dramatic fashion. While two years ago it was mainly start-up founders that had a bone to pick with proposed changes to capital gains taxation, the latest malaise is more widespread – it has even seen business leaders, not usually known for their fondness for industrial action, take to the streets in protest.

A number of measures in the government's "Responsibility Pact" have sparked the business community's ire, but one in particular, the loi Hamon (Hamon Act), attracted significant criticism: owners wishing to sell a business now have to notify every single employee two months prior to any transaction taking place. On the face of it, the measure, which came into force in November, should have serious implications for private equity. So, should GPs be joining their portfolio company managers in the war of words with Hollande's government?

The spirit of the new law is commendable; it aims to prevent smaller businesses from going under after failing to find a suitable buyer, when the employees themselves might be willing to step up to the plate. The practicalities, however, raise myriad issues. Entrepreneurs' main concern is confidentiality – though employees are urged not to disclose sensitive information to third parties, rumour of an incoming sale might be enough to rattle suppliers and customers, not to mention competitors. Containing the spread of information is already difficult enough in a normal M&A process, without hundreds of individuals being in the loop.

On top of that is the potential administrative burden. If challenged, the vendor should be able to prove that every single staff member has been consulted, or at least notified of the decision to sell. Given that the law covers businesses with up to 250 staff, the time and resources needed to tick either box and be able to unequivocally prove it are considerable.

Finally, the sanction itself raises a number of challenges. Failure to comply with notification requirements can lead to a judge declaring the resulting transaction void. Given that this scenario is likely to materialise after a long legal process has elapsed, the uncertainty on the buy-side – and therefore the reluctance to pursue a deal in the first place – is not to be underestimated.

It is worth bearing in mind what situations the new law covers though, to realise that the impact on private equity managers themselves should be fairly limited.

Loopholes galore
First of all, the measure only applies to businesses with up to 250 employees, and more importantly with an annual turnover of less than €50m. The transaction also has to cover the sale of a majority stake. Finally, a number of situations are excluded from the law, notably capital increases and the transmission of a business for succession reasons.

Taking all these into consideration, the law is bound to only apply to a very small subsegment of the local private equity market, and certainly not one where the industry should worry about international investors being driven away as foreign GPs focus almost exclusively on the larger end of the scale.

There is another very significant caveat to the law: it doesn't apply to the sale of a majority stake in a holding company. Given that the vast majority of private equity transactions that could fit the law's other criteria will have been acquired through a newco, most portfolio companies should be sheltered.

One way the law could affect local small-cap buyout houses is on the buy-side, as it could theoretically deter family and private vendors, thus limiting dealflow. But then again, Paris's many law firms will no doubt be busy in the months ahead advising their clients on the best way to restructure prior to initiating a deal, so as to exploit one of the law's loopholes.

Activity figures for the first quarter should act as a suitable barometer – but the new rule will probably do far more damage to the relationship between a beleaguered business community and a government quickly running out of options than it will to the local M&A market.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• France
• Regulation
• France
• Top story
• Unq2015Jan