Reorganization, insolvency and distressed M&A in France

July 2009

Reid FeldmanKramer Levin Naftalis & Frankel LLP47, avenue Hoche75008 Paris, Francetelephone: + (33) 1 44 09 46 00fax: + (33) 1 44 09 46 01rfeldman@kramerlevin.com

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Topics covered

Legislative context and recent reformsReorganization/ 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.

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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)

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Reorganization/insolvency processGoals and principles

Goals 1st priority: continue the business 2nd priority: maintain employment 3rd priority: settle liabilities to creditorsPrinciples

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

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Reorganization/insolvency processAvailable procedures

Ad-hoc mediation (mandat ad hoc)

Conciliation (conciliation)

Safeguard (sauvegarde)

Judicial reorganization (redressement judiciaire)

Judicial liquidation (liquidation judiciaire)

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Reorganization/insolvency processComparative table - 1

Ad-hoc mediation Conciliation Safeguard

Judicial Reorganization Judicial Liquidation

Purpose Informal agreement with creditors or preparation of voluntary composition

“Facilitate agreement with principal creditors, and possibly contractual counterparties, which resolves the company’s difficulties”

“reorganization of the business to permit continuation of economic activity, maintenance of employment and settlement of liabilities” (L620-1)*

Possible outcomes include plan of continuation of business; adjustment of liabilities, division of business, sale of some units and (in reorganization only) possible sale of entire business

“Bring an end to the business or liquidate the debtor’s assets by sale of assets as a whole or separately” (L640-1)

Criteria re solvency(measured by the cash-flow test)

Not insolvent current or expected “legal, economic or financial difficulty” and either solvent or insolvent for 45 days

Debtor not insolvent but experiencing “difficulties which it is not able to overcome” (L620-1)

Insolvent (management required to file 45 days after the debtor becomes insolvent)

Automatic stay and status of ongoing contracts

No automatic stay.General debt extension provisions can be used permitting a court to delay payment of specific debts for up to two years

Automatic stay of enforcement actions against the debtor.. Payment of pre-petition debts prohibited except via set-off of related debts; security interests cannot be enforced No interest accrues on debts except loans or deferred-payment contracts with duration 1 year. (In safeguard proceeding only, guarantors benefit from automatic stay.) Ongoing contracts can be terminated.

*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.

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Ad-hoc mediation Conciliation Safeguard

Judicial Reorganization Judicial Liquidation

Time-frame None specified; ends upon request of debtor

Four months with possible extension for one month (or, if a plan is proposed, until a court decision thereon) . Debtor can end proceeding at any time, mediator can request end of proceeding if his proposals are rejected by debtor.

Six months with possible extension of six months plus possible additional six-month extension at request of public prosecutor

Claims must be filed within two months (four months for foreign creditors) of publication of commencement of proceedings.

Appointments made by the court

Mediator (mandataire ad hoc) – can be proposed by debtor – empowered to talk with creditors and management

Mediator (conciliateur) – name can be proposed by debtor

Expert

• Experts (optional) for specific missions• Supervising judge (juge-commissaire)• Employees’ representative• Bankruptcy administrator (administrateur judiciaire),

optional unless turnover 3M€ or employees 20; in safeguard procedure, name can be proposed by the debtor and management remains in office

• Creditors’ representative (mandataire judiciaire, a bankruptcy professional)

• Up to five inspectors (chosen among creditors – but inspectors cannot purchase the debtors’ assets)

• Two creditors’ committees (optional unless employees  150 or turnover  20M€): (1) creditors who are EEA financial institutions and others (including purchasers of debt) and (2) creditors who are suppliers of goods or services (including all with >3% of debtor’s liabilities)

• If there are bondholders, they are consulted via bondholders’ assemblies

• Supervising judge (juge-commissaire)

• Liquidator. • Employees’ representative • Up to five inspectors (chosen

among creditors – but inspectors cannot purchase the debtors’ assets)

Reorganization/insolvency processComparative table - 2

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Ad-hoc mediation Conciliation Safeguard

Judicial Reorganization Judicial Liquidation

Agreement or plan

Any arrangement reached is implemented by contract

Agreement can be acknowledged by court and made directly enforceable, and protects to guarantors.If agreement is approved by court (homologué) and rendered public, new credits granted thereby have priority, in case of later insolvency proceedings, over debts incurred prior to commencement of the conciliation proceedings

• To be approved by committees within six months of commencement of the proceedings; in safeguard proceeding plan is proposed by the debtor with participation of the administrator and in judicial reorganization proceeding by the administrator with the participation of the debtor.

• Approval by each committee requires an affirmative vote of holders of 2/3 of debts whose holders vote.

• Maximum duration generally 10 years unless longer duration approved by both committees.

• Any substantial modification in the plan requires re-approval by the committees.

• Can include conversion of debt to equity• First payment must be within one year• Small claims up to 300€ or 0.5% of liabilities (total

limited to 5% of liabilities) not reduced.• Court can impose a plan.• Safeguard proceeding can be converted into

judicial reorganization.

Can involve sale of business unit(s), including intangible assets.

Reorganization/insolvency processComparative table - 3

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Ad-hoc mediation Conciliation Safeguard

Judicial Reorganization Judicial Liquidation

Dismissals of employees

Normal rules applyCollective dismissals may be carried out under accelerated procedures if “urgent, unavoidable and indispensable” (L.631-17, L.631-19, L.641-4, L.641-10, L.642-5).

Voidable preferences(i.e. clawback)

In case of later insolvency proceedings, the insolvency date cannot be set prior the date of approval of a composition agreement (important for determination of voidable preferences).

Certain transactions entered into after insolvency date including: sales where debtor’s obligations are disproportionate in the context; payments for debts not due; payments by unusual means for debts which are due; mortgages or pledges to guarantee prior debts; and payments or performance to parties aware of insolvency.

Insolvency date can be set up to 18 months prior to commencement of proceedings.

Reorganization/insolvency processComparative table - 4

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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 lendersRisks of liability

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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 lendersDebt-trading issues

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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 FeldmanKramer Levin Naftalis & Frankel LLP47, avenue Hoche75008 Paris, Francetelephone: + (33) 1 44 09 46 00fax: + (33) 1 44 09 46 01rfeldman@kramerlevin.com

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