France: Dealing With Stock Options And Free Shares When Launching A Tender Offer On A French Company

Last Updated: 1 July 2011
Article by Erwan Barre and Jérémie Gicquel

Acquisitions of French companies raise a number of employment law issues, including issues related to employee share compensation plan, information and consultation of employee representatives, management transition and treatment of employee personal data. Dealing with these issues is important, especially when employees are key to the success of the business.

When the target is a public company acquired through a tender offer, bidders need to carefully consider employees' incentive schemes as they may have a significant impact on the outcome of the tender offer itself. As bidders generally seek to control at least 95% of the target for tax integration purposes and in order to be allowed to squeeze out the minority shareholders, French tender offers are often subject to a minimum tender condition threshold generally computed on a fully diluted basis. In a friendly deal, it is therefore both the target's and the bidder's interest that stock options and free shares be tendered.

Most French listed companies have stock option and free share plans in place, benefiting not only top executives but also more and more often other executives as well as rank-and-file employees. At the time a change of control is considered, the number of shares or options granted pursuant to such compensation plans can represent a significant portion of a company's capital on a fully diluted basis.

Considering that stock options and free shares are subject, under French law, to restrictive vesting and lock-up periods during which the underlying shares cannot be assigned, share compensation plans must be dealt with carefully in the context of a public tender offer in order to ensure that the bidder owns in the end more than the required number of target shares to meet the condition, on a fully diluted basis. Dealing with such stock options and free shares requires a prior review of the moving legal framework applicable to French stock option and free share schemes, in order to identify and distinguish between several groups of holders and treat each of these groups in a way which will allow the bidder to fulfill its objectives.

French stock option and free share schemes: a moving legal framework

Whereas share compensation is usually considered as wages and therefore subject to employers and employees' social contributions and income tax, favorable tax and social contribution regimes have been attached to stock options and free shares, to encourage the development of employee shareholding.

Since their initial implementation in 1970 (stock options) and 2005 (free shares), the favorable tax and social contribution regimes have been frequently revised and amended. In the same way that the Sarbanes-Oxley Act of 2002 addressed issues raised by the proliferation of stock options granted to and exercised by top corporate executives, numerous French laws have been enacted over the past few years1 with the aim of increasing social and tax contributions attached to stock option and free share schemes, tightening conditions of grant to executives, and encouraging global grants to all employees.

Under French law, eligible beneficiaries of stock options and free shares include not only all employees and officers of the company granting options, but also employees and officers of a company of which at least 10% of the share capital is held directly or indirectly by the company granting the options. In addition, beneficiaries of incentive stocks of an eligible listed company also include employees and officers of a company (i) which holds, directly or indirectly, at least 10% of the company that grants the option, or (ii) 50% of the share capital of which is held, directly or indirectly, by a company itself holding, directly or indirectly, at least 50% of the share capital of the company granting the options. As a result, beneficiaries of stock options or free shares of French companies often include employees of foreign affiliates who are non French tax residents. Foreign beneficiaries are subject, in addition to the main provisions attached to stock option and free share schemes by French law that are detailed below, to specific local tax and social security regulations which should also be considered in the context of a public tender offer in France.

Stock Options Vesting and Lock-up Periods

  • Stock-options granted to employees and officers cannot be assigned.
  • The period during which stock options granted can be exercised is determined by the shareholders' meeting and is usually up to ten years.
  • The benefit of a favorable tax and social regime, which applies only to French tax residents and/or persons subject to the French social security regime, is conditioned upon the shares issued or delivered upon the exercise of the options not being assigned during a four-year period from the grant of the options. In this respect, the stock option plans usually require that the beneficiary may not transfer all or part of the stock received under the stock option plans during a period that must not exceed three years from the date of exercise of the option.
  • An even more favorable tax treatment of the stock capital gain may apply whenever the shares underlying the options are held for an additional two years (i.e., a total of six years).

French law does not prohibit a beneficiary from exercising his/her vested stock options and tendering its shares during the lock-up period. The opening of a public tender offer does not, however, automatically accelerate the vesting of stock options. As a consequence, the loss of the applicable tax and social contribution favorable regime which would result from the exercise and sale of stock options before the end of the above-mentioned four-year lock-up period makes it unattractive for the beneficiary to tender his/her underlying shares. In addition, where the completion of a public tender offer is subject to the achievement of a specific threshold – usually the tender of 2/3 of the shares of the target company on a fully diluted basis – stock option holders will likely not take the risk to exercise their options and tender underlying shares as they would lose the applicable tax and social contribution favorable regime with no certainty as to the realisation of the public tender offer. Under such circumstances, stock option holders would either keep their vested stock options or exercise them and sell the underlying shares on the public market.

Depending on the number of stock options granted and the value of the underlying shares, the bidding and/or target companies may consider to indemnify beneficiaries for the loss of the applicable tax and social contribution favorable regime to incentivize them to exercise their options and tender their shares.

Free Share Acquisition and Lock-up Periods

  • The grant of free shares becomes definitive at the end of a vesting period of at least two years. The beneficiary receives such shares only at the end of such a vesting period.
  • The vested free shares are thereafter subject to a minimum two-year lock-up period.
  • With regard to the duration of the lock-up period, French law allows the shareholders' meeting to waive the minimum two-year lock-up period if the acquisition period is extended to four years. The benefit of a favorable tax regime, which applies only to French tax residents and/or persons subject to French social security regime, is however subject to the non assignment of the free shares during at least two years after the acquisition period.

As opposed to stock option vesting and lock-up periods which are set up for tax and social contribution purposes, free shares acquisition and lock-up periods are required by French corporate law, so that the parties cannot overrule such requirements. Even the implementation of a mandatory squeeze out may not ensure that the bidding company will own 100% of the target company in the end if free shares have been granted to employees or officers.

Negative Windows and Specific Lock-up Conditions Applicable to Officers

In a company whose shares are admitted to trading on a regulated market, free shares may not be sold, even when the lock-up period is over, during the period of ten trading days that precede or follow the date on which the financial statements are published. Insider trading regulations also prohibit beneficiaries of free shares or stock options to assign underlying shares during the period between the date on which the company's management has knowledge of information (such as the knowledge of a contemplated tender offer) which, were it to be published, could have a significant impact on the price of the company's securities, and the date being ten trading days after such information is published.

In addition, some officers and directors of French companies2 are required, pursuant to article L. 225-185 of the French commercial code to hold a portion – determined by the board – of their outstanding stock options or underlying shares until the termination of their mandate as officer.

Identifying and distinguishing groups of stock option and free share holders

In the context of a tender offer, an accurate understanding of stock option and free shares outstanding in light of the above-mentioned applicable legal framework is necessary in order to identify the different groups of stock options and free share holders and set the most appropriate threshold conditions and provide an adequate treatment of their stock options and/or free shares.

Finding adequate treatment of outstanding stock options and free shares

In order to optimize the result of the tender offer, various options addressing specific constraints applicable to each identified groups of stock options and free share holders can be implemented.

The standard approach to address most of these constraints is to enter into so-called liquidity agreements with stock option and free share holders in order to ensure that shares underlying outstanding stock options and free shares be assigned to the bidding company at the end of any applicable lock-up period. While stock option and free share holders may, under this approach, continue to benefit from the applicable tax and social contribution favorable regime, underlying shares will not be tendered to the offer. As a consequence, the bidder may not be in a position to achieve the threshold condition based on a percentage of the fully diluted capital and voting rights which may have been set forth as a condition to the completion of the tender offer.

Depending on the outcome of the review of stock option and free share grants, the target company and/or the bidding company may therefore have to consider alternative and immediate effect options:

  • amending the terms and conditions of stock option and/or free share plans, subject to the mandatory legal provisions detailed above, i.e., accelerating the vesting of non-exercisable stock options or free shares, or anticipating the expiration of stock options. The purpose of these amendments is to allow stock option and free shares holders to tender a maximum of underlying shares to the offer. Such amendments should, however, be handled carefully in order to ensure that the holders of stock options and free shares are still in a position to benefit from the applicable favorable tax and social contribution regimes. Making these amendments fully enforceable would also require prior formal approval of each stock option and free share holder, except in specific circumstances where it can be demonstrated that the amendments have no adverse effect for the holders;
  • entering into waiving agreements with each holder of unvested stock options (whether in or out of the money), holder of vested stock options out of the money and holder of unvested free shares, pursuant to which such holders would waive all their rights in relation with such grants in consideration for the payment of a compensation, subject to the success of the public tender offer after taking into account the cancellation of such instruments. Such waiving agreements tend to ensure to the bidders that no stock options survive the tender offer, as vested stock options in the money should be exercised and tendered by holders – if the tender offer is attractive – and all other stock options, i.e., unvested and out of the money stock options, would be cancelled. The same goal could be achieved with respect to free shares only during the vesting period. However, according to French case law, such compensation paid to individuals subject to the French social security regime and French tax residents should be treated as wages and therefore be subject to social contributions and income tax. The favorable tax and social contribution regime applicable to such stock options and free shares would therefore no longer be applicable;
  • exchanging, only in the context of a public exchange offer, shares of the target company resulting from the exercise of stock options and target company free shares with shares of the bidding company. While this alternative approach proves to be efficient, it can only be implemented in the context of a public exchange offer. In this respect, the shares of the bidding company granted to holders in lieu of shares resulting from the exercise of stock options and free shares must be registered in pure registered form, with a legend indicating their unavailability, during the remaining lock-up period, in order to ensure that the holder continuously benefits from the favorable tax and social contribution regime;
  • implementing a mix of the above-mentioned options, which is likely to be the case if different groups of stock option and free share holders have been identified.

To implement these choices, the competent corporate body, i.e., the board of the target company or the target company's shareholders meeting, must adopt whatever resolution is needed. In most cases, however, depending on the resolutions initially adopted by the target company's extraordinary shareholders meeting and delegation of powers granted to the board of the target company, the latter shall have sufficient authority to implement the options listed above, without having to convene an extraordinary shareholders meeting.

In addition, all treatment options require each holder's approval in order to be fully enforceable, except in case of acceleration of the vesting of options or where it can be demonstrated that amendments to the terms and conditions of stock option or free share plans have no adverse effect for the holders.

As a consequence, massive grants of stock options and free shares by a public company can be considered as poison pills in the context of a hostile tender offer, as it will force the bidder to identify and finance treatment options which may prove to be costly.

Therefore, it is important to anticipate these issues as much as possible by conducting a review of stock option and free share grants and structuring the tender offer efficiently so that it will be attractive for employees benefiting from stock incentives as this will maximize chances for success.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions