By Noro-Lanto Ravisy, Thibault Delorme, Arnaud Bélisaire, Anne-Sophie Hebras & Philippe Reigné, Doctor in French law, legal consultant.
New law on economic regulations
French law no. 2001-420 of May 15, 2001 (the NRE law) is composed of three principle sections:
- financial transactions;
- competition; and
This article provides a brief overview of the main impact of this law on corporate practices.
Many provisions of company law are directly based on rules of corporate governance. The new regulations seek to ensure increased transparency within joint-stock companies (sociétés par actions) by improving the balance of power between the management entities. For French corporations (sociétés anonymes), this legislation increases the number of constraints and applicable mandatory provisions. It will undoubtedly lead to many companies now choosing the legal form of simplified joint-stock company (société par actions simplifiée).
This objective of increased transparency has led, in particular, to:
- a redefinition of the organization of power within companies with a Board of Directors;
- new limitations on the number of concurrent corporate offices that may be held by a corporate officer in all sociétés anonymes; and
- an expanded scope of the procedure for approving related-party agreements.
Redefinition of the organization of power within companies with a Board of Directors
Prior to the new law, the legal organization of power within companies having a Board of Directors ("Board") led to confusion as regards the duties of the Board and those of the Chairman. Both were vested with the broadest powers to act under all circumstances in the name of the company.
Role of the Board
Powers of management and control
The role of the Board is stipulated and redefined by the law of May 15, 2001, which sets out a distinction between the Board's management authority and its power of control.
- The Board will now be responsible for determining the strategies for the company's business activities and for monitoring the implementation of these strategies, subject to the company's corporate purpose and the powers expressly granted to shareholders. In this way, the law of May 15, 2001 limits the Board’s authority to defining the company's general policy. However, the specific powers granted to the Board by the previous law (i.e., those with respect to drawing up the corporate financial statements, authorizing guarantees and suretyships, convening general meetings of shareholders, etc.) are maintained.
This new law also requires that any issue regarding the smooth running of the company be submitted to the Board, thus allowing it to be involved in the general management of the company as required. However, such general management is officially carried out either by the Chairman of the Board (Président du Conseil d’Administration) or the Chief Executive (Directeur Général) (see below).
- Furthermore, the law confirms that the Board has broad powers of control over the management, pursuant to which the Board may conduct any controls and verifications which it deems appropriate. In this respect, the prerogatives of the Board now more closely resemble those of a supervisory board.
- As the Board's status is that of a collective body, it may only carry out its power of control collectively. However, under French law, the directors have an individual right to information, which has been upheld by case law.
Powers with respect to third parties
The powers of the Board with respect to third parties remain unchanged. Accordingly, as regards any third party, a company is bound even by acts of the Board which fall outside the scope of the corporate purpose, unless the company can provide proof that the third party in question was aware of, or could not fail to be aware of, the fact that a specific act did not fall within the scope of such purpose.
In practice, the fact that Boards tend to act only infrequently significantly reduces the scope of application of these provisions.
Separation of the duties of Chairman of the Board and those of Chief Executive
General management of a company
The general management of a company is carried out either by the Chairman of the Board ("Chairman") or by another individual holding the position of Chief Executive. The Board must choose the management method most suited to the company's needs. The law does not prohibit the Chief Executive from being a member of the Board.
Role of the Chairman
In the past, the Chairman had the following two prerogatives:
- to chair the Board; and
- to be responsible for the company’s general management.
The new law of May 15, 2001 allows the Board to separate these two prerogatives should it so wish.
The Chairman, acting solely in such capacity, will now merely organize and manage the work of the Board and report on this work to the shareholders. The Chairman is responsible for the smooth operation of the company's management entities and, in particular, ensures that the directors are able to perform all of their duties properly. It is the Chairman's responsibility to provide the directors with all necessary information in this respect.
- For companies whose shares are traded on a regulated stock market, an extraordinary general meeting of shareholders must be convened within 18 months from May 16, 2001, the date of publication of the new law (that is, by November 17, 2002). The purpose of that meeting is to amend by-laws and articles of association (statuts), which set out the conditions under which the Board is to appoint the person in charge of the general management of the company (quorum and majority requirements, period of application of the choice made). Failing this, any interested party may ask the presiding judge of the court, ruling in summary proceedings, to order the Board to convene an extraordinary general meeting of shareholders. An implementing decree must set out the publication requirements for the choice made by the Board of Directors.
- All other companies may maintain their current by-laws and articles of association, and no specific deliberations are required, until the next extraordinary general meeting of shareholders is convened for other reasons.
