French Law

Business secrecy under French Law

Law dated N° 2018-670 dated 30 July 2018 related to protection of business secrecy implements European directive 2016/943 dated 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. Protected information is defined by Article 1 of the law (L.151-1 of the French commercial Code) with the following criteria. In a nutshell, protected information (i) is not, in itself, or in the configuration of accurate addition of its elements, generally known or easily accessible by persons familiar of that kind of information due to their activity sectors; (ii) has a commercial value either effective or potential due to its secret feature; and (iii) is subject to reasonable protection measures by its legitimate holder, given the circumstances, in order to keep its secret feature. Conditions of application of this new regulation are to be determined by a specific decree. In the meantime, given that the deadline to implement the European directive has expired, French law should be construed in the light of such a directive (and EU law).


Protecting borrowers under a loan and collateral agreement in Nigeria

In order to execute large projects or for businesses to expand, there is usually a need to apply for loan facility from Banks (“the Bank”). Though, Banks are likely to grant loan to Borrowers if they have the requisite collateral, most times Borrowers end up in trouble with the Banks either because they cannot pay back the repayment instalments as at when due; or the interest rate on the loan facility is too high; or they breached an important covenant of the Loan and Collateral Agreement (“the Agreement”) or they simply did not understand the risks and obligations under the Agreement. Therefore, Borrowers must take the following provisions in the Agreement seriously.

The Collateral Provision;

The Borrower must ensure that it has the collateral stated in the Agreement and the evaluation of the collateral must be as envisaged in the Agreement. If the collateral is to be provided by a third party, the Borrower must ensure that the third party provides the specified collateral timeously. The Borrower must ensure the third party binds himself to provide additional collateral upon the Bank’s request.

If the collateral provision provides that the Bank may demand for additional collateral upon some conditions or the happening of an event, the Borrower must ensure that such conditions or event are clearly spelt out in the Agreement.

The Interest Rate Provision;

The current Central Bank of Nigeria’s lending rate is 14 percent while that of commercial Banks is 18 percent. The Borrower must ascertain whether it will be able to pay the interest rate on the loan sum. If the Bank reserves the right to review the interest rate to a higher margin, the Borrower must know the circumstances in which the Bank will increase the interest rate.

The Borrower must take into account all provision on additional interest rates such as interest rate on sums drawn more than the loan sum or unpaid instalments to the Bank upon expiration of the loan period before it makes a decision on whether to take the loan or not.

Repayment Provision;

There are different repayment schedule towards liquidation of the loan sum. Some of which include; equal payments, equal instalments, fixed equal instalment, bullet repayment and instalment free period. The Borrower must ascertain whether the repayment schedule proposed by the Bank is convenient to it and its line of business.

Commencement Date Provision;

The Borrower must ensure that the date of disbursement of the loan sum is in line with the purpose for which it requires the loan. This will prevent it from incurring interest payment for the period it did not do business with the loan sum.

Conditions of Loan Provision;

In some Agreements, the Bank may withhold, recall or even cancel the loan facility if the Borrower fails to use the loan for the purpose it was granted; diverts repayment instalments to other ventures; breaches obligations under the Agreement; fails to repay the agreed instalments for a period of time; makes material misrepresentation regarding facts which induced the Bank to grant the loan or the value of the collateral depreciates.

Again, the Bank may have the right to convert loan facility to overdraft, advances, commercial papers and other market instruments or vary the terms of the loan to reflect the prevailing conditions in the financial markets or monetary regulations. Disbursement of the loan sum may be subject to the availability of funds and ability of the Bank to accommodate the loan sum.

In such a circumstance, the Borrower must ensure that it uses the loan for the purpose it was granted, avoid misrepresentation of facts on its eligibility to be granted the loan and repay the instalments as at when due. The Borrower must determine whether it agrees with the right of the Bank to convert the loan to other financial instruments or the conditions in which the Bank may withhold, recall or cancel the facility.

The Borrower’s business is premised on the Bank disbursing the entire loan sum in accordance with the Agreement. Hence, the Borrower must be certain that the Bank will disburse the entire loan sum. This will prevent the Borrower from being frustrated and stranded.

