FRANCE Law and Practice Contributed by: David-James Sebag, Donald Davy and Marie-Sophie Chevreteau, Gide Loyrette Nouel
to financial and business due diligence, plus, sometimes, a technical due diligence and back - ground check of the founders. The legal due dili - gence covers the following. • Corporate law (including status of the found - ers) and capitalisation table. • Employment law. • Intellectual property and IT law (including more recently compliance with AI Act). • Data protection law (compliance with General Data Protection Regulation ((EU) 679/2016) (GDPR) or similar regulation). • High level review of top 10/20 contracts. For larger financing rounds, due diligence may also cover the following additional topics. • Commercial/competition law. • Financial law. • Regulatory law. • Tax law. 3.2 Process New financing rounds usually take between one and two months from execution of the term sheet, depending on due diligence, structure of the investment and negotiations. Usually, and for the sake of efficiency, counsels to the company (who also advise the founders) are in charge of leading negotiations and coor - dinating the various parties involved, including: • new investors (and their counsels, generally appointed by the lead investor); • existing investors (and their counsels, in par - ticular in case of reinvestment); and • business angels/employees (who generally have no counsel).
Fees of the participating investors’ counsels are usually re-invoiced to the company (within a cer - tain cap negotiated in the term sheet). Although French corporate rules provide that a capital increase may be voted by a 50% or a two-thirds majority of the shareholders, the structuring of the deal and the rights requested by investors (notably liquidation preference and drag-along rights) generally require the prior consent of all (or virtually all) holders of securities (including ESOP – Employee Stock Ownership Plan – holders). The company’s corporate and contractual structure must be organised accord - ingly from the early stage of financings. 3.3 Investment Structure In most cases, investors subscribe to preferred shares with certain rights (notably liquidation preference rights, anti-dilution ratchet rights and information/audit rights). For major inves - tors, preferred rights may also include the right to appoint board member(s) and veto rights on key decisions. Preferred rights may be defined by either: (i) the certificate of incorporation ( “statutory preferred shares” ) or (ii) the shareholders’ agreement ( “ordinary shares labelled as preferred” ). Statutory Preferred Shares The preferred rights are reflected in both the shareholders’ agreement and the certificate of incorporation. However, the issuance of such preferred shares requires that: • a court-appointed auditor (or an auditor appointed unanimously by the shareholders) delivers a report to the shareholders on the impact of the issuance of statutory preferred shares; and
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