TACIS Corporate Governance Project

Transcription

1 TACIS Corporate Governance Project REGULATION OF AFFILIATED PARTIES FRANCE A EXECUTIVE SUMMARY French Law does not provide for a specific definition of an affiliated party. From a corporate Law perspective, its corporate existence may be determined on the basis of capital or control links between two companies. No provision specific to affiliated parties has been adopted in French Law. However, guiding by corporate governance considerations, most of the recent French legislation has brought improvements regarding affiliated party issues in different lines of business such as corporate law, securities and banking regulations. B. ANSWERS TO QUESTIONS 1. How does the legislation of France define the concept of an affiliated party? Please refer to 2 below. 2. What characteristics must an entity have in order to be recognized as affiliated? French Law has two approaches to recognition of an entity as an affiliated party : 2.1 Affiliated parties characterized as such based on the size of the shareholding In this definition, it is just the percentage held by one company in the capital of another and does not take into account the period of time the shares are held, the intention behind the purchase or subscription and the real powers of the participating company. A subsidiary ( filiale ) is deemed to be any company in which more than half of its capital is held by another company 1, except for the percentage of the capital that corresponds to non-voting preferred shares, if any. A shareholding ( participation ) exists when a company holds between 10% and 50% cent of the capital of another company 2 ; when calculating the percentages, the nonvoting preferred shares are not included in the amount of the capital. 2.2 Affiliated parties characterized as such based on the objective sought Other than the capital link that the French Commercial Code retains to qualify a company as a subsidiary or to qualify a shareholding, another concept under French law should be noted, which is that of control ( contrôle ). To control a company can be defined as to exercise a determining influence over the management of the company whose shares another company acquires or subscribes for. Control is appreciated in terms of the voting rights and not the number of shares held in the capital. 1 Article L of the Commercial Code. 2 Article L of the Commercial Code.

2 French law provides for several control situations: legal control, de facto control, the presumption of control and the joint control Legal control ( contrôle de droit ) Within the meaning of the Commercial Code, a company is deemed 3 to have legal control over another company: - when it directly or indirectly holds a percentage of the capital conferring on it the majority of the voting rights in the general meetings of this company; - or when it holds alone the majority of the voting rights pursuant to an agreement concluded with other shareholders De facto control ( contrôle de fait ) According to Article L of the Commercial Code, this de facto control exists when a company in actual fact makes the decisions in the general meetings of another company through the voting rights it holds. The factual circumstances in which decisions can be taken in general meetings can result from a large number of the shares being held by shareholders outside the company. The de facto control must be proved. For example, to try to find this proof, the capital breakdown, the existence of blank powers of attorney or common managers should be looked for The presumption of control ( présomption de contrôle ) The control is presumed when the company directly or indirectly holds more than 40% of the voting rights and no other shareholder directly or indirectly holds a higher percentage The joint control ( contrôle conjoint ) The control of a company can be exercised jointly by several persons, whether individuals or legal entities, acting in concert ( action de concert ) 5. Acting in concert can be achieved through an agreement with the aim of acquiring, transferring or exercising voting rights to implement a common policy in this company. However, there is joint control only if the people acting in concert actually make the decisions taken in general meetings. The simple fact of acting in the same way during a general meeting cannot in itself be proof of the existence of joint control. This supposes that the people acting in concert have succeeded in imposing a common policy during the meeting on which they had already agreed. 3. To what entities do the rules concerning regulation of the activities of affiliated parties apply? 3 Article L , paragraph 1 of the Commercial Code. 4 Article L , paragraph 2 of the Commercial Code. 5 Article L , paragraph 3 of the Commercial Code.

3 There is no specific corporate form for which affiliated parties issues apply. 4. On what grounds and subject to what conditions may the parties be classified as affiliated parties in France? Please refer to 1 and 2 above. 5. What is the procedure for recognizing or deeming a party to be affiliated in France? The qualification as an affiliated party is an established fact and does not require any particular prior authorization procedures. As we indicated in paragraph 2.2.3, the control can be presumed. 5.1 Appreciation of control The issue of the appreciation of control arises more particularly during general meetings, particularly when there is a shareholder holding the majority of the voting rights. However, it can arise at any time, for example, when there are acquisitions or transfers of all or part of the shares that need to be notified (cf. paragraph 7.). 5.2 Contesting the control before the courts The public prosecutor or/and the Autorité des Marchés Financiers (stock market regulatory authority) ( AMF ), for companies making public offerings, are authorized to bring legal proceedings to have the existence of control over one or more companies acknowledged 6. According to the debates in parliament, only the AMF and the public prosecutor are able to apply to the courts to have the existence of control acknowledged. All the other interested parties must first approach the public prosecutor and the AMF. French law does not expressly explain that the public prosecutor and the AMF are the only ones authorized to bring legal action. The intention of the government and parliamentarians was to set up a filter intended to stop the increase in this kind of legal action. 6. Have any separate laws specifically concerning affiliated parties been adopted in France? No provision specific to affiliated parties has been adopted in French law. 7. What is the procedure in France under which a legal entity or its participants files, maintains, and discloses information on its affiliated parties of a legal entity? 7.1 The legal obligation to report on the possession of significant shareholdings, declaration when a threshold is exceeded. ( déclarations de franchissement de seuil ) Subject to the heavy civil and criminal sanctions described in paragraph 9.1, any individual or legal entity, acting alone or in concert, who gains possession of a number of shares representing more than one-twentieth, one-tenth, one-fifth, one-third or one 6 Article L of the Commercial Code.

4 half or two-thirds of the capital or voting rights of a company having its registered office in France, whose shares are listed on a regulated market, must inform this company, within five trading days of the day on which the threshold is exceeded, of the total number of shares and voting rights that such person owns 7. The person also informs the AMF within five trading days that the shareholding has exceeded the threshold when the company s shares are traded on a regulated market. The public is made aware of this information by the release of an AMF notice. These provisions target the threshold being exceeded not only on the advance but also on the decrease. The company may provide for by-law declaration when a threshold is exceeded. 7.2 Declaration of intent ( déclarations d intention ) When an individual or a legal entity (directly, indirectly or in concert) acquires a number of shares representing more than one-tenth or more than one-fifth of the capital or voting rights of a company whose shares are traded on a regulated market, the company is required to declare the objectives it intends to pursue over the subsequent 12 months 8. The purchaser must indicate whether he or it is intending: - to stop or continue making purchases of shares; - to acquire or not the control of the company concerned; - to seek his or its appointment or that of one or more persons as a director, member of the management board or member of the supervisory board. In any case, the purchaser must indicate if he is acting alone or in agreement with one or more persons. The declaration must be sent to the company whose shares have been acquired, to the AMF within ten trading days, and the public is made aware of the information according to the conditions established by the release of an AMF notice. 7.3 Compulsory tender offer ( offre publique obligatoire ) The possession of significant shareholdings may oblige the company or companies holding them to make an imperative tender offer. When an individual or a legal entity, acting alone or in concert with others, holds more than one-third of the shares or voting rights of a French law company, whose shares are traded on a regulated market, it must inform the AMF and file a draft tender offer covering all the shares in the capital and all the shares giving access to the capital or voting rights of such company Conditions relating to the acquisition of or increase in an undertaking in credit institutions and investments other than portfolio management companies 7 Article L , paragraph 1 of the Commercial Code. 8 Article L , paragraph 7 of the Commercial Code COB Regulation No concerning the information to be published when the thresholds of shareholdings in the capital of a liste company are exceeded. 9 Article L , paragraph 1 of the Monetary and Financial Code.

5 Any person or group of persons acting together shall obtain the authorization of the Comité des Etablissements de Crédit et des Entreprises d Investissement prior to carrying out any operation relating to the acquisition, increase or disposal or a direct or indirect equity interest in an undertaking subject to this Regulation, when the effect of the transaction is to enable said person or persons : - to acquire or relinquish effective control over the management of the undertaking, - to acquire or relinquish one third, one fifth or one tenth of the voting rights. By way of derogation from the foregoing provisions, only operations carried out between companies placed, directly or indirectly, via capital links, under the effective control of a single undertaking shall be immediately notified to the Comité des Etablissements de Crédit et des Entreprises d Investissement, except if the effect of these transactions is to transfer effective control or all or part of the above-mentioned rights to one or more persons not subject to the law of a State that is party to the agreement on the European Economic Area. Furthermore, any transaction whose effect is to enable one person or several persons together to acquire one twentieth of the voting rights shall be immediately reported to the Comité des Etablissements de Crédit et des Entreprises d Investissement. Undertaking subject to this Regulation, other than credit institutions that are affiliated to a central body, are required to file financial information on each person owning at least 10% of their capital with the Commission Bancaire each year. 8. Does the legal entity have any obligations to record or account for its affiliated parties? 8.1 The obligation to consolidate accounts Subject to the exceptions concerning small groups, commercial companies of whatever form that are lead companies in a group must draw up and publish not only their own annual accounts but also consolidated accounts 10. In principle, all the subsidiaries and affiliates that are under the direct or indirect control of the dominant company or over which such company exerts a significant influence must be included in the consolidation. 8.2 Obligation to publish a report about the management of the group The board of directors, the management board or the managers (gérants) of the consolidating company must draw up a report on the management of the consolidated group, the contents of which are based closely on the annual report of the company s situation and activity during the preceding year, and it may be included in such annual report Obligation to communicate the consolidated accounts 10 Article L and following of the Commercial Code. 11 Article L of the Commercial Code.

6 The managers ( gérants ) of sociétés en nom collectif, sociétés en commandite simple and sociétés à responsabilité limitée required to draw up consolidated accounts, must provide these accounts and the report on the management of the group (if not included in the annual management report) to the shareholders before the annual general meeting according to the same conditions as the annual accounts 12. In joint stock companies, the consolidated accounts and the report on the management of the group must be provided along with the corporate documents to the shareholders who have asked for them Obligation to inform the shareholders The rules about informing the shareholders are applicable to all commercial companies that have corporate personality once the shareholding exceeds 5% of the capital of another company. The information must be particularly detailed when the holding exceeds 50%. The management report presented to the annual general meeting by the board of directors, the management board or the managers about the business operations of the preceding year must mention any acquisition of a shareholding during such year in a company which represented more than one-twentieth, one-tenth, one-fifth, one-third or one-half of the capital of such company or the obtaining of control over the company 14. The statutory auditors report must mention significant shareholdings acquired in other companies or the obtaining of control over them and, if it is a joint stock company, the information about the breakdown of the capital and internal controls What are the powers and authority of the competent government agency, in EU countries, which collects information on affiliated entities have in EU countries, in cases where such information is presented to the agency? 9.1 Sanctions for failure to declare the threshold being exceeded If shares exceeding the percentage that should have been declared are not validly declared according to the conditions described in paragraph 7, when such shares are traded on a regulated financial instruments market, they are deprived of the voting right for all shareholders meetings that will be held until the end of a two-year period following the date the notification is made. The proceedings in this regard can be brought by: - the chairman of the company; or - a shareholder of the company; or 12 Article L of the Commercial Code for sociétés en nom collectif Article L , paragraph 2 of the Commercial Code for sociétés à responsabilité limitée. 13 Article L of the Commercial Code. 14 Article L , paragraph 1 of the Commercial Code. 15 Article L , paragraph 1 et L of the Commercial Code.

7 - the AMF. The Commercial Court in whose jurisdiction the company has its registered office can, after hearing arguments from the public prosecutor, order the total or partial suspension, for a period that may not exceed five years, of the voting rights of any shareholder who has not made the declarations set out in Article L of the Commercial Code. In addition, as a criminal sanction, the chairmen, directors, members of the management board, managers (gérants) or general managers of legal entities not reporting the information set out in Article L of the Commercial Code are punishable by a maximum fine of EUR 18,000 euros 16. In addition, as the legal provisions concerning declarations of intent are also expressed in the AMF s rules, the defaulting shareholders runs the risk of the civil and criminal sanctions indicated above, but also financial sanctions of a maximum of EUR 1,500,000 that might be imposed by the AMF for the breach of one of its regulations. 9.2 Sanctions for failure to comply with the provisions about the declarations of intent The civil or criminal sanctions in the case of failure to comply with the legal provisions concerning the declarations of intention, as described in paragraph 7.2, are similar to those concerning the declarations of thresholds being exceeded, as described in paragraph 9.1. above. 10. Who may obtain information on affiliated entities from the respective state authority or organization in France? 10.1 The management appraisal ( expertise de gestion ) at the request of the subsidiary s shareholders To be better informed about the group s policy and the particular situation of their subsidiary in the group, the minority shareholders have the option of requesting a management appraisal. One or more shareholders representing at least one-twentieth of the capital can ask the court to appoint one or more experts responsible for presenting a report on one or more management operations 17. The request for an appraisal cannot concern the management of the company as a whole or the validity of the corporate accounts, but only one or more given management operations. Contrary to the rules that applied prior to law No of May 15, 2001, shareholders or associations of shareholder can no longer ask the court to appoint an expert. They must first send written questions to the chairman of the board of directors or the management board about the management operation or operations about which they are seeking explanations The management appraisal at the request of a parent company s shareholders 16 Article L of the Commercial Code. 17 Article L , paragraph 1 of the Commercial Code.

8 Since law No of May 15, 2001, the shareholders of a parent company can request to have an expert examine the operations carried out by a company controlled by their company within the meaning of Article L of the Commercial Code, but only if it is justified by the interest of the group 18. The only operations concerned are the management operations of the subsidiaries of the company whose shareholders are making the request. They cannot therefore implement the appraisal procedure for the operations carried out by the parent company or companies of their company. 11. Do France impose any liability (in particular, administrative) for violation of the requirements to provide information on affiliated parties? 11.1 Sanctions for failure to comply with the provisions concerning the communication of the consolidated accounts The directors, members of the management board or managers (gérants) of the companies required to consolidate their accounts who do not draw up consolidated accounts within the period of time provided by the law and then send them to the shareholders, run the risk of a fine of EUR 9,000, without prejudice to the judge s right to order the publication of the judgement in one or more newspapers at the guilty party s expense 19. Since law No of May 15, 2001, the shareholders can also request the presiding judge of the commercial court ruling in summary procedures to order the managers of the company, subject to a penalty, to notify to them the consolidated accounts and the report on the management of the group, or appoint a representative to carry out this notification Sanctions for failure to comply with the provisions concerning the obligation to inform the shareholders The chairmen, directors (members of the management board), general managers, managers (gérants) or delegated general managers of a company run the risk of a prison term of two years and a fine of EUR 9,000 when they 20 : - in the annual report presented to the shareholders on the operations of the fiscal year, did not mention the acquisition of a shareholding in a company having its registered office on French territory representing more than one-twentieth, onetenth, one-fifth, one-third, one-half or two-thirds of the capital or voting rights at general meetings of the company or the direct or indirect obtaining of control over such company; - in the same report, did not give an account of the activity and results of the whole consisting of the company, the company s subsidiaries and the companies it controls, by business sector; - did not attach the table showing the situation of the subsidiaries and affiliates to the company s balance sheet. 12. What limitations do France impose on the rights of affiliated parties? In particular, what requirements are there for transactions with affiliated parties? 18 Article L , paragraph 1 of the Commercial Code. 19 Article L , paragraph 2 of the Commercial Code. 20 Article L , paragraph 1 of the Commercial Code.

9 12.1 Regulated agreements ( conventions réglementées ) Parent companies and subsidiaries (in the broad sense) frequently have directors, general managers, members of the management board or the supervisory board in common. In this case, agreements entered into between the parent company and its subsidiary, commonly called regulated agreements, are subject to a particular control procedure: prior authorization of the board of directors or the supervisory board, statutory auditors special report, approval by the general shareholders meeting 21. Even when there are no common members (largely theoretical hypothesis), the control procedure of agreements entered into between the parent company and its subsidiary must be followed at lease in the subsidiary since this procedure applies also to agreements entered into between a joint stock company and another company when the latter has more than 10% of the voting rights of the former. There is no particular provision at present that allows this procedure to be avoided in a group of companies for the many agreements signed between the various companies of the group. The only derogation possible is that for agreements concerning standard operations concluded at normal conditions ( conventions portant sur des opérations courantes et conclues à des conditions normales ) Standard operations ( opérations courantes ) are understood to be those carried out by the company in its normal course of business and, with regard to agreements of sale, agreed at conditions that are sufficiently usual to be assimilated to the normal course of its business Management contracts ( contrats de gestion ) Parent companies often sign agreements with each of their subsidiaries whereby the parent companies undertake to provide the subsidiaries with various administrative services in consideration for fees calculated generally based on a percentage of the subsidiary s turnover. The AMF has recalled that this remuneration must not be out of proportion compared to the cost of the services provided and that it must not result in actual fact in a transfer of profits from the subsidiaries to the parent company. This disproportion, if there was one, could in the frequent case in practice where companies have common directors, result in the application to these directors of the criminal sanctions provided for cases of misuse of the assets and credit of the company. Furthermore, the agreement could be cancelled for harm to the corporate interest and abuse of a majority, which would result in the obligation for the parent company to return the sums paid in performance of the agreement Cash flow operations ( opérations de trésorerie ) The excess cash flows that certain companies in a group frequently have are made available to other companies of the same group. These operations are carried out directly or through a pivot company ( société pivot ), the most often the parent company whose role is to collect then redistribute or invest the available funds. 21 Article L à L of the Commercial Code for agreements between the company and one of its managers of directors. Article L à L of the Commercial Code for agreements between the company and one of the members of the management board or the supervisory board.

10 Even though they fall within the scope of a banking activity, and as such are subject to the monopoly of credit establishments, these cash pools ( pools de trésorerie ) or inter-group loans ( prêts inter-groupe ) are authorized by Article L of the Monetary and Financial Code, which provides that an enterprise whatever its nature can carry out cash flow operations with companies that have direct or indirect capital links with it giving one of the related enterprises a power of actual control over the others. The cash flow advances granted by one company to another company of the same group do not constitute a misuse of corporate assets, when the following conditions are met: - the two companies must belong to the same group, which supposes the existence of structural links between the companies that are members of the group and the implementation of a common strategy with a view to the pursuit of a common objective; - the operation must be dictated by a common economic, social or financial interest assessed in light of a policy drawn up for the whole group; - the financial facility must granted for consideration and must not affect the balance between the respective undertakings of the various companies concerned or exceed the financial capacities of the company assuming the financial burden.