Events of Default Provision;

Some Agreements provides that if the Borrower is unable to pay its debts; admits in writing to its inability to discharge its financial obligations; or makes legal authorization to the Bank to postpone repayment of the instalments, all the monies outstanding to the Bank as principal sum and interest will become immediately due and payable.

This may also extends to circumstances where the Bank perceives that there is an extra ordinary situation which will make it impossible for the Borrower to discharge its obligations under the Agreement; inability of the Borrower to execute a distress levied on its property within 7 days; a call by the Central Bank of Nigeria for the Bank to recall the loan; material adverse change in financial condition of the Borrower and the unenforceability of the Agreement under Nigerian law.

The Borrower must consider whether it can cope with the wide premise in which the Bank may recall disbursed sums or make them immediately due and payable.

Covenants Provisions;

The Agreement may provide for the Borrower to fund its account with the Bank with a monthly turnover of a specific amount to pay interest, commission and other charges. The Borrower must ensure that it can provide such monthly amount in order to prevent itself from being overwhelmed by unpaid instalments and interests.

Insurance Provision;

The Borrower may be obligated to pay the premium and maintain a comprehensive insurance as the Bank may approve in the joint name of both the Bank and the Borrower and the Bank’s interest will be first protected in the insurance policy in case of the occurrence of the insured risk.

The Borrower must determine whether its business interest will be protected if it maintains a comprehensive insurance in its name and that of the Bank and ensure the Bank’s interest is first protected in the insurance policy.

From the foregoing, it is important for Borrowers to understand and evaluate the risks in the Agreement before signing the dotted lines to bind themselves. A stich in time saves nine.


Tax on dividends (French law)

On 6 October 2017, French Constitutional Supreme Court (Conseil Constitutionnel) ruled unconstitutional first sub-paragraph of paragraph I of Article 235 ter ZCA of French tax Code (Code général des impôts), in its drafting derived from of Law N° 2015-1786 dated 29 December 2015 (the challenged regulation). This decision, commonly named tax on dividends, applies as from the date of its publication (i.e. 8 October 2017) to all cases not definitely ruled as of this date. The challenged regulation creates a new tax to be paid by entities subject to company tax named « additional contribution to company tax in relation to amounts distributed ». This contribution is due by the entity who distributes revenues (within the meaning of Articles 109 to 117 of the said Code). The amount due is equal to 3% of the distributed amounts.

The Conseil Constitutionnel was seized of the case by the French Administrative Supreme Court (Conseil d’Etat) on the basis of a QPC (Question Prioritaire de Constitutionalité).

This means that Law N° 2015-1786 dated 29 December 2015 was in force when the Conseil Constitutional was seized, but part of it was challenged before the Conseil d’Etat, which transferred a question to the Conseil Constitutionnel raised by the plaintiff, the société de participations financière. The question was to determine whether or not the challenged regulation was unconstitutional.

This constitutionality a posteriori conformity is not only based on the French Constitution stricto sensu but encompasses all human and civil rights guaranteed by French Constitution. This is the reason why many laws may potentially be challenged irrespective of a given area of law (e.g. tax, corporate, business, labor, civil, administrative).

The question raised before the Conseil Constitutionnel was in relation to an additional contribution to company tax related to distributed amounts. The relevant part of the challenged regulation was first sub-paragraph of paragraph I of Article 235 ter ZCA of the French Code général des impôts, which states that “Companies, or French or foreign entities subject to company tax in France, UCITS mentioned in Article L214-1 of the French monetary and financial Code excluded, and those which qualify for the definition of micro, small and medium companies given in annex I of Commission regulation (UE) n°651/2014 dated 17 June 2014 stating certain categories of aids compatible with the internal market by application of Articles 107 and 108 of the Treaty are subject to an additional tax to this tax in respect of amounts distributed within the meaning of Articles 109 to 117 of the present Code.”.

This means that an additional tax is created in respect of (i) profits or products that are not put in reserve or incorporated in the share capital, (ii) any sums or values put at the disposal of the partners, shareholders or holders of units and not withheld on profits, (iii) unless evidenced the contrary, amounts put at the disposal of the partners (directly or indirectly) in respect of advances, loans or deposit (iv) sums or values attributed to holders of beneficiary unit or in respect of founder in relation to buybacks of the said units, (v) remunerations and occult advantages, (vi) non-deductible fraction of remuneration (within the meaning of Article 39 (1°)(1) of the French Code général des impôts), (vii) expenses and charges which reduction for company tax basis is forbidden according to sub-paragraph and c) of the said Article 39.

The question raised was to determine whether or not this additional contribution to company tax was unconstitutional. The plaintiff, which was a company, alleged a non-equal treatment not justified between the redistributions of dividends from subsidiaries depending on the location of the said subsidiaries. According to the challenged regulation, if the subsidiary is located in the EU, it does not bear the additional contribution. If the subsidiary is located in France or in a third country it is subject to the additional contribution.

In addition, the plaintiff alleged that the challenged regulation creates a non-equal treatment not justified between companies distributing dividends received from subsidiaries located in the EU and the subsidiaries distributing dividends taken from their operating profit.

As a result, the plaintiff alleged that the challenged regulation breaches the equality treatment in relation to public burdens (principe d’égalité devant les charges publiques).

In response, the Conseil Constitutionnel, used the « bloc de constitutionalité » i.e. civil rights applicable in addition to the Constitution itself. In particular, the Conseil Constitutionnel based its decision on Articles 6 and 13 of the Déclaration des droits de l’homme et du citoyen dated 1789.

According to Article 6, the law « must be the same for all, if it protects or if it punishes. ». However, the equal treatment does not contravene the possibility for the law to rule differently situations that are different. In addition, a derogation to equal treatment also exists in the event of public interest. This position is in line with case law ruled by the Conseil d’Etat (e.g. CE Denoyez dated 10 May 1974 (Section) n° 8803288148, Rec. Lebon).

According to Article 13, a common contribution is essential for the maintenance of the public force and for expenses of administration. Such contribution must be allocated between all citizens, depending on their capacity. Using a core rule of the Constitution (Article 34), the Conseil Constitutionnel stated that it is for the law to determine, within the respect of constitutional principles and given the features of each tax, rules according to which have to be assessed the contributive capacities. In particular, to ensure respect of equal treatment, the law must ground its assessment upon rational and objective criteria, depending on goals determined by the law itself. However, this assessment must not give rise to a characterized breach of equal treatment before public burdens.

In addition, the Conseil Constitutionnel referred to the Conseil d’Etat case law: Article 235 ter ZCA cannot be applied to profits redistributed by a parent (mother) company taken from a subsidiary established in an EU member state other than France to which the daughter/mother regime of Directive dated 30 November 2011 applies. Article 235 ter ZCA can, however, be applied to other profits distributed by such mother company.

As a result, the challenged regulation creates a non-equal treatment between mother companies depending on whether or not the dividends are distributed by a subsidiary established in a member state other than in France. Yet, these companies are in the same situation with regards to the object of the contribution consisting of taxing any distributed amounts, regardless of their geographical origin, including those subjects to the mother/daughter EU regime.

By instituting this additional contribution to company tax related to distributed amounts, French parliament aimed at compensating the loss of sustainable income generated by the suppression of withholding tax on UCITs. Thus, the aim of French parliament was clearly a yield objective. To rule the case, the Conseil Constitutionnel states that such a goal is not, itself, of a public interest nature justifying the non-equal treatment between mother companies redistributing dividends from subsidiaries established in an EU member state and those redistributing dividends from subsidiaries established in France or in a third country. As a result, the equality principle before the law and the public burdens is breached and the challenged regulation is therefore unconstitutional.

Up to date 6 October 2017


Corporate Authorizations and Capital Markets Law in France

The French Code de commerce has recently been amended by ordinance N° 2017-970 dated 10 May 2017. In this perspective, Article L. 228-40 of the Code de commerce is amended in the view of widening the scope of delegation of powers. This is the main purport of the reform. The new Article L. 228-40 is now drafted as follows:

“The Board of Directors, the Management Board, the manager or the managers are capable of deciding or authorizing the issue of bonds, except if the Article of Association reserve this power to the general meeting or if the general meeting decides to exercise such power.

The Board of Directors or the Management Board may delegate to any persons of its choice, the necessary powers to carry out, within a period of one year, the issue of bonds and to determine the terms and conditions.

Designated persons report to the Board of Directors or the Management Board under conditions determined by these bodies.”

The new regime of delegation applicable to limited companies is now synchronised with the regime applicable to credit institutions (banks) (établissements de crédit). This allows the possibility to delegate to any persons (and not only to a specific person provided for in former Article L. 228-40, such as a member of the Board of Directors), the power to carry out the contemplated bond issue. The term person(s) used in Article L. 228-40 is generally understood as individual(s). This construction is consistent with market practice, even if, from a French law perspective, a literal interpretation could lead to the possibility for a person within the meaning of French law (i.e. an individual or a legal entity) to carry out the contemplated bond issue.

Such a literal construction would imply the possibility for another company, for example for a company within the same group of the issuer, to carry out a bond issue. Such a construction, although not being currently in line with market practice of corporates or banks, cannot be excluded. In practice, this would lead to the possibility for an issuer to administratively externalise the carrying out of the bond issue and, why not, to the possibility for a specific dedicated entity to be created within a group of companies or banks to bear the administrative burden of the bond issue. This might be interesting for companies or banks which are contractually structured as a group of companies, with the funding being separately managed.

In practice, this amendment allows members of the issuer, typically members of the funding department, to carry out bond issues. Such members do not longer have to be at the same time members of the Board of Directors as this is, to a certain extent, considered as useless for the single purpose of carrying out bond issues decided by the Board of Directors. In addition, asking a member of the Board of Directors to carry out bond issues may lengthen the issuance process due to his potential non-availability.

It has also to be emphasised that Article L. 228-40 maintains the concept of delegation of powers only, this being in line with market practice. However, in theory, it can be considered that a delegation of signature is also possible, as new Article L. 228-40 does not prohibit it.

Up to date 17 August 2018


Characterization of bonds (obligations) and capital markets

On 23 November 2017, the French Cour de Cassation (second civil room of the French Supreme Court dedicated to private cases) ruled, by a literal and traditional construction of Article L. 213-5 of the French monetary and financial Code, that the characterization of bond (obligation) is not conditioned on the guarantee of repayment at par. Bonds that are not capital guaranteed remain nevertheless bonds.

In the previous instance, on 21 June 2016, the French Court of appeal of Paris ruled, on the contrary, that repayment at par was included as an essential feature in the concept of bond (obligation). This position was held to protect consumers, in a context where they have subscribed for life insurance based on non-capital guaranteed products, and they have not get back, at least, what they have invested.

It has to be mentioned that insurance companies are sometimes sellers in the secondary market of bonds (obligations i.e. titres financiers), that the market calls structured products. This implies that the performance of the bond is linked to an underlying which can be volatile and sometimes the capital invested is not guaranteed. In a way, non-capital guaranteed structured obligations can economically be similar to derivatives (contrats financiers) and this may result in massive loses. In such circumstances, the insurance company has to ensure, when such bonds / structured products are sold to consumers repackaged as life insurance, that the advisory and the information obligations are fully complied with.

When we are in presence of bonds that are not capital guaranteed, the characterization of bond is then not only crucial for insurance companies but also for issuers, subscribers, and holders for other regulatory purposes.

The current position of the French Cour de Cassation will reassure the bond market as a whole.

Up to date 23 November 2017


Contract and Capital Markets Law in France

Law N°2018-287 dated 20 April 2018 ratifying ordinance N°2016-131 dated 10 February 2016 related to contract law and evidence was adopted on 11 April 2018 (with an entry into force on 1 October 2018).

The law not only ratifies the ordinance but also amends certain of its provisions. In this perspective, the law contains a very important article which excludes derivatives (contrats financiers) and transactions over securities (opérations sur titres) from the unforeseen theory (théorie de l’imprévision). In a nutshell, the unforeseen theory allows a party to ask a judge to amend or to rescind the contract in the event of a material adverse change of his economic situation (i.e. when it becomes extremely expensive for a party to perform the contract).

The exclusion is applicable to the transactions mentioned in I to III of Article L211-1 of the French monetary and financial Code. This therefore includes securities (e.g. shares, bonds, units of UCITS) and derivatives (e.g. forward, future, swaps, credit default swaps, options). The importance of this exclusion has to be stressed as it strengthens the capital markets legal safety, as a whole. Correlatively, it also avoids a potential disruption of the international recognized existing legal scheme based on the material adverse change (MAC) provisions.

Up to date 8 August 2018