Fiducie spoke — LBO & acquisition financing

Security fiducie in LBO:
structuring security over shares

In a Leverage Buy-Out transaction, the security fiducie offers a superior alternative to the classic pledge of shares: transfer of ownership to the fiduciary (Civil Code art. 2011 to 2030), erga omnes enforceability, tax-neutral regime (French Tax Code 238 quater A to I). For bank pools, it is maximum security; for the acquisition holding, it is management flexibility preserved through the availability agreement. This spoke sets out the LBO + fiducie architecture.

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— In brief
Governing text
Civil Code art. 2011 to 2030 + Law of 19 February 2007
Key advantage
Transfer of ownership > classic pledge
Tax regime
Neutrality French Tax Code 238 quater A to I (transparency)
Coordination
Bank pool + availability agreement (holding management)
Implementation
Fixed fee + priority rank enforceable against third parties
— 01

Why the fiducie outperforms the pledge in LBO

The traditional pledge of shares (Monetary and Financial Code art. L. 211-20) suffers from several limits in LBO: (1) the pledgor remains the owner, (2) implementation requires heavy formalities (formal notice, public auction or realisation by way of attribution), (3) conflicts with other creditors (in particular URSSAF, the Treasury) may downgrade the rank of the pledge.

The security fiducie over shares brings a threefold superiority: (a) ownership with the fiduciary from creation (Civil Code art. 2024), (b) erga omnes enforceability, including against the bodies of an insolvency proceeding, (c) simplified realisation by amicable sale or attribution according to the terms of the contract, without judicial intervention as a first step.

Our conviction: for mid-sized LBOs (€10-200M), the security fiducie has become the market standard on the bank-pool side. The additional cost of creation (~€50-150K vs a pledge) is largely offset by the legal certainty and the speed of realisation in the event of default. The fiducie is the reinforced pledge of the Paris market.

— 03

Case study handled by the firm

Industrial LBO €85M — security fiducie over 100% of the shares

Secondary LBO of an industrial group (revenue €110M, EBITDA €14M), acquisition price €85M financed with €18M mezzanine + €50M senior + €17M equity. Our strategy: (1) creation of a security fiducie covering 100% of the NewCo's shares (and indirectly of the target) for the benefit of the senior agent, (2) a detailed inter-creditor agreement between senior and mezzanine on the terms of realisation, (3) an availability agreement allowing the equity investor to manage the target until the occurrence of a default, (4) quarterly covenant reporting to the fiduciary with an automatic notification mechanism to the pool. Creation cost: ~€85K. Closing in 8 weeks vs ~12 weeks for a classic pledge architecture.

— 02

LBO + fiducie architecture — 4 building blocks

1. Acquisition holding (NewCo) as settlor

The NewCo that acquires the target's shares creates the fiducie for the benefit of the bank pool. The acquired shares are transferred to the fiduciary at closing, as security for the senior debt. The NewCo retains voting rights and management through the availability agreement (except in the event of default, where the pool may recover the governance rights).

2. Fiduciary — often a bank or a dedicated company

The fiduciary is typically (a) an agent bank of the bank pool, or (b) a dedicated fiduciary management company (a subsidiary of the adviser structuring the transaction). Its mission: hold the shares, execute the agreed management instructions, monitor the financial covenants (LTV, DSCR, ICR ratios) and trigger realisation in the event of a contractual breach.

3. Availability agreement ("AA")

A central document: it specifies how the NewCo continues to exercise voting and management rights over the target, and under what conditions the fiduciary may take back control (breach of covenants, payment default, credit event). The AA also frames the partial disposals of the target (asset stripping) and any distribution of dividends up to the NewCo.

4. Tax regime — full neutrality if conditions are met

Article 238 quater A to I of the French Tax Code provides that transfers to the fiduciary and re-transfers to the settlor generate no taxable capital gain, subject to three conditions: (i) the contract complies with art. 2011 to 2030 of the Civil Code, (ii) the settlor is designated as beneficiary, (iii) the fiduciary complies with the accounting undertakings (carry-over of historical book values). In practice, it is a major advantage vs a classic sale-and-leaseback.

— Frequently asked questions

Can the bank pool sell the fiducie-held shares in the event of default?

Yes, this is precisely the advantage of the fiducie. The fiduciary is the owner of the shares; it may therefore dispose of them according to the terms provided in the contract (amicable sale, attribution to the pool, public auction) without having to go through seizure proceedings. The contract specifies the trigger conditions (default, breach of covenants), the notice period given to the settlor, and the valuation rules. The disposal takes place without judicial intervention as a first step.

Which covenants can be attached to the fiducie?

All the classic financial covenants of an LBO: LTV (Loan-to-Value), DSCR (Debt Service Coverage Ratio), ICR (Interest Coverage Ratio) ratios, net debt/EBITDA level, capex cap, cap on dividends distributed upstream. Any breach constitutes an event of default that may trigger the enforcement of the fiducie. The contract specifies the notification terms, the cure periods, and the escalation chain.

How does the LBO fiducie interact with corporate tax and the deduction of interest?

The fiducie is tax-transparent (French Tax Code 238 quater A to I): the NewCo remains subject to corporate tax on consolidated results (with or without tax consolidation depending on the architecture). The interest on the senior and mezzanine debt is deductible under general law conditions (French Tax Code 212 on the limitation of interest between related companies, French Tax Code 212 bis on the general cap at 30% of EBITDA). The fiducie creates no additional difficulty in this respect.

Which assets can be transferred into a fiducie in an LBO?

Beyond the NewCo shares, the following can be attached to the fiducie: intermediate company shares, inter-company receivables, the group's trademarks and patents, key commercial contracts. For real-estate LBOs, operating buildings or dedicated SCIs may be included. The multi-asset fiducie has become standard for LBOs > €50M.

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An LBO to structure with a fiducie?

A confidential initial consultation: analysis of the target, structuring of NewCo + fiducie + AA, coordination of the bank pool and advisers.

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© BENSAID Avocats — The information on this site does not constitute legal advice and cannot replace a personalised tax and legal analysis.