Which companies are subject to the obligation of information? The companies that are subject to the obligation to inform their employees are:

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1 Flash Obligation to provide prior information to the employees of SMEs in the event of the sale of a company or on-going concern: there are more questions and discussions than answers... In France, the law of 31 July 2014 relating to the social and solidarity economy (the ESS law or the Hamon law, from the name of its author) introduced an obligation to provide prior information to the employees in the context of certain proposed transfers of companies or ongoing concerns. Originally, the aim was to avoid having to close a company following the departure of its director, which was a commendable intention considering that every year, 8,000 companies with less than 100 employees have to close down in the absence of any successor. However, it must be observed that the legal results are very far from the original intentions. Although we have very relative distance regarding this law, the purpose of this flash is to describe as pragmatically as possible its main impacts, including in terms of timing, and to address the issues which are still pending, as the accompanying information guide (guide d accompagnement) published by the Direction Générale des Entreprises of Bercy, and the Q&A available on the Internet, which are devoid of any legal force, raise more issues than they provide answers. 1

2 Which companies are subject to the obligation of information? The companies that are subject to the obligation to inform their employees are: - companies with less than 50 employees and; - companies with between 50 et 249 employees and which turnover is less than EUR50 million or whose total balance sheet is less than EUR43 million. Which transactions are concerned? The transactions that trigger the obligation to inform the employees are the proposed transfers of on-going concerns or of holdings representing more than 50% of the share capital (parts sociales, shares or securities, the stock of which gives access to the majority of the share capital) - and not 50% of the voting rights -, carried out as from 1 st November While the ESS law refers to transfers without any further precision, the decree implementing it has defined this term as transfers of ownership. The accompanying information guide explains that the following transactions are to be considered as transfers : any sale, donation, transfer of shares ( dation en paiement ), transaction, trust ( fiducie ), exchange or capital contribution. With respect to capital contributions, we note that such an assertion is contrary to the case law of the Cour de cassation, which has refused in several instances to consider that a capital contribution was a transfer. We hope that the courts which will have to decide on this issue will not bring the case law to evolve in this direction Even more surprisingly, the accompanying information guide expressly refers to the transfers made within corporate groups. Thus, a reclassification of shares solely intended to streamline the daily operation of a group will require the prior information of all employees of the relevant company, which employees will then have the option to submit an offer to acquire the shares, even though the shareholders last controlling the company are still the same. Because of the constraints in terms of timing (see below), this issue will now have to be taken account Which transactions are expressly excluded? Certain transactions have been expressly excluded from the scope of the obligation to provide prior information to the employees: - transfers of ownership in the context of a transfer of all of the assets ( transmission universelle de patrimoine ); - donations, transfers and gifts made to the spouse, ascendant, descendant of the donor; - cash share capital increases; - transfers taking place in the context of a succession, a liquidation of the matrimonial property; - companies that are subject to insolvency proceedings. 2

3 Which transactions would likely not be subject to the obligation of information? In the absence of any specification as to the application of the obligation to inform the employees in the context of transactions which may be considered as transfers, the practitioners have had to take a position. In this respect, we believe that the following transactions should be excluded from the scope of the obligation to inform: - transactions whereby the transfer of a minority stock to another shareholder results in said shareholder acquiring the control of the company; - transfer of more than 50% of the share capital by several transferors, where none of them holds the majority of the share capital, the notion of concerted action ( action de concert ) not being included in the law; - transfer, by the same transferor of a holding of more than 50%, but where such transfer is divided into several transfers staggering over time for objective reasons, subject to a potential abuse of right; - mergers and spin-offs; - transfer of a holding company set up above the operational company employing the employees, where said holding company does not have any employee; - transfers of beneficial right ( usufruit ). We also consider, in light of the purpose of the law, that the security interests taken on the shares and the undertakings to sell included in shareholders agreements ( drag along and tag along clauses) should not fall within its scope. However, it would have been preferable to have these situations expressly excluded by statutes. What type of information should be communicated? The obligation to provide prior information to the employees shall not be confused with the information-consultation of the workers council, whether as to its format or as to its content. The information shall only comprise the two following items: - the proposed transfer; - the possibility for the employee to submit an offer to acquire. In any event, it is not necessary to communicate the information relating to the buyer, to the price or to the terms of the transfer. How to inform the employees? The decree implementing the ESS law lists the various options available to the transferor or to the legal representative, as applicable, in order to inform the employees. While it would have been much simpler to inform the employees through posting on official notice boards, as is the case with job-saving plans for instance, the law and its decree provide for the information to be provided on an individual basis to each of the relevant employees, that is, potentially to 249 people 3

4 In concrete terms, the means of information are the following: - information meeting of the employees involving the signing of an attendance roll; - notice board posting along with an attendance roll; - , provided that the date of receipt can be certified ( of the employee acknowledging due receipt); - letter delivered personally against a receipt; - registered letter with acknowledgement of receipt, being specified that such means of communication may raise many problems if the recipient thereof fails to take any measure to recover said letter; - extra-judicial document. The main challenge of such an information procedure lies in its operational cumbersomeness In addition, the transferors could face blockages in the event that employees are absent for relatively long periods (sick leave, parental leave, sabbatical leave, employees on secondment etc.) or if employees refuse to acknowledge receipt of the information. This issue is all the more important as the two-month period (see below) only starts from the date of receipt of the information by the last employee who has been informed. It is therefore essential to retain evidence that each of the employees has benefited from the information, such evidence enabling to establish with certainty a date of receipt of the information. In which timetable fits the obligation to inform? The right to information of the employees arises out of the seller s willingness to sell, a subjective notion which is difficult to understand in the absence of tangible element. Therefore, the process for informing the employees must be triggered at least 2 months before the contemplated date of transfer, when there is no workers council, or at the latest at the beginning of the information-consultation procedure, when there is a workers council. Please be careful and remember that the date to be taken into account is the date of receipt of the information by the last employee who has been informed! Therefore, you will need to be especially careful on this matter and to set aside several days, or even several weeks, in order to take into account these constraints, unless this timetable is reduced by having each employee waive his/her opportunity to submit an offer to acquire. Lastly, remember that completion of the transfer will need to be notified to the employees. Indeed, the two-month period of limitation during which an employee may request the nullity of the transfer (see below) is to start on the date of this notification. Does the transferor have to accept an offer which price is higher than the original selling price? No. For the moment, the transferor has no obligation whatsoever to accept, or even to take into account, any offer that would be submitted by an employee, even though this offer would be more advantageous than the offer originally received. 4

5 The prior information of the employees may not, under any circumstance, be considered as a preemption right. However, an employee who would be excluded from the take-over process without any reason could ask for damages on the basis of article 1382 of the French Civil code. A very serious sanction in the event of non-compliance The ESS law provides that the sanction for failure to comply with the obligation to provide prior information is the nullity of the transfer that has taken place. However, the accompanying information guide specifies that this nullity is only optional It will therefore be up to the judge of the Tribunal de Commerce to assess on a case by case basis whether the breach of the statute shall entail the nullity of a transaction which has taken place several months, or even several years, earlier. Yet, because this accompanying information guide has no legal force, the possibility that the courts automatically cancel all transfers with respect to which a breach of the law has been evidenced, cannot be ruled out. The nullity of the transactions entails practical effects that are extremely serious (parties to be put back in the situation in which they were prior to the transaction) and potentially unfavorable for the relevant company. Therefore, in practice and in our opinion, the employee who will take legal action will have to prove that if he/she had been duly informed he/she could have submitted an offer which had chances of been accepted. What are the conclusions? This new information procedure has given rise to a very large number of criticisms from the practitioners, and it cannot be ruled out that this procedure will be amended in the coming months. Indeed, a Member of Parliament has just been appointed by the Prime Minister to provide him with a first assessment of its implementation by March 15, The fact remains that for the moment said procedure must be complied with. Therefore, we strongly encourage you to be very careful as to the steps which need to be followed in the timetable applicable to your transfers. Contacts : Etienne PUJOL Partner - Tel : Mail : epu@stcpartners.fr Faustine CARRIERE Associate - Tel : fca@stcpartners.fr 5