FRANCE Law and Practice Contributed by: Idris Hebbat, Camille Perrin, Franck Vacher and Nicolas Menard-Durand, C-Level Partners
As an exception to the above, however, some man - agers may be offered certain rights as a party to an investment agreement. The content of these rights depends mainly on the negotiating capacity and the final weight that the management team is expected to carry in the company following the investment. This can go as far as veto rights on certain issues involving the company, anti-dilution protection or influence on the exit of the private equity fund. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights Corporate Governance In order to monitor the performance of a portfolio company, private equity investors usually negotiate the following corporate governance arrangements, which are generally set out in the shareholders’ agree - ment: • appointment of representatives in the supervisory committee; • veto rights on strategic decisions; and • information and audit rights. Nomination of supervisory committee members Most private equity investors are granted the right to appoint a certain number of members of the supervi - sory committee. Such members represent the inter - ests of the private equity fund at the level of the com - mittee, the main role of which is to monitor business performance and vote in strategic decisions. Veto rights on strategic decisions Besides the right to appoint members of the super - visory committee, private equity investors are usu - ally granted veto rights over extraordinary manage - ment decisions affecting the organisation, structure or performance of the portfolio company, which may include: • amending the company’s by-laws; • issuing additional shares or transferring shares; • adopting financial budgets; • incurring new debt above a certain threshold; • hiring or dismissing directors and key employees;
• investing above a certain amount; • setting up new subsidiaries or entering into a new line of business; and • pursuing a merger, an acquisition or a carve-out, etc. The list of strategic decisions is usually set out in the shareholders’ agreement and is sometimes reiterated in the company’s by-laws. Information and audit rights Information and audit rights are also commonly requested by private equity investors. Consequent - ly, the management of the portfolio company has a reporting obligation towards investors and must pro - vide financial reports to the private equity fund every month or at the end of every quarter. Furthermore, as part of their audit rights, private equity investors are entitled to conduct on-site investiga - tions and can therefore audit the company’s books and records, either alone or assisted by legal advisers. 9.2 Shareholder Liability In general, private equity investors do not wish to interfere with the daily management of the portfolio company, in order to limit their liability in this regard. Hence, private equity investors prefer to perform a supervisory role. However, under certain conditions, private equity funds, in their capacity as shareholders, may be held liable in the context of their activity, and the princi - ple of limited liability may be put aside. Thus, when shareholders are found to have committed a personal error that cannot be linked to the management of the company and which has caused damage to others, it is established case law that the personal liability of the shareholder will be engaged. Above all, shareholders will be personally liable if they are qualified as de facto managers. Thus, when a shareholder interferes in the management of the part - nership in a manner that leads to a loss for the com - pany, this interference will engage the personal liability of the shareholder. This is why counsels of private equity funds have to draft the shareholders’ agree - ment so carefully. Indeed, the rights that are granted
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