FRANCE Law and Practice Contributed by: David-James Sebag, Donald Davy and Marie-Sophie Chevreteau, Gide Loyrette Nouel
In France, carried interest is structured through the subscription of specific fund units or shares, which generally represent one (1)% of the size of the fund. Carried interest units or shares are subscribed by the management company, its employees or its directors, in return for a capital investment. This capital investment is released pari passu with the fund’s other investors. According to the established practice, the share of the capital gain attached to carried interest units or shares is generally twenty (20)% of the total capital gain for a direct fund, after payment of a priority return to the investors. The carried interest mechanism in France is sub - ject to special tax treatment. Under this special tax treatment, distributions and gains made by the directors and employees of a management company from holding carried interest units or shares in a fund are subject to a taxation as capi - tal gains ( plus-values ) rather than as wages and salaries ( traitements et salaires ), provided that certain conditions are met. The relationship between the holders of carried interest units or shares and the management company is the subject of “vesting agreement” . The purpose of this agreement is to define the terms and conditions under which holders of carried interest units or shares will be required to sell such units or shares in the event of volun - tary or involuntary termination of their employ - ment contract. The vesting agreement includes a schedule for determining the portion of carried interest that the holder may retain in the event of voluntary or involuntary termination. The vesting agreement also covers cases of good leaver and bad leaver. In addition, the governing documents of VC funds that are dedicated to professional/non-
retail investors are more frequently negotiated by investors because French laws and regulations allow the flexibility for a wide variety of terms. lnvestors negotiate provisions that are com - monly sought by investors in global PE funds, for example: • key persons and change-of-control provi - sions; • fault and no-fault removal of the management company; • limitations relating to raising a successor fund; • management and other fees; • reporting and environmental, social and gov - ernance (ESG) obligations; and • advisory committee membership. 2.3 Fund Regulation VC Funds open to retail investors (FCPRs, FCPIs and FIPs) must be authorised by the AMF before both: • formal establishment of the entity; and • marketing its interests to prospective inves - tors. VC Funds limited to non-retail/professional investors (FPCIs and SLPs) must be notified to the AMF within one month after their formation. Since the implementation of the AIFM Directive, the marketing of interests in a VC fund must comply with French regulations relating to: • public offerings (VC funds that are offered to the public require the AMF’s prior approval of the offering terms); • solicitation (VC funds must not solicit if they are not approved for marketing either through a marketing passport or under the French local marketing regime); and
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