Reed Smith 42, avenue Raymond Poincaré 75782 Paris Cedex 16 France Phone: +33 (0)1 76 70 40 00 Fax: +33 (0)1 76 70 41 19 reedsmith.com Further changes to French corporate & insolvency legislation Anker Sorensen Partner, Reed Smith LLP, Paris 1 asorensen@reedsmith.com Recently, a wave of reforms has been implemented in France by the newly appointed Minister of Economy, Finance and Industry, Emmanuel Macron who previously held position as a senior investment banker at Rothschild & Cie. The new law aims to modernize the French economy. It was published on August 7, 2015 in the French Official Bulletin, and is known as the Macron law, named after the Minister responsible. Its full title is the "Loi sur la croissance, l'activité et l'égalité des chances économiques" ( law to promote growth, activity and equal economic opportunities ). One of its main goals is to free up sectors of the French economy which are currently burdened by a number of restrictive practices 2. Even though some parts of the law were declared unconstitutional by the French Conseil Constitutionnel 3, most of its other provisions have been upheld. Some measures came into force the day after publication of the Macron law, on August 8, whereas others will come into force at a later date or will have to wait to be completed by further decrees. Because the Macron law contains a wide-ranging series of small measures, it has been termed in some quarters the catch-all law ( loi fourre-tout ) 4. It contains over 300 articles covering many areas of the law including bankruptcy, corporate, competition and labor law. It addresses topics as diverse as work on Sunday, coach transportation, employees savings plans, regulated legal professions, environmental regulations for industrial development and authorization of transfer of State controlled defence companies to the private sector. Regarding the corporate area and other closely related domains, the Macron law has brought changes, to cite a few, to the regimes of restricted stock units ( actions gratuites ), specific stock options giving access to share capital reserved for employees or executives of companies ( bons de souscription de parts de créateur d entreprise ), and has also opened up the possibility for accountants to provide legal, labor and tax related services and provide opinions in these 1 The author would like to thank Alexandra Dear, trainee at Reed Smith LLP Paris, along with Andrew Tetley and Brice Mathieu, counsels at Reed Smith LLP Paris for their contributions to this presentation. 2 http://www.esquireglobalcrossings.com/2015/02/modernization-of-the-french-economy-and-changes-in-insolvency-law/ 3 On August 5, 2015. Cons. Const. 5 août 2015, n 2015-715 DC 4 http://www.lesechos.fr/economie-france/dossiers/0203864091073-une-loi-fourre-tout-pour-doper-la-croissance-1054380.php
areas in front of public or private authorities for clients for whom they regularly work as accountants, provided that the legal work is related to their mission 5. This presentation of the Macron law will aim at highlighting and commenting only the main changes which have been brought in by the new law in the insolvency/corporate restructuring area, i.e. : The specialization of commercial courts in order to deal with large insolvencies, The dilution of shareholders in companies in redressement judiciaire, when a reorganization plan ( projet de plan ) provides for a change of the share capital, and The headline part of the Macron law in the field of insolvency, consisting in the forced sale of shares held by shareholders who vote against a change of the share capital provided for by a reorganization plan. 1) Specialization of Commercial Courts 6. The Macron law limits which Commercial Courts may be seized to deal with insolvency procedures ( sauvegarde, redressement and liquidation judiciaires ) where the debtor is a legal entity exceeding a certain size. The outcome sought is the management of complicated matters in a more efficient manner by concentrating large insolvencies within a limited number of courts. These specialized courts will have jurisdiction where the following criteria are met: 1 - (i) entities employing 250 or more employees with a turnover of at least 20 million and/or (ii) entities with a turnover of more than 40 million irrespective of the number of employees or (iii) companies which hold or control other entities where the total combined number of employees is 250 or more and where they have a combined total turnover of at least 20 million or (iv) companies which hold or control other entities, irrespective of the number of employees and where the combined turnover is at least 40 million. 2 - proceedings where the international jurisdiction of the court is determined according to acts taken as per the European Union and related to insolvency proceedings. 3 - proceedings under which the international jurisdiction of the court results from the presence in its jurisdiction of the debtor s center of main interests. 4 - conciliation proceedings initiated by the debtor, at the request of the Public Prosecutor or by decision of the president of the Commercial Court, when the debtor is an entity or a group fulfilling the conditions cited above at 1 (i) to (iv). 5 Article 62 of the Macron law which modifies article 22 of the order n 45-2138 of September 19, 1945 regulating the profession of accountants 6 Articles 231 and 233 of the Macron law - 2 -
