What are the main precautions required to ensure optimal legal security when buying and selling securities (shares or partnership interests) held in hotels, cafes, restaurants, and nightclubs?
The transfer of shares or partnership interests in hotels, cafes, restaurants, and nightclubs is the transaction by which the transferor, whether an individual or a company, sells some or all of the shares or partnership interests they hold in a company.
This sale of shares or partnership interests in hotels, cafes, restaurants, and nightclubs can be made to someone outside the company, to a partner, or even to the company itself, which buys back the shares.
1- Before a sale, it is necessary to analyze the articles of association or shareholders’ agreement to determine whether the sale of shares is subject to approval or a right of first refusal by other partners (or shareholders) or the landlord:
– Is there approval from the other partners (or shareholders)?
Therefore, when a sale of shares in a hotel, café, restaurant, or nightclub is being considered, it is essential to inquire about the conditions under which the seller can sell and the buyer can purchase.
In principle, the transfer of shares (in a corporation, etc.) is unrestricted. However, the sale of shares in partnerships such as general partnerships (SNCs) or limited liability companies (SARLs) operating a hotel, café, restaurant, or nightclub is generally subject to the approval of the partners, which allows them to monitor the seriousness and credibility of individuals wishing to join the company.
However, it is essential to carefully review the articles of association, as they may stipulate a different procedure for transferring shares.
In practice, when approval is required, the procedure is as follows: the partner (or shareholder) wishing to sell their shares must notify the company and the other partners of their intention to sell. A vote will then be held at a general meeting convened by the manager, who will approve or reject the transfer by the majority required by the articles of association or a separate shareholders’ agreement. If approval is granted, the sale of the shares in the hotel, café, restaurant, or nightclub will proceed.
Is there a right of first refusal for the other partners?
This clause is often included in the sale of shares or stock, and sometimes it is even in addition to the approval process. The right of first refusal procedure is also stipulated in the articles of association.
These clauses allow existing partners or shareholders to have priority in purchasing shares before any person outside the company. This prevents the entry of unwanted investors who could take control of the company.
If approval is refused or the right of first refusal is not exercised, the seller must be able to propose a new buyer. If no solution is found by the end of the period stipulated in the articles of association or shareholders’ agreement, the approval of the new buyer will generally be considered granted.
– Are there risks in not complying with the procedures stipulated in the articles of association or shareholders’ agreements? :
If the seller does not comply with the procedure stipulated in the articles of association for the sale of shares or stock held in hotels, cafes, restaurants, or nightclubs, then the sale may be annulled (i.e., considered never to have taken place). This action may be initiated, in particular, at the request of the company or other partners (or shareholders), and the price returned to the buyer.
If, on the other hand, this approval is simply provided for in a shareholders’ agreement, then the sale should not, in principle, be annulled; however, it may give rise to a claim for damages.
– Is the landlord of the premises in which a hotel, cafe, restaurant, or nightclub is operated required to give their approval?
The landlord must, in particular, be informed of the sale of the hotel, cafe, restaurant, or nightclub business and, specifically, be a party to the transfer agreement. Furthermore, some leases contain approval clauses that allow the landlord to verify the reliability and solvency of the new buyer. Indeed, when a hotel, café, restaurant, or nightclub business is sold, it is another party, in this case, the buyer, whether an individual or a company who will operate the establishment.
Conversely, when purchasing shares or stock, the same entity will continue to operate the business, that is the company or individual already running the hotel, café, restaurant, or nightclub. Only the shares or stock of the operating company are transferred; the operating company itself remains the same. Therefore, in principle, the landlord does not have the same obligation to verify the identity of the company operating the hotel, café, restaurant, or nightclub.
2- Are certain details required in the deed of transfer of shares or stock?
2-1 Basic requirement:
Regarding the terms to be included in the deed of sale/purchase of a hotel, café, restaurant, or nightclub business, the law of July 19, 2019, removes the following mandatory requirements:
1° The name of the previous seller, the date and nature of their acquisition, and the purchase price for the intangible assets, merchandise, and equipment comprising the hotel, café, restaurant, or nightclub;
2° A statement of any liens or pledges registered against the hotel, café, restaurant, or nightclub;
3° The turnover achieved during the three fiscal years preceding the year of the sale of the hotel, café, restaurant, or nightclub;
4. The operating results achieved during the same period for the hotel, café, restaurant, or nightclub;
5. The lease, its date, duration, and the name and address of the landlord of the premises where the hotel, café, restaurant, or nightclub is located.
However, in practice it remains advisable to include this information in all deeds of sale for hotel, café, restaurant, or nightclub businesses, as well as for sales and purchases of shares or stock in unlisted companies, as these are essential elements for valuing the price and ensuring the legal security of the sale.
Obviously, the names of the buyer and seller of the hotel, café, restaurant, or nightclub are important (even in the context of a sale-leaseback arrangement).
A sales statement for the period of the current year up to the date of the transfer is important in practice because it will need to be valued when the preliminary agreement or deed is signed.
The valuation of the hotel, café, restaurant, or nightclub must, of course, be specified. The value of a share depends on the company’s accounts and their analysis by a professional in the hotel, café, restaurant, and nightclub industry.
The assets, liabilities, profitability, EBITDA, and future performance potential will be taken into account.
In practice, the seller and buyer will determine a provisional price based on an audit conducted with their accountant and lawyer. This price is often calculated as follows:
Agreed price of the hotel, café, restaurant, or nightclub + financial assets (security deposit, etc.) + current assets – provisions and liabilities
The timeframe for definitively setting the price is often two to three months after the sale, as the year’s financial statements cannot yet be finalized at the time of the sale. During this 2 to 3 months period, the seller’s accountant will finalize the financial statements of the company operating the hotel, café, restaurant, or nightclub. The parties and their accountant will conduct a joint inventory (equipment, merchandise, compensation, employee salaries and vacation pay, cash balance, etc.).
This will allow the accountant to review the pro rata accounts and definitively determine the price. The final price of the hotel, café, restaurant, or nightclub will then be established, generally using the same method as the preliminary sales agreement (which itself follows the method used in the preliminary sales agreement).
2-2- Asset and Liability Guarantee (also known as “GAP”): Security for the Buyer.
If the seller sells business assets (and not shares or membership interests) in a hotel, café, restaurant, or nightclub, there is generally no transfer of liabilities to the buyer. The purchase price is held in escrow by a third party, and unpaid creditors (tax authorities (FISC), social security contributions (URSSAF), suppliers, etc.) will file an objection to the sale price. The proceeds will not be released to the seller by the escrow agent until these objecting creditors have been paid their undisputed debts. This provides security for the buyer.
In the sale or purchase of shares in a company operating a hotel, café, restaurant, or nightclub, there is no mandatory escrow of the sale price. And the company’s debts remain, since the same person is still operating the business (the company whose shares were transferred).
Therefore, an asset and liability guarantee is crucial for the security of the buyer of a hotel, café, restaurant, or nightclub.
Depending on the risk, the parties can agree on an asset guarantee, a liability guarantee, or both.
It is advisable to include both in the transfer agreement to avoid any surprises for either the buyer or the seller.
This clause guarantees the buyer:
* the existence and value of the assets declared in the seller’s accounts at the time of the sale, namely:
– fixed assets: such as technical installations and equipment, patents and trademarks, land, advances and down payments, securities held in other companies, etc.),
– current assets: such as merchandise, receivables of the company from certain customers, suppliers, the Treasury (Trésor Public), cash, etc.
* the liabilities of the company’s accounting position, namely:
– equity (capital, reserves, retained earnings, profit for the year, etc.)
– provisions for risks and charges
– loans and debts (from banks or other institutions, advances and down payments received on orders, accounts payable, tax and social security liabilities, deferred revenue, etc.)
Asset guarantees, liability guarantees, or both, can be invoked by The buyer of shares (or stock) in the hotel, café, restaurant, or nightclub:
– Guarantee of the company’s assets: if the company’s assets, as recorded in the accounting records at the time of the sale, prove to be inaccurate or diminished, and if this diminishment is due to events attributable to the seller’s management period,
– Guarantee of the company’s liabilities: if there are debts unknown to the buyer on the date of the sale that come to light after the sale date and were not recorded on the balance sheet at the time of the sale: in other words, if there are debts unknown to the buyer that originated before the sale but come to light after the sale, the buyer may invoke this guarantee.
If the Guarantee of Assets (GAP) was not stipulated, then there will generally be no automatic guarantee from the seller.
If stipulated in the agreement, the buyer may request compensation from the seller equal to the observed decrease in assets, and/or compensation equal to the excess of observed liabilities.
However, this asset and/or liability guarantee is risky for the seller of a hotel, café, restaurant, or nightclub, as it could result in a subsequent reduction in the sale price.
However, it is also risky for the buyer if it is not well drafted, particularly if it includes an excessively long waiting period or an insufficient seller’s guarantee limit.
It must therefore be tailored and proportionate to the specific situation, including the accounting aspects, the nature of the business, and its environment.
Thus, the duration, nature, and amount of the guarantee are important and should be specified from the outset in the contract for the sale and purchase of shares or stock in a hotel, café, restaurant, or nightclub.
These details can be stipulated in a separate contract attached to the sales agreement.
– The duration of the guarantee:
This must be agreed upon by the parties on a case-by-case basis.
In practice, the asset and liability guarantee can be for a period of three years, plus the current year.
It is advisable to specify that, with regard to tax, parafiscal, and social security contributions, the guarantee period will apply for the entire duration that the company operating a hotel, café, restaurant, or nightclub is liable for the tax. This period varies depending on the nature of the tax or debt and the good or bad faith of the declarant. This clause will thus allow the buyer to request and obtain reimbursement from the seller, several months after the sale of the company shares, for sums owed to the tax authorities, the URSSAF (French social security agency), etc.
However, in practice, it may be possible to reduce this period if the company has recently been subject to a tax (tax authorities) and social security (URSSAF) audit over the last three fiscal years, as this reduces the risk of reassessment.
– The amount of the asset and liability guarantee:
The amount of the guarantee is to be agreed upon by the parties.
There may be a trigger threshold or even a deductible, and even a maximum guarantee for the seller.
In practice, it varies depending, in particular, on the risk taken by the buyer. If the risk is low, then the guarantee amount may be capped at a lower amount than if it is high. It all depends on the specific case.
For these reasons, it is important to consult a lawyer specializing in hotels, cafes, restaurants, and nightclubs to properly assess and determine the guarantee and ensure the transaction is secure. The PETROUSSENKO Law Firm, specializing in the sale, purchase, and transaction of hotels, cafes, restaurants, and nightclubs, has been handling these matters daily for over 20 years to ensure optimal legal security for all parties.
– Guarantee terms and how to activate it:
These vary: It may be agreed that the buyer will directly request reimbursement from the seller based on a payment commitment made by the seller in the deed of sale.
This commitment can be counter-guaranteed by:
– a bank guarantee: this can be called upon after unsuccessful attempts to recover payment from the seller,
– a first-demand guarantee (without attempting to recover payment from the seller): this can be provided by a bank or other financial institution (investment guarantee company, etc.). For this guarantee to be granted, the bank or company will often require the seller to freeze funds in their bank account or pledge securities, preferably liquid ones. These securities will allow the bank to pay the buyer upon first demand from the funds held by the buyer.
– an escrow amount: in this case, a portion of the price is held in escrow by a professional, generally a third party, and is not available until the guarantee expires. Often, this guarantee is sliding, meaning its value decreases over time.
For these guarantees to exist, they must have been included in the deed of sale of shares or stock held in companies operating hotels, cafes, restaurants, nightclubs.
3- Formalities to be completed once the sale of shares is signed:
There will, of course, be fees payable by the buyer.
The share transfer agreement must be registered with the Registration Service within one month. The registration fee cannot be less than €25.
The buyer is generally required to pay 3% of the transfer tax, with a deduction of €23,000 per share, calculated by dividing €23,000 by the total number of shares in the company.
However, the registration tax rate for the sale of shares, for example, in a simplified joint-stock company (SAS), is reduced to 0.10%. This rate is applied to the base amount corresponding to the price agreed upon by the parties, without any deduction.
The registration fee for companies whose assets consist primarily of real estate is 5%, with no possible reduction (the company’s capital must not consist of more than 50% real estate at the time of the transfer, or in the year preceding the transfer). Shares held in other companies owning real estate are included in this calculation.
To make the transfer legally binding, it must be published and served by a court bailiff or an original deed of transfer must be filed at the company’s registered office address. Filing the deed of transfer and the minutes of the general meeting authorizing it with the Commercial Court/Tribunal de Commerce registry will be required.
5- Capital Gains Tax on Transfers of Shares
5-1 How is this capital gain taxed?
The capital gain from the sale of company shares is the positive difference between the acquisition price of the shares plus acquisition costs, and the sale price plus costs.
For example, Mr. Y sells his shares for €1,000,000, excluding the €20,000 in sales-related costs.
Therefore, €1,000,000 – €20,000 = a net sale price of €980,000.
He had acquired these shares six years earlier for €250,000, not including the €30,000 registration fees, so the total acquisition cost was €280,000.
Therefore, the capital gain will be calculated on €980,000 – €280,000 = a capital gain of €700,000. This amount will serve as the basis for calculating the capital gains tax.
The standard tax regime is as follows: for sales made after January 1, 2018, the seller of shares or membership interests has two options:
5-1- The Flat Tax regime: this is a flat tax rate of 30% (including income tax: 12.8%; and social security contributions (CSG-RDS) of 17.2%) without any allowance. This regime applies automatically unless the seller opts for the progressive tax scale.
5-2- The capital gain is included in the seller’s other income: taxation then occurs normally by applying the progressive tax scale (0%, 14%, 30%, 41%, 45%) to the income.
| Tax Brackets | Applicable Tax Rates |
| Up to €9,964: | 0% |
| From €9,965 to €27,519: | 14% |
| From €27,520 to €73,779: | 30% |
| From €73,780 to €156,244: | 41% |
| Over €156,245: | 45% |
Only this standard tax regime allows for the application of allowances that reduce the cost.
** Allowance for holding period:
Several allowances are linked to the holding period of the securities and apply to the remaining capital gains after offsetting any capital losses.
* Allowance for standard holding period:
When the shares, units, rights, or other securities sold have been held for at least two years, or when the distribution received results from the sale of securities held for at least two years but less than eight years, there is a 50% allowance (65% after eight years). This allowance does not apply to the amount of social security contributions, which remain due on the total amount of the capital gain.
Let’s look at the example of a sale of company shares allowing the seller to realize a capital gain of €60,000. These shares were held by him for seven years.
He will benefit from a €30,000 allowance based on his holding period.
He will therefore be taxed on the remaining €30,000 according to the progressive tax scale indicated above (0%, 14%, 30%, 41%, 45%). Social security contributions will be calculated on the remaining €60,000.
*Enhanced allowance: This applies to capital gains from the sale of shares in SMEs less than 10 years old at the date of subscription or acquisition, shares held by SME executives upon retirement, or capital gains realized within the family group.
It is equal to:
- 50% for shares held for at least 1 year and less than 4 years;
- 65% for shares held for at least 4 years and less than 8 years;
- 85% for shares held for at least 8 years.
Capital gains on the sale of shares in small medium sized enterprises (SMEs) that have existed for less than 10 years at the time of subscription or acquisition of the shares
This tax allowance applies to SMEs provided that the shares are subscribed to and acquired within 10 years of their creation.
The company must:
– have fewer than 250 employees and have annual revenue of less than €50 million or an annual balance sheet total of less than €43 million.
– not be the result of a restructuring, expansion, takeover, or consolidation of pre-existing activities,
– not provide any capital guarantee to its shareholders or partners in return for their subscriptions, but only the rights arising from their status as a partner or shareholder,
– be subject to corporate income tax or an equivalent tax,
– be established in a Member State of the European Economic Area (EEA) or in a State party to the EEA Agreement that has concluded a tax cooperation agreement with France for the purpose of combating tax fraud and evasion,
– carry out a commercial, industrial, craft, professional, or agricultural activity (but it cannot involve the management of its own movable or immovable assets).
If the SME is an active holding company, these conditions must be met in each of the group’s companies.
Titles of retiring SME executives:
Capital gains from the sale of shares or units in SMEs operating a hotel, café, restaurant, or nightclub by retiring executives are reduced by:
– a fixed allowance of €500,000,
– and, if the price is higher, an additional allowance on the higher portion of the price: this allowance is the one provided for the enhanced holding period. The capital gain will be taxed after the allowance, subject to income tax at the progressive rate.
The conditions are:
- the sale must have involved all the shares (or units) or more than 50% of the voting rights of the company operating the hotel, café, restaurant, or nightclub whose shares, units, or rights are being sold;
- the executive must have continuously held their position for 5 consecutive years preceding the sale; and he must have held at least 25% of the voting rights or rights to profits in the company whose shares or rights are being transferred.
- The executive must have ceased all functions within the company and claim their retirement benefits within two years of the transfer of shares or units.
- In the case of a transfer of shares to a company, he must not be a shareholder of the acquiring company for three years.
- The company whose shares or units are being sold must be an SME and its registered office must be located in a member state of the European Union, Iceland, Norway, or Liechtenstein. It must be at least 75% owned by individuals or companies that meet the same workforce and financial thresholds.
To benefit from the increased tax allowance granted to retiring SME executives, you must complete the specific form no. 2074 DIR.
Example application :
Mr. X and his wife receive €160,000 in annual income, plus a capital gain of €6,300 (from the sale of his hotel after 5 years).
€160,000 + €6,300 / 2 shares (family quotient) = €83,150.
(€27,519 – €9,965) x 14% = €17,554 x 14% = €2,457.56
(€73,779 – €27,520) x 30% = €13,877.70
(€83,150 – €73,780) x 41% = €3,841.70
€0 + €2,457.56 + €13,877.70 + €3,841.70 = €20,176.96
€20,176.96 x 2 = €40,353.92
The total tax paid will be €40,353.92 (instead of €49,890 if he had chosen the Flat Tax of €166,300 x 30%). So a saving of 9536.08 e.
5-2 What happens when a company operating a hotel, café, restaurant, or nightclub sells its shares in the company it owns?
The capital gain will be recorded in the accounts of the selling company and subject to corporate income tax, for companies that are eligible (public limited companies, including simplified joint-stock companies, limited liability companies that have opted for corporate income tax, general partnerships, etc.). The taxable profit will then be taxed according to the rates below.
The standard corporate income tax rate is being progressively reduced for fiscal years beginning on or after January 1, 2017, as follows:
| Companies with revenue less than €7.63 million | |||||
| Including profits | Fiscal year beginning on or after January 1, 2018 | Fiscal year beginning on or after January 1, 2019 | Fiscal year beginning on or after January 1, 2020 | Fiscal year beginning on or after January 1, 2021 | Fiscal year beginning on or after January 1, 2022 |
| Between €0 and €38,120 | 15% | 15% | 15% | 15% | 15% |
| Between €38,120 and €500,000 | 28% | 28% | 28% | 26.5% | 25% |
| Over €500,000 | 33,1/3% | 31% | 28% | 26.5% | 25% |
| Companies with revenue exceeding €7.63 million | |||||
| Including profits | Fiscal year beginning on or after 1/1/2018 | Fiscal year beginning on or after 1/1/2019 | Fiscal year beginning on or after 1/1/2020 | Fiscal year beginning on or after 1/1/2021 | Fiscal year beginning on or after 1/1/2022 |
| Between €0 and €500,000 | 28% | 28% | 28% | 26.5% | 25% |
| Over €500,000 | 33,1/3% | 31%* | 28% | 26.5% | 25% |
* Article 84 of Law No. 2017-1837 of December 30, 2017
Companies may be liable for other contributions:
- The social contribution, which represents 3.3% of the corporate income tax due for companies with a turnover of at least €7.63 million and whose corporate income tax exceeds €763,000;
- The exceptional 15% corporate income tax contribution (for companies with a turnover exceeding €1 billion) and the additional 15% corporate income tax contribution (for companies with a turnover exceeding €3 billion) apply to fiscal years ending between December 31, 2017, and December 30, 2018.
A specific tax regime for long-term capital gains and losses exists for certain disposals: For example:
- disposals of patents and similar assets, subject to certain conditions;
- disposals of equity securities, as well as units or shares of certain venture capital funds (FCPR) meeting certain conditions, and shares of venture capital companies (SCR) when these units or shares have been held for at least five years;
- transfer of shares in listed real estate-weighted companies (SPI) subject to corporate income tax;
- The net income from licensing agreements for patents, patentable inventions, or manufacturing processes.
Long-term capital gains from the sale of equity securities held for at least two years, other than shares in real estate-weighted companies (SPIs), as well as, under certain conditions, income and capital gains from holding venture capital funds (FCPRs) or venture capital companies (SCRs), are taxed at a rate of 0% (for fiscal years beginning on or after January 1, 2007). A portion representing expenses and charges equal to 12% of the gross amount of capital gains is added back to taxable income.
- Capital gains from the sale of SPI shares for fiscal years beginning on or after December 31, 2007, are taxed at a rate of 19%;
- other long-term capital gains remain taxable at a rate of 15%;
- The net profit from the licensing of industrial property rights is also taxable at a rate of 15%.
It is important that the sale and purchase of shares or stock in companies operating hotels, cafes, restaurants, and nightclubs be secured.
We invite you to contact our firm, which has specialized in these transactions for over 20 years, to carry out your sales, purchase, and investment projects throughout France, Europe, and abroad.