The Chairman will continue to be responsible for the general management of the company, as in the past, until the by-laws and articles of association are amended.
Status of the Chief Executive and the Deputy Chief Executives
The Chief Executive ("CE") is appointed by the Board, which sets his/her remuneration.
On the CE's recommendation (or on the recommendation of the Chairman if he/she is responsible for the general management of a company), the Board may appoint one or more individuals, referred to as Deputy Chief Executives ("DCEs") (Directeurs Généraux Délégués), to assist the CE. The maximum number of DCEs is established by the company's by-laws and articles of association, and may in no event be greater than five.
Powers of the CE and DCEs
The CE has the same powers with respect to the general management of a company as those previously granted to the Chairman.
Accordingly, the CE is vested with the broadest powers to act in the company’s name under any circumstances, subject to the powers expressly granted by French law to the shareholders and to the Board. The CE represents the company in dealings with third parties. The provisions of the by-laws and articles of association or decisions of the Board limiting the powers of the CE are not enforceable as regards third parties.
The Board and the CE jointly define the scope and period of application of the powers of the DCEs. However, the DCEs have the same powers as the CE with respect to third parties.
Removal from office
The Board may remove the CE and the DCEs from office at any time. The difference introduced by the new law is that damages may be awarded if these persons are removed from office without valid grounds, as in the case of the removal from office of the members of the executive board of a société anonyme with a two-tier board. However, this rule does not apply to the Chairman, who may still be removed from office at any time, without being able to claim any damages, even if he/she is responsible for the general management of the company.
The civil liability of CEs now follows the same rules as those pertaining to the civil liability of directors. The CE and the DCEs are subject to the same criminal penalties as those applied to the CE under the former law.
Limitation on the concurrent holding of corporate offices in sociétés anonymes
In order to ensure that the corporate officers are more closely involved in corporate management entities, the law on new economic regulations strengthens the previous system with respect to the limitation on the concurrent holding of corporate offices by individuals, while taking into account the specific situation existing in groups of companies. This system only applies in sociétés anonymes.
Directors and members of the Supervisory Board
At present, an individual may not concurrently hold more than five offices as a director or a member of a Supervisory Board, as opposed to eight terms of office under the previous law.
This limitation now also applies to the duties of permanent representative of a legal entity which is a director or member of the Supervisory Board, except in exceptional circumstances (permanent representatives of companies whose purpose is to manage equity interests: venture capital funds, innovative mutual funds, etc.).
By way of exception, terms of office as a director or member of the Supervisory Board in unlisted subsidiaries are not taken into account. The term "unlisted subsidiaries" means companies controlled by a company in which an office of director or member of the Supervisory Board is held, and whose shares are not traded on a regulated stock market. The control of a company is assessed by reference to the provisions of Article L. 233-16 of the French Commercial Code, which defines the scope of consolidation. This gives a broader definition to the term "control" than the widely-used definition provided in Article L. 233-3 (formerly Article 355-1 of the French Law of July 24, 1966) relating to subsidiaries and shareholdings.
CE, members of the Executive Committee and Chairman
An individual may not concurrently hold more than one office as CE, member of the Executive Committee or sole CE.
A second office may, however, be held in an unlisted subsidiary; this term has the same meaning as that set out above.
This mechanism only concerns the status of CE and not that of Chairman. In this respect, the legal provisions which previously existed, limiting the number of Chairmanships to two, have now been abrogated. The Chairman is only subject to the rules regarding the concurrent holding of directorships and may thus hold five Chairmanships, with no exception.
An individual may not concurrently hold more than five offices of CE, member of the Executive Committee, sole CE, Director or member of the Supervisory Board of a French société anonyme. As an exception, directorships and memberships of the Supervisory Board in unlisted subsidiaries are not taken into account.
Any individual who infringes the provisions regarding the concurrent holding of corporate offices must voluntarily resign from one of his/her offices within three months of his/her appointment or within three months from when the exception ceases to apply. The law offers the freedom to choose the office from which the person will resign.
Upon expiration of this three-month period, the persons in question will be deemed to have automaticlaly resigned from their new office which no longer fulfils the conditions laid down previously, although the validity of any deliberations in which the persons may have taken part during this three-month period will not be called into question.
Entry into force
These provisions are applicable immediately with respect to new appointments. The new law grants corporate officers already in office 18 months as from May 16, 2001 (that is, by November 17, 2002) to comply with the new regulations. Upon expiration of that time, the new law provides for a particularly harsh sanction. All corporate officers who have refused to apply the new provisions will be deemed to have resigned from all of their corporate offices.
