Law n° 2003-706 of August 1, 2003 on financial security (La Loi de Sécurité Financière) (the "Reform") was adopted by the French Parliament one year after the U.S."Sarbanes-Oxley " Act with the same objective of restoring the trust of the investors in the French markets.
To this end, the Reform, which is divided into three sections, deals with the following areas:
- Modernization of the authorities supervising financial activities;
- Reinforcement of investors' protection;
- Modernization of the auditing of company accounts and improvement of corporate transparency.
In connection with the modernization of the auditing of company accounts and the improvement of corporate transparency within joint stock companies (société par actions), the Reform provides specifically for:
- An increased level of corporate reporting to the directors, shareholders and the public in French joint stock companies;
- A redefinition of the status and mission of the statutory auditors;
- A reorganization of certain rules of operation of joint stock companies.
This briefing focuses upon those provisions of the Reform that impact French corporate governance practices and that require immediate attention from a compliance standpoint .
I. INCREASED LEVEL OF CORPORATE REPORTING TO THE DIRECTORS, SHAREHOLDERS AND THE PUBLIC IN FRENCH JOINT STOCK COMPANIES
The Reform imposes new obligations on corporate officers and directors in relation to providing information about the company.
1.1 INFORMATION TO BE PROVIDED TO DIRECTORS
Prior to the Reform, the French Commercial Code provided that "each director shall receive all the information necessary for the accomplishment of his/her mission and may obtain communication of all documents he/she deems relevant" (Art. L. 225-35 al. 3 of the Commercial Code).
The Commercial Code did not mention, however, who was responsible for providing such information and documents to the directors.
The Reform remedies this deficiency by specifying that the President of the Board of Directors or the Chief Executive Officer (Directeur Général) shall communicate to each director all the documents and information necessary for the accomplishment of his/her mission.
Although this new provision states that the President or the Chief Executive Officer shall communicate the documents and information, it should be understood that such corporate officers are jointly liable for this obligation.
Besides, even though it is not expressly provided for in the amended legal provision, the directors should still be able to ask for the necessary documents and information if they are not spontaneously communicated to them.
1.2 INFORMATION TO BE PROVIDED TO SHAREHOLDERS AND TO THE PUBLIC
The Reform improves the quality of the information provided by joint stock companies to their shareholders and to the public in connection with the corporate governance procedures applied.
1.2.1 Information relating to the internal control procedures
Additional report to be prepared by the President of the Board of Directors or Supervisory Board
The Reform requires that the President of the Board of Directors (conseil d'administration) or Supervisory Board (conseil de surveillance) of corporations (sociétés anonymes) prepare, in addition to the Board's annual management report, a separate report on the internal control of the company. This new report shall indicate the conditions of preparation and organization of the Board meetings, the company's internal control procedures and as the case may be, the limitations placed upon the powers of the Chief Executive Officer by the Board of Directors (Art. L. 225-37 and L. 225-68 of the Commercial Code).
This requirement applies to all French corporations, whether private or public, for fiscal years beginning on or after January 1, 2003. Thus, the Presidents of corporations which closed their fiscal year in December 2003 shall have to submit the report to the ordinary shareholders' meetings which shall be held between April and June 2004 for the approval of the 2003 accounts.
In an attempt to clarify the purpose and content of this additional report, two major associations representing the interests of French companies (MEDEF and AFEP) have published guidelines detailing the information to be included in this report and offering a possible outline for the report. In addition, the legal committee of the National Association of Joint-Stock Companies (ANS also published a note aiming at explaining the purpose of this report. According to the ANSA, the report should provide significant, factual and concise information relating to the internal control procedures themselves and not to the subject matter of the procedures (i.e., the content of the information provide which is addressed in other documents (such as the management report). Therefore, the report should be short and clear in order to give an overall vision of the internal procedures in place at the company.
Accordingly, the report should include the following information:
Conditions of preparation and organization of the Board meetings
- A description of the conditions of preparation of the internal regulations (règlement intérieur) organizing the operation of the Board of Directors, specifying, as the case may be, the conditions under which directors may engage in transactions involving the share capital of the company for which they have privileged information;
- A description of the measures taken to evaluate the performance of the Board of Directors and to decide the allocation of director compensation;
- A description of the conditions of preparation of the Board meetings including the utility of the work of the Board committees;
- A description of the measures taken to enable the Board and the relevant committee(s) to fulfill their mission in relation to the internal audit of the accounts;
- A description of the rules applicable to the determination of the variable part of the director compensation and the allocation of any stock options.
Internal control procedures
- A description of how the President obtained the information discussed in and below;
- A description of the internal procedures: persons entitled to carry out the control, reference documents used by the company, measures taken by the company, information relating to the preparation and processing of financial and accounting data, organization and verification of such data;
- An evaluation by the President of the effectiveness of the internal control procedures, at least for listed companies.
Limitations placed upon the powers of the Chief Executive Officer
- A list of the limitations of powers;
- An evaluation of such limitations.
The report must be provided together with the management report of the Board of Directors. Therefore, it shall be:
- sent to the shareholders;
- presented at the Annual Ordinary Shareholders' Meeting;
- filed with the clerk of the Commercial Court within 30 days of the Annual Ordinary Shareholders' Meeting.
However, if the joint stock company is a company listed with the French stock exchange, the information contained in this report shall also be made available to the public under the conditions set forth by the general regulations (règlement général) of the Autorité des marchés financiers ("AMF") (Art. L. 621-18-3 of the Monetary and Financial Code). Until these general regulations are issued, the AMF recommends that:
- a paper version of the report be made available free of charge at the registered office of the company or sent to any person upon request;
- an electronic version of the report be made available on the website of the AMF, as well as the website of the company;
- a publication be made informing the public of the availability of the report; and
- a copy of the report be included with any document issued by the company that relates to the company's 2003 fiscal year.
Additional report to be prepared by the statutory auditors
The statutory auditors are required to prepare, in addition to their general report on the company's accounts, a separate report presenting their comments on the internal control procedures of the company, to the extent that they relate to the preparation and processing of the company's accounting and financial information (Art. L. 225-235-5 of the Commercial Code).
1.2.2 Information relating to the compensation of the officers of listed companies and their transactions involving shares of the company
Information on the compensation of the officers
Prior to the Reform, the French Commercial Code provided that the annual management report of the Board of Directors or the Management Board (Directoire) had to disclose the compensation paid to the company's officers (mandataires sociaux) by this company and any company under said company's control. However, any compensation paid by controlling companies was not included in this provision.
The Reform remedies this deficiency by requiring that any compensation paid to the officers of a company by controlling companies be added in the annual management report (Art. L. 225-102-1 of the Commercial Code).
However, the Reform provides that this rule is not applicable to privately-held companies. Therefore, the compensation of the officers of privately-held companies no longer needs to be indicated in the annual management report.
Information on transactions carried out on shares of listed companies by their officers
A listed company must inform the AMF and the public, within the time limit set by the forthcoming general regulations of the AMF, of any transactions carried out by any of its officers or by any person having a close personal connection with an officer of said company (Art. L. 621-18-2 of the Financial and Monetary Code).
1.2.3 Information on passing thresholds, declarations of intent and shareholders' agreements relating to listed companies
Prior to the Reform, in case of crossing (upward or downwar of one of the following thresholds: 5%, 10%, 20%, 1/3, 50% or 2/3 of the capital or voting rights of a given listed company, the shareholder crossing such thresholds had to notify the company within fifteen (15) days of passing the thresholds and indicate the number of shares held by him. The shareholder also had to notify the Conseil des marchés financiers ("CMF") within five (5) business days. The CMF would then inform the public.
The Reform modifies the above provision by requiring:
- that the company be notified within five (5) trading days,
- that the notification include the shareholder's overall voting rights in addition to the number of shares and
- that the information be made available to the public under the conditions set forth in the forthcoming general regulations of the AMF (Art. L. 233-7 of the Commercial Code).
In addition, prior to the Reform, financial intermediaries registered in the shareholders' register on behalf of foreign shareholders were required to make notifications in their own names in the event that a threshold was passed. Such provision was repealed by the Reform.
The Reform provides that a shareholder shall notify the company and the AMF of its objectives for the subsequent twelve months with regard to its shareholding within ten (10) trading days after passing the 10% or 20% thresholds of the capital or voting rights of such listed company. Prior to the Reform, the deadline was fifteen (15) days. The notification must specify whether the purchaser is acting alone or in concert with others and whether it intends to continue purchasing, to acquire control of the company or to request its appointment or that of one or more persons as directors or members of the Management Board or Supervisory Board. The information shall then be made available to the public under the conditions set forth in the forthcoming general regulations of the AMF (Art. L. 233-7 of the Commercial Code).
The shareholder shall notify the company and the AMF, within five (5) trading days of the signature, of any provisions of the signed agreement containing preferential terms for the sale or purchase of 0.5% or more of the capital or voting rights of a listed company. The information shall be made available to the public in accordance with the terms of the forthcoming general regulations of the AMF (Art. L. 233-11 of the Commercial Code).
1.2.4 Communication of draft resolutions submitted by shareholders
Prior to the Reform, draft resolutions proposed by one or various shareholders of a given company were only put on the agenda of the shareholders' meetings.
The Reform adds that such draft resolutions should be brought to the attention of all the shareholders by the company before the shareholders' meeting under the terms of a decree yet to be published (Art. L. 225-105-2 of the Commercial Code).
1.2.5 Communication of the advice of the workers' council
Where the consultation of the workers' council on modifications of the company's economic or legal organization is required in accordance with the French Labor Code (Art. L. 432-1), its advice must be communicated to the shareholders' meeting called to decide on such modifications (Art. L. 225-105-4 of the Commercial Code).
II. REDEFINITION OF THE STATUS AND MISSION OF THE STATUTORY AUDITORS
2.1 APPOINTMENT AND MISSION OF THE STATUTORY AUDITORS
2.1.1 Appointment of the statutory auditors
The Reform provides for a new procedure for the appointment of statutory auditors, especially with respect to listed companies (Art. L. 225-228 of the Commercial Code).
The statutory auditors are proposed for appointment to the annual general shareholders' meeting by a draft resolution of the Board of Directors or Supervisory Board, or by the shareholders with a minimum share capital's ownership.
If the company is listed, the Board of Directors decides on the statutory auditors to be proposed to the shareholders' meeting, without the vote of the Chief Executive Officer and Deputy Chief Executive Officer if they are also directors.
The AMF is informed of the proposition for the appointment or renewal of statutory auditors of listed companies and may make any comments in this regard. These comments are communicated to the shareholders (Art. L. 621-22 of the Monetary and Financial Code).
If the proposed statutory auditor has audited during the preceding two years a contribution or merger operation of the company or any company controlled by it, this should be mentioned in the draft resolution.
2.1.2 Convening of statutory auditors to the meetings of supervisory and management organs
Prior to the Reform, the statutory auditors were convened only to the meetings of the Board of Directors or Management Board settling the accounts of the company for the previous fiscal year. Since the Reform, the statutory auditors must be convened to all meetings related to the accounts of the company, including those of the Supervisory Board, as well as all meetings of management or control committees examining and settling the intermediary accounts (Art. L. 225-238 of the Commercial Code).
2.1.3 Reporting obligations for statutory auditors of listed companies
The Reform imposes additional reporting obligations upon and grants additional rights to the statutory auditors of listed companies:
- The AMF may require the statutory auditors of listed companies to provide any information on such companies;
- The statutory auditors may consult with the AMF with respect to any difficulties they encounter that may have an impact on the financial situation of the company;
- The statutory auditors are required to inform the AMF of any fact or decision justifying their intent to refuse to approve the accounts of the company;
- The statutory auditors shall communicate to the AMF
- a copy of the document transmitted to the President of the Board of Directors or the Management Board in the event of application of the alert procedure set out in the French Commercial Code and
- the conclusions of the report they intend to present to the shareholders' general meeting;
- The statutory auditors are released from their professional secrecy obligation and may not be held liable for providing any of the above-mentioned confidential information.
2.2 INDEPENDENCE OF THE STATUTORY AUDITORS
In order to ensure the independence of the statutory auditors, the Reform establishes certain new rules, including but not limited to, the following:
- statutory auditors must take an oath before the court of appeal that they will exercise their profession with "honor, integrity and independence" and that they will respect laws and have them respected (Art. L. 822-3 of the Commercial Code);
- statutory auditors may not acquire, receive or keep, directly or indirectly, any interest in an entity audited by them, or any entity controlled by or controlling such entity (Art. L. 822-11-I of the Commercial Code);
- statutory auditors may not give assistance, such as advice, opinions or recommendations, to companies they have audited if such assistance is not directly linked to their audit mission (Art. L. 822-11-II of the Commercial Code);
- statutory auditors affiliated with a multidisciplinary network may not audit a company which benefits from non-audit services provided by another member of the network (Art. L. 822-11-II of the Commercial Code);
- statutory auditors may not become corporate officers or employees of a legal entity audited by them or any legal entity controlling or controlled by it within five (5) years of the end of their functions (Art. L. 822-12 of the Commercial Code);
- corporate officers or employees of a legal entity may not become statutory auditors of such legal entity, of a company holding more than 10% of the share capital of this legal entity or a company held by this legal entity at more than 10%, within 5 years of the end of their functions (Art. L. 822-13 of the Commercial Code); and
- statutory auditors may not audit a listed company for more than six (6) years in a row (Art. L. 822-14 of the Commercial Code)
III. REORGANIZATION OF CERTAIN RULES OF OPERATION OF CORPORATIONS AND SIMPLIFIED JOINT STOCK COMPANIES
3.1 CORPORATIONS (SOCIETES ANONYMES)
3.1.1 Power of representation of the President of the Board of Directors
Prior to the Reform, the President of the Board of Directors had the power to represent the Board. However, as the Board of Directors is not a legal entity under French law, the meaning of that provision was unclear.
