The French Supreme Court related to private matters (Cour de cassation) ruled as a ratio decidendi on 28 November 2018 that the single vote on the resolution related to an increase in share capital reserved to employees is considered satisfactory to regularize an increase in share capital not subject to a vote on a preceding general meeting. This allows the possibility for a general meeting to ratify an increase in share capital reserved to employees (due to the relativity of the nullity – nullité relative) and is in line with the spirit of company law to allow ratification as much as possible to ensure legal safety.
The current situation of partners of limited liability companies carrying on a civil professional purpose (SEL – Société d’Exercice Libéral) is protected by law and the constitutive documents. This is due to the fact that they have to be protected as they are running the business activity. This is particularly the case in the event of exclusion of partners, when a decision is made to exclude a partner from the company.
In this respect, Article R.4381-16 of the French public health Code (Code de la Santé publique) states that a partner practicing within the company can be excluded when (i) he is prohibited from practicing or providing care to covered parties for a period equal to three months or (ii) the said partner contravenes operating rules of the company.
Article R.4381-16 of the French public health Code gives guarantees as to the exclusion decision: no exclusion decision can be taken if the partner was not legally convened and if he has not been in the position to plead his case on specific facts for which he was charged.
However, as to the voting process, Article R.4381-16 of the French public health Code states that the decision of the partners to exclude a partner is taken on the reinforced majority calculated excluding not only the vote of (i) the partners having been sanctioned for the same facts or related facts but also (i) the concerned partner (unanimity of other partners practicing within the company and entitled to vote having as well to be obtained).
The fact that the concerned partner does not take part to the vote is not in line with the ratio decidendi of the Cour de cassation (i.e. com. 9 July 2013) and the challenged provision is deemed not to have been written. Such a provision may as well be considered in breach of the ECHR (European Convention on Human Rights), in this particular case of Article 6 (right of a fair trial) or of Article 13 (right of an effective remedy).
The business activity is also protected in the event of temporary prohibition from practicing or providing care to covered parties (Article R.4381-16). In this perspective, provided that the partner is not excluded, the person concerned keeps his partners’ rights and duties, to the exclusion of the remuneration linked to his professional activity (Article R.4381-17).
This protection is crucial to ensure management stability, legal safety and thus, to foster business activity.
Up to date 17 August 2018
Law dated 10 August 2018 (n°2018-727) creates by way of experiment the possibility for a plaintiff to raise a written question in order to obtain a legal position related to the application of the law. The particularity of such a new regulation is that such a question may be raised before French administration (Article 22 of the law) or before the administrative judge (Article 54 of the law) (depending on the applicable procedure).
Inspired by the historical roman institution (rescrit du préteur), this new legal institution is additional to the already existing ones, such as the question préalable (for administrative law), the question préjudicielle (for EU law), the question prioritaire de constitutionnalité (QPC) (for constitutional law) or the tax ruling (for tax law).
The mechanism underpinning the procedure is the same: raise a question on the application or construction of the law. The addressee is however different: judge for a question préalable, a question préjudicielle or a QPC, administration for the tax ruling and