Extension of the scope of application of the procedure for the control of regulated related-party agreements within joint-stock companies
A few provisions have amended the system relating to agreements which are subject to a control procedure in joint-stock companies. The most significant changes are set out below.
Regulated related-party agreements
French law has considerably broadened the scope of application of the procedure for controlling regulated related-party agreements. This procedure now also applies to agreements entered into directly or via an intermediary between the company and:
- a shareholder holding more than 5% of the voting rights;
- or, should such shareholder be a legal entity, the company which controls such legal entity within the meaning of Article L. 233-16 of the French Commercial Code.
Moreover, in French sociétés anonymes, the scope of application of the procedure also includes agreements entered into with a business in which one of the managers of the société anonyme is also a manager of this business. This change has been introduced for the sake of providing an overall perspective on the matter and anticipates the possible creation of new legal forms of companies.
Non-regulated related-party agreements
Agreements relating to day-to-day transactions entered into under arm's length conditions ("non-regulated agreements") must now be brought to the attention of the Chairman (or the Chairman of the Supervisory Board), who must send a list stating the subject matter of the agreements to the members of the Board (or Supervisory Board) as well as to the Statutory Auditors.
Furthermore, all shareholders have the right to have access to the list and to be informed of the subject matter of these agreements.
In simplified joint-stock companies, the Statutory Auditors and shareholders have direct access to the actual content of the agreements themselves.
The scope of application of the provision which prohibits Directors and CEs from taking out loans with the company, from having an overdraft granted to them by the company or from having their commitments with respect to third parties endorsed or guaranteed by the company, is broadened to include DCEs.
French simplified joint-stock companies (SAS)
Conversion of a company into a joint-stock company
The new law requires that any conversion of a company into a joint-stock company be subject to the assessment, by an appraiser of conversions (commissaire á la transformation), of the "value of the assets which make up the share capital and any special benefits." For example, when a limited liability company (SARL) is converted into a simplified joint-stock company, an appraiser of conversions must be appointed. This was not previously necessary.
Conversion of a simplified joint-stock company into a company with a different legal form
Up until now, if a simplified joint-stock company was converted into a company with a different legal form, the company had to have existed for at least two years and the balance sheets for the first two fiscal years had to have been drawn up and approved by the shareholders.
These requirements, which are identical to those applicable for the conversion of a societ é anonyme into a company with a different legal form, have now been eliminated.
However, the decision to convert a company must now be made by the shareholders. Provided the corporate officers fail to comply with the powers granted by law to the shareholders, they will now be subject to criminal sanctions.
Possibility of a simplified joint-stock company being set up by a member of an independent proffession
The new law has created a specific form of company, a simplified joint-stock professional partnership (société d'exercice libéral par actions simplifiée (SELAS), which now enables professional practitioners to conduct business in the form of a simplified joint-stock company.
The rules which apply to simplified joint-stock companies have been adapted to take into account the specific nature of the purpose of a simplified joint-stock professional partnership and the status required of the partners.
Publication of the corporate officers' remuneration
In French société anonymes and partnerships limited by shares (sociétés en commandite par actions), the management report which is submitted to the annual general meeting of shareholders/partners by the Board of Directors, the Executive Committee or the Managers, as applicable, must specify the following:
- the total remuneration and benefits of any kind paid each year by the company to the corporate officers (Chairman, CE, DCEs, Directors, members of the Executive Committee or members of the Supervisory Board, etc.);
- the amount of remuneration and benefits of any kind which each of these corporate officers has received during the fiscal year, from controlled companies within the meaning of Article L. 233-16 of the French Commercial Code;
- the list of all the offices and duties performed by each of these corporate officers during the fiscal year in any company.
No penalty has been provided for in the event that this information is not disclosed. However, it seems possible to request the disclosure of such information, subject to a penalty by using the new mandatory injunction procedure introduced by the law.
These provisions apply to annual reports which relate to fiscal years as from January 1, 2001.
New powers of the Workers' Committee (Comité d'Enterprise) within companies
In the event of an emergency situation, the new law grants the Workers' Committee the authority to ask a court-appointed and duly authorized representative to convene a general meeting of shareholders/partners.
This representative may also require the inclusion of draft resolutions on the agendas of any general meeting of shareholders/partners.
Furthermore, two members of the Workers' Committee are now authorized to attend general meetings of shareholders/ partners and must, if they so request, be allowed to express their views with respect to any decisions that must be made unanimously by the shareholders/ partners.
The scope of application of these provisions appears to be unclear. In this respect, because the new legal provisions use a term which is not clear under French law (associé, which may be translated as either partner or shareholder, depending on the type of company concerned) it is not possible to determine whether they are intended to apply solely to joint-stock companies or whether they relate to all forms of company.
Continued existence of equity warrants for founders' shares in start-ups
The new law provides for the continued existence of equity warrants for founders' shares in start-ups ("BSPCEs"), originally introduced on a provisional basis. The law removes the eligibility requirement relating to the business activities of the companies issuing the equity warrants, with retroactive effect as from April, 27 2000. Previously, companies performing banking, financial, insurance, property management or rental or deep-sea fishing activities could not issue BSPCEs.
In order to make the procedure of issuing BSPCEs easier to implement, the law authorizes the extraordinary general meeting of shareholders to delegate to the Board of Directors/Partners or the Executive Committee the task of drawing up the list of beneficiaries of BSPCEs and the number of equity warrants allocated to each Shareholder / Partner.
Reform of the perogatives of minority shareholders
The new law changes the rights of minority shareholders via several provisions on different topics.
Reduction in the percentage of capital that must be held in order to initiate certain actions
The law reduces to 5% the threshold required for minority shareholders, acting alone or jointly, to request the following:
- an expert appraisal regarding the company's management,
- the relief or removal from office of one or more Statutory Auditors,
- the appointment of a duly authorized representative in charge of convening the general meeting of shareholders,
- that the Chairman or the Executive Committee to answer questions relating to any matter which is likely to jeopardize the company's existence as a going concern.
Expert appraisal regarding the company's management
The law asserts that an expert appraisal regarding the company's management is only a secondary measure. This procedure now begins with a written question put to the Chairman or to the Executive Committee. Only in the event no reply is given within one month or the reply given is deemed to be unsatisfactory, may the shareholders refer the matter to a judge. Furthermore, the expert appraisal requested may relate to the management of subsidiaries.
Removal of the minimum shareholding requirement
The new law has done away with the possibility of the by-laws and articles of association requiring a minimum number of shares in order to be able to take part in general meetings, as one of the objectives of the law is to increase the number of shareholders taking part in general meetings.
Mandatory injunction procedure
When interested parties are unable to obtain certain corporate documents (such as the company's detailed statement of assets and liabilities, annual financial statements, management report, etc.)
which should be provided, they may ask a judge, ruling in summary proceedings, either to order the corporate officers to provide these documents, subject to a penalty per day of delay, or to appoint a duly authorized representative responsible for ensuring that such documents are provided.
Case study: new telecommunications technologies and the functioning of joint-stock companies
By authorizing the use of new telecommunications technologies at meetings of the corporate entities (such as the Board of Directors, Supervisory Board, General Meetings of Shareholders) of joint-stock companies, the French law of May 15, 2001 takes the lead from the French law of March 13, 2000 relating to the adaptation of the law governing evidence to take into account new technologies and electronic signatures.
However, the provisions of the law will only take effect once a decree has been adopted after consultation of the French Supreme Administrative Court (Conseil d'Etat) to determine the nature of and conditions for use of these technologies. It will be possible to hold meetings via video conferencing and other means of telecommunications; this would include, in particular, the transmission of documents by electronic means, primarily via the Internet.
Video conferencing enables participants to send animated images, as well as to transmit speech and graphics.
New possibilities offered by the law
The law would allow remote participation by members of the Board or the Supervisory Board or the shareholders in the deliberations and voting of the corporate entities to which they belong. The physical presence of the members of the Board and the supervisory board will still be required for certain decisions (such as the appointment and removal from office of the Chief Executives and Deputy Chief Executives, etc.).
Video conferencing is only suitable for meetings with a limited number of attendees.
Several companies (Vivendi, Pinault-Printemps-Redoute, Sodexo) already broadcast all of the deliberations of their General Meetings of Shareholders live on an open-access site, thus making these General Meetings public. Shareholders may take part in the deliberations using an "electronic access card" which certifies their capacity.
Shareholders may not vote on-line.
New possibilities offered by the law
The by-laws and articles of association will be allowed to provide for general meetings of shareholders/partners to take into account shareholders who participate in meetings via a means of telecommunications which permits identification, in order to calculate the quorum and majority requirements.
Problem encountered: verification of the shareholder's identity and voting rights held.
Solution: use of an "electronic voting form" including the "electronic signature" of the shareholder and the intermediary custodian (for shareholders holding bearer securities).
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.