The Reform amends the law by eliminating any reference to the President's power to represent the Board of Directors (Art. 225-51 of the Commercial Code).
3.1.2 Limitation on simultaneously held positions in société anonymes
Under French law, an individual may not simultaneously hold more than five positions as Chief Executive Officer, member of a Management Board, sole Chief Executive Officer, director or member of a Supervisory Board in French société anonymes.
The Reform excludes from the above mentioned rule of limitation the simultaneous holding of positions as directors or members of the Supervisory Board held in companies controlled by a company in which an individual already holds a position as Chief Executive Officer, member of the Management Board, sole Chief Executive Officer, director or member of the Supervisory Board (Art. 225-94-1 of the Commercial Code).
3.2 SIMPLIFIED JOINT STOCK COMPANIES (SOCIETES PAR ACTIONS SIMPLIFIEES)
Prior to the Reform, only the President of a simplified joint stock company could represent the company.
The Reform amends such rule by stating that the by-laws may provide for one or several persons to represent the simplified joint stock company who would then have the title of Chief Executive Officer or Deputy Chief Executive Officer (Art. L. 227-6 of the Commercial Code).
3.3 CORPORATE OPERATIONS
3.3.1 Conversion of a company into a joint stock company
Prior to the Reform, a report of an independent auditor (commissaire à la transformation) was necessary in case of conversion of a company of any form into a joint stock company of any form (société anonyme, société par actions simplifiée, société en commandite par actions).
The new law provides that such auditor report remains compulsory only if the company does not have a statutory auditor (Art. L. 224-3 of the Commercial Code). The obligation to obtain such audit report will therefore only concern the conversion of small companies into joint stock companies, since only those small companies do not have statutory auditors.
3.3.2 Share capital increase
Share capital increase and employee savings
Prior to the Reform, in case of a decision of share capital increase, the extraordinary shareholders' meeting had to vote on a resolution related to an additional share capital increase in the sole benefit of employees.
The new law provides for two exceptions: (i) a share capital increase following a contribution in kind and (ii) a share capital increase resulting from a prior issuance of transferable securities giving right to the subsequent attribution of shares (Art. L. 225-129 VII of the Commercial Code).
Share capital increase with suppression of preferential rights for the benefit of designated persons
Prior to the Reform, the shareholders' meeting could suppress the preferential right of subscription in favor of one or more persons.
The new law adds that when the shareholders' meeting suppresses the preferential right for the benefit of a category of persons answering to certain criteria, but not designated persons, the shareholders may delegate the power to the Board of Directors or the Management Board to provide a list of the beneficiaries, the number of shares to be allocated to each beneficiary and the issue price (Art. L. 225-138 II of the Commercial Code).
3.3.3 Consolidation perimeter
Companies shall have to consolidate the accounts of the companies over which they exercise a dominant influence through a contract or provisions of the by-laws even though they do not hold any shareholding in those companies (Art. L. 233-16 II of the Commercial Code).
This new text is a response to the mechanism of "deconsolidation" which allowed through a friendly or ad hoc company, the dominating company to abandon any holding in the other company while still exercising a contractual dominant influence.
This new provision shall apply starting from the first fiscal year opened as of August 2, 2003, which should be January 1, 2004 for most companies.
3.3.4 Control of regulated related-party agreements
Agreements entered into between a company and a shareholder holding more than 10% of the share capital (5% under previous law) qualify as regulated related-party agreements subject to specific approval procedures (Art. L. 225-38, L. 225-86, L. 226-10 and L. 227-10 of the Commercial Code).
Agreements related to day-to-day transactions entered under arm's length conditions no longer need to be brought to the attention of the President of the Board of Directors or Supervisory Board or in case of simplified joint stock companies to the attention of the statutory auditors if "because of their object or financial consequences, they are significant for none of the parties" (Art. L. 225-39, L. 225-87, L. 227-11 and L. 612-5 of the Commercial Code).
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In application of the first section of the Reform the CMF together with the Commission des opérations de bourses ("COB") were replaced by the AMF.
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