LBO, MBO, OBO in France 2026: Legal Guide to Leveraged Buyouts

LBO, MBO, OBO in France 2026: Legal Guide to Leveraged Buyouts

A Leveraged Buy-Out (LBO) is one of the most structuring transactions in private equity. It involves acquiring a target company by financing the price predominantly through debt, the repayment of which is secured by the target's own cash flows. In 2026, the French LBO market remains active despite monetary tightening, with heightened scrutiny on structural soundness.

Definitions: LBO, OBO, MBO, MBI, BIMBO

Leveraged transactions vary depending on the buyer's identity:

• LBO (Leveraged Buy-Out): acquisition by an external investor (private equity fund) using debt
• MBO (Management Buy-Out): acquisition by the incumbent management team
• MBI (Management Buy-In): acquisition by an external management team
• BIMBO: combination of MBO and MBI (internal + external team)
• OBO (Owner Buy-Out): the owner-manager sells the company to himself via a holding, monetising part of his wealth while retaining control
• LBU (Leveraged Build-Up): LBO followed by complementary acquisitions

Legal Architecture of an LBO

The Acquisition Holding

The transaction relies on the creation of a holding company (typically an SAS or SA) incorporated to acquire the target's shares. The holding raises funds (equity + debt) and holds the acquired shares.

Multi-Tier Financing

A typical LBO is financed as follows:

• Equity contributed by the fund and/or managers: 30% to 50% of the price
• Senior debt: amortising bank loan, secured by share pledges
• Mezzanine or unitranche debt: debt subordinated to senior debt, with higher yield, often with warrants
• Vendor loan: deferred payment of part of the price

French Legal Framework

Article L. 225-216 of the Commercial Code

The transaction must comply with the prohibition of financial assistance: a company may not grant advances, loans or security with a view to the subscription or purchase of its own shares by a third party. Debt push down (transferring the acquisition debt to the target) is strictly regulated.

Debt Remontée Techniques

To economically transfer the debt to the target, several mechanisms are used:

• Dividend distributions from target to holding
• Tax consolidation agreement (article 223 A French Tax Code) allowing flow remittance and deduction of financial charges
• Post-acquisition merger between holding and target (debt push down by merger), subject to strict conditions

Interest Deductibility Limitation

Since the 2019 Finance Act transposing the ATAD directive, the deductibility of financial charges is capped (article 212 bis French Tax Code): 30% of fiscal EBITDA or EUR 3 million if higher. The Charasse amendment (article 223 B) further limits deduction in case of acquisition by a related party.

The Management Package

The management package consists of tools allowing managers to invest in the capital and benefit from amplified upside upon success:

• Ordinary shares subscribed at investment price
• BSPCE (Founder share warrants) for young companies
• Preference shares with ratchet mechanisms
• Free share grants (AGA) subject to presence and performance conditions
• Stock options

The decision Cass. com., 28 March 2018, no. 16-50.015 confirmed that management package gains may be requalified as salary if the manager's risk-taking is insufficient.

Lender Guarantees

Banks and debt funds require a comprehensive security package:

• Pledge of target and holding shares
• Pledge of bank accounts
• Dailly assignment of receivables
• Security over intellectual property
• Subordination agreements between senior and mezzanine
• Financial covenants: leverage ratios (Debt/EBITDA), interest coverage (ICR)

Specific Legal Risks

Several issues require particular vigilance:

1. Covenant breach: may trigger debt acceleration
2. Cash-flow shortfall: risk of holding cessation of payments
3. Wrongful trading action against directors for management fault contributing to asset shortfall (article L. 651-2 of the Commercial Code)
4. Tax requalification (abuse of law, abnormal management act)
5. Challenge by creditors under article L. 632-1 (suspect period nullities)

Exit from an LBO

Classic exit routes are:

• Industrial sale to a strategic buyer (trade sale)
• Secondary sale to another private equity fund
• Initial public offering (IPO)
• Refinancing (recap) with exceptional distribution to shareholders
• Secondary LBO

Reference Case Law

• Cass. com., 19 December 2018, no. 17-15.435: clarifications on disclosure obligations in leveraged transactions
• CE, 24 October 2018, no. 412382: framework on interest deductibility in LBOs
• Cass. com., 28 March 2018, no. 16-50.015: requalification of management package as salary

Conclusion

The LBO remains a powerful tool for transmission and growth, but its structuring requires sharp legal expertise at every stage: audit, capital structuring, covenant negotiation, management package drafting, and anticipation of exit scenarios. A structuring error may compromise the profitability, or even the survival, of the transaction.

Sources: French Commercial Code (articles L. 225-216, L. 632-1, L. 651-2), French Tax Code (articles 212 bis, 223 A, 223 B), AFIC, France Invest, Cour de cassation case law.