The specialized Commercial Courts will also have jurisdiction for any proceeding regarding a company held or controlled, in terms of articles L.233-1 and L.233-3 7 of the French Code of Commerce, by another company and in respect of which an insolvency proceeding has been commenced before a specialized Commercial Court 8. In such cases, all proceedings will be handled by one and the same court regardless of the commencement date of the different procedures. These provisions will be applicable to proceedings which are commenced on or after March 1, 2016. In early 2016, it is anticipated that a decree will issue a listing of the specialized Commercial Courts concerned. According to leaks in the press, the Commercial Court in Nice may be selected in preference to the Commercial Court of Marseille, for the French Riviera region 9. With similar aims to the present reform, and in the competition area, eight specialized Commercial Courts were designated in recent years to deal with complex competition law issues 10. Only the Paris Court of Appeal has jurisdiction to handle appeals in such competition cases. The question remains whether these same eight courts will also be those selected as the preferred specialized Courts in insolvency matters. Given that there will only be a few courts selected to deal with such insolvency matters, there is legitimate concern that the affected insolvency procedures will not be efficiently managed, when the Macron law takes effect. It may be necessary to swiftly allocate further resources to handle the expected increased flow of complex and urgent issues. On the plus side, the reform will mean that affected procedures are dealt with by specialized professionals who will develop an expertise in complex matters. This should in the longer term lead to greater efficiency and competency to the benefit of the economy as a whole. Finally, with only one court now with jurisdiction to deal with insolvency procedures commenced against different companies in a group, the various practitioners tasks will be made much easier in such cases. This aspect is both innovative and welcome. 2) Shareholder removal and dilution 11 The Macron Law sets out two ways in which the Commercial Courts may force out recalcitrant shareholders. These powers are only available within a reorganization procedure ( redressement judiciaire ). They are not available in safeguard ( sauvegarde ) or liquidation procedures. 7 Under French law a company controls another entity when it holds more than half of the latter s capital. A company will also be deemed to control another entity if it exercises a certain influence over the entity in question. The French Code of Commerce sets out when control will be deemed in such cases. By way of example, control will be deemed if a company directly or indirectly holds a fraction of the capital conferring on it a majority of the voting rights in that other company. 8 Article 233 of the Macron law. 9 http://www.petites-affiches.fr/droit,044/tribunaux-de-commerce-les,5460.html 10 Articles L.442-6 and D.442-3 of the French Code of Commerce. The Code provides a list of thirteen specific cases where litigation will fall under the jurisdiction of the specialized courts. For example, they will be competent in event of dispute over a refusal to mention the name and address of the manufacturer on the labelling of a product sold under manufacturer s brand name, if the manufacturer has so requested, pursuant to Article L. 112-6 of the Consumer Code. 11 Article 238 of the Macron law - 3 -
Nor will they apply to any pre-insolvency process such as conciliation and mandat ad hoc. This is consistent with the notion that in such procedures coercion is anathema to what is expected and sought by the parties. They are by essence consensual procedures. Also, it would be difficult to justify expropriation or dilution of shareholders in companies that may not be seriously in trouble. Since entry into force of previous legislative reform in 2014, 12 the committee creditors 13 of a company in sauvegarde or redessement judiciaire have been allowed to submit a reorganization plan. The Macron Law now allows them, as well as shareholders, who present a reorganization plan, to cram down recalcitrant shareholders. Cram down will happen where the recalcitrant shareholders in question have sufficient voting power to block the proposed reorganization plan 14. In this scenario, and provided a number of strict conditions are met, the Commercial Courts may take steps which will lead to either (2.1) the forced dilution of shareholders, or (2.2) the forced sale of dissenting shareholders shares. 2.1. Shareholder dilution 2.1.1. Application process The Court may order various measures (see below under 2.1.3) at the request of the court appointed administrator or the Public Prosecutor. The request cannot be made earlier than three months after commencement of the proceedings ( jugement d ouverture ). The request is only admissible after the Court has analyzed the possibility of a sale of all or part of the debtor s business. The manner in which the request is made by the court appointed administrator or Public Prosecutor is not described in the Macron law. Shareholder dilution will only apply to reorganization proceedings ( redressement judiciaire ) commenced as from the publication of the Macron law, i.e. as from August 7, 2015 15. 2.1.2. Conditions A number of conditions must be cumulatively met before dilution can occur: Dilution may only be applied to companies that employ at least 150 employees or which dominate 16 one or more other entities and where the combined total number of employees is at least 150; 12 Order n 2014-326 of March 12, 2014 regarding pre-insolvency measures and insolvency proceedings ( Ordonnance portant réforme de la prévention des difficultés des entreprises et des procédures collectives ) 13 Tout créancier membre d un comité, L 626-30-2 of the French Code of Commerce 14 Brice Mathieu counsel at Reed Smith LLP, The Macron Bill about to introduce a right to remove shareholders of distressed companies: a new threat for investors or new opportunities for creditors of French companies in need of turnaround?, INSOL International Electronic Newsletter, April 2015 15 Article 238 of the Macron law, last paragraph 16 Domination is employed pursuant to the sense of article L. 2331-1 of the French Labor Code which refers to the notion of control in the French Code of Commerce, but also to a domination more generally - 4 -
The disappearance of the company s business would need to cause serious disturbance to the national or regional economy and to the local employment area ( bassin d emploi ); The change to the share capital as provided in the reorganization plan proposed by the debtor and the administrator, or by creditor members of the relevant committees, must be the only serious solution to avoid such disturbance to the economy and allow continuation of the debtor company s activity; and A reorganization plan must have been prepared to preserve the company and the relevant number of qualifying shareholders, whose votes are required to approve the resolution modifying the share capital, must have refused such approval. 2.1.3. The Dilution process Once the conditions outlined above are met, the Commercial Court may, at the request of the appointed administrator or the Public Prosecutor, appoint a mandataire, a professional instructed to carry out a specific mission. The latter s mission here will consist in: i) convening another shareholders meeting of the debtor company, and ii) voting the share capital increase, up to the amount set out in the reorganization plan, in lieu of the dissenting shareholders who refused to vote the share capital increase set forth in the plan. The share capital increase will need to be completed within a maximum period of thirty days after the shareholders meeting which decided it. Interestingly, the Macron law provides that the increase can be carried out by way of a set-off with the claims filed by creditors against the debtor company, provided that: i) these creditors participate in the plan, ii) their outstanding claims are admitted, and iii) the set-off remains within the limit of the reduction to which these claims may be subject to in the plan. In that case, the increase will take the form of a reserved share capital increase ( augmentation de capital reservée ) to some of the debtor company s creditors. If the share capital increase is to be paid in cash ( libérée en numéraire par versement d espèces - which is not exactly the wording used by the new section of the code implemented by the Macron law 17 ), then all the existing shareholders will retain their preferential right to subscribe to the increase and be offered the possibility to subscribe to this share capital increase in proportion to their shareholdings in the company. In that event, all the shareholders will be free to subscribe to the capital increase if they wish to avoid being diluted. The Conseil Constitutionnel had to determine whether the dilution provisions of the Macron law were compliant with the French Constitution. It was argued by those who challenged the provisions that they 17 The new article L. 631-19-2-1 of the French Code of Commerce, which deals with the dilution and share capital increase, only refers to an increase by way of apports en numéraire, which covers increases by payments in cash and also by way of setting off outstanding and undisputed claims. This new article may need some redrafting in order to refer only to increases by way of apports en numéraire libérés par versement d espèces (paid in cash). Indeed, under article L. 225-128, al. 2 of the Code of Commerce, the contribution either by a payment in cash ( versement d espèces ) or by sett-off of mutual debts ( par compensation de créances liquides et exigibles ) fall under the same type of share capital increase en numéraire, but are different payment / release modalities. - 5 -
infringed shareholders fundamental property rights. The Conseil Constitutionnel rejected the challenge and upheld the dilution provisions. Giving its reasons, the Conseil Constitutionnel 18 considered that the mechanism was not a manifestly disproportionate infringement of shareholders property rights, in view of the fact that the mechanism was strictly regulated. It also took into account that not all shareholders are dispossessed from their voting rights when the capital increase occurs, but only those who have refused the proposed modification. Also, even though creditors can subscribe to the capital increase by way of set off with their admitted outstanding claims against the debtor company, it only concerns admitted debts up to any reduced amount imposed by the plan. The Conseil Constitutionnel also took the position that shareholders rights are preserved, because the new shares will be offered in priority to all shareholders, including the dissenting shareholders. This is true only if the increase is paid in cash and not by way of setoff. In that case, as mentioned above, the increase would be reserved to the creditor(s) whose debt(s) against the debtor company have been admitted. Obviously, for the Conseil Constitutionnel, saving the debtor company and local employment outweighed the shareholders rights. Interestingly, the Macron Law contains no sanction for shareholders who fail to attend the shareholders meeting, and thereby prevent a vote in favour of the plan on the basis that there is no quorum. 2.1.4. Judicial supervision When a request to appoint a mandataire is made by the court appointed administrator or the Public Prosecutor, the matter will be argued in the presence of the Public prosecutor. The Court will also hear all concerned shareholders, the other shareholders, creditors and any third person implicated in performing the proposed plan, as well as employee representatives. In practice, the request by the administrator or the Prosecutor to appoint a mandataire will be made on the initiative of shareholders, creditors or parties presenting the proposed plan and demanding the capital modification. 2.1.5. Appeal A right of appeal exists against the Court decision appointing a mandataire to convene another shareholders meeting. This aspect is commented in section (2.2.5) below. 18 Cons. Const. 5 aout 2015, n 2015-715 DC, spé. Cons. 142 et s. - 6 -
2.2. Forced sale of dissenting shareholders shares 2.2.1. Application process and conditions The application processes, as well as the conditions, are the same as in the case of shareholder dilution (see above sections 2.1.1 and 2.1.2). 2.2.2. Forced sale process The Commercial Court can order sale of all or a part of the shares held by shareholders who have refused to approve a share capital increase. The sale so ordered will be in favor of those engaged in performance of the proposed plan. The Court s decision can only be directed at shareholders who have refused approval and who hold alone or together a percentage of the share capital allowing them a majority of the votes or a blocking minority in general meetings. The Court s decision may also be directed at shareholders who hold a majority of voting rights by virtue of a shareholders agreement. The concept of a forced sale gives rise to a number of difficulties, both practical and legal. At a practical level, tracking down and obtaining shareholders votes may not be easy. As well, there may be disagreement on the value of the shares. This will require that an expert be appointed by the President of the Commercial Court at the request of a party, the administrator or the Public Prosecutor. The expert will then determine the value of the shares. Dispositions regarding appointment of experts and appraisal of the value of shares, in case of disagreement in relation thereto are provided for in the French Civil Code 19. These dispositions have been complemented by case law and experts enjoy wide freedom in determining value. However, the Macron law makes no reference here to the specific section of the Civil Code dealing with the valuation of shares by the court appointed expert. This leaves some question marks regarding the mechanism of evaluation of the shares for this particular situation. A further point of concerns relates to the decision appointing the expert. This decision is not subject to appeal 20. The shareholder(s) who are forced to sell as well as the buyer(s) will be irreversibly bound by the choice of expert made by the President of the Commercial Court. The Conseil Constitutionnel was required to rule on the constitutionality of the forced sale provisions of the Macron Law, which were challenged in the same way as the dilution provisions. For the same or comparable reasons given in the case of the dilution provisions the Conseil Constitutionnel rejected the challenge and upheld the provisions. However, the position of the Conseil Constitutionnel is perhaps more questionable in this area. Under a forced sale, unlike a dilution process, the targeted shareholders are entirely divested of their shareholding. The infringement against their fundamental property rights, including their right to shareholder status in a company ( le droit de demeurer associé ), is arguably more grievous than in the 19 Article 1843-4 of the French Civil Code 20 Article 238 of the Macron law - 7 -
case of dilution. However, be that as it may, the die is cast and both mechanisms are now undoubtedly available to the Commercial Courts. 2.2.3. Option for non-dissenting Shareholders Under the new regime, non-dissenting shareholders have the right to withdraw from the company and request that their shares be repurchased. This option enables shareholders to withdraw where they do not want to cohabit with the new shareholders imposed on them by the Court. The Macron Law does not make clear who has the obligation to repurchase the shares in this situation. One would assume here that the latter would be the parties backing the plan, or some of them specifically identified in the plan, who have benefitted from the order for forced sale. 2.2.4. Judicial supervision The same court supervision exists as in the case of dilution. In addition, where the shares are listed, the Court may only take a decision regarding a forced sale after consulting France s Financial Markets Authority ( Autorité des Marchés Financiers ). In order to ensure expeditious treatment of the matter, the Court will rule on the sale and the value of the shares, determined by the appointed expert, in a single decision. In its decision the Court will also appoint a mandataire who will be responsible for giving effect to the forced sale, including signing off documents as required and ensuring payment in cash is made to the sellers on the transfer date. 2.2.5. Appeal Certain parties are entitled to appeal 21 the decision appointing a mandataire to convene the new shareholders meeting, or ordering the forced sale of dissenting shareholders shares: the debtor, the court appointed administrator, the mandataire judiciaire, the court appointed professional representing creditors, the applicable employee representative the shareholders party to the forced sale, or the dissenting shareholders, and the Public Prosecutor. As per the general provisions of French insolvency law 22, the time limit under which the appeal against the above decision(s) must be filed is 10 days from service of the decision(s). 21 Article L. 661-1-I 6 bis of the Code of Commerce, further to its amendment by the Macron law 22 Article R 661-3 of the Code of Commerce - 8 -
3) Other measures Certain other measures have also been introduced by the Macron Law in the insolvency/corporate restructuring area. We list them below: Protection of the sole trader s domicile. 23 Previously 24, sole traders ( entrepreneurs individuels ) were entitled to make a formal declaration ( déclaration d insaisissabilité ), which protected the traders main residence or any built/non built property not assigned to his/her business, against seizure by potential creditors. No declaration is now required for the main residence. The protection will apply as of right for the trader s main residence and will protect against professional creditors of the sole trader, whose claims arise after publication of the Macron Law. Prohibition against management for directors. 25 From now on, a Court may only prohibit a director from management of an entity if he knowingly fails to file for insolvency in a timely manner, that is to say at the latest within 45 days after payment failure ( cessation des paiements ). Appointment of a second administrateur or mandataire judiciaire 26.The appointment in general safeguard proceedings of two mandataires judiciaires or administrateurs judiciaires will be mandatory if the debtor company operates businesses in another jurisdiction in France from the one where it is registered. It will also be mandatory when (i) the debtor controls at least two companies undergoing insolvency proceedings ( sauvegarde, redressement or liquidation judiciaires ), or (ii) when the debtor is controlled or owned by a company subject to an ongoing insolvency proceedings and the company itself holds or controls at least one other company which is also subject to insolvency proceedings. These entities will have to meet certain turnover levels which will be defined later by decree. These provisions will come into force after publication of the expected decree. * * * About Reed Smith Reed Smith is a global relationship law firm, with more than 1,900 lawyers in 25 offices throughout Europe, the Middle East, Asia and the United States. Founded in 1877, the firm represents leading international businesses from FTSE 100 corporations to mid-market and emerging enterprises. Its lawyers provide litigation and other dispute resolution services in multi-jurisdictional and high-stake matters, deliver regulatory counsel, and execute the full range of strategic domestic and cross-border transactions. Reed Smith is a preeminent advisor to industries including financial services, life sciences, health care, energy and natural resources, advertising, technology and media, shipping, real estate, manufacturing, and education. For more information, visit reedsmith.com. 23 Article 206 of the Macron law 24 Article L. 526-1 of the French Code of Commerce 25 Article 239 of the Macron law 26 Article 235 of the Macron law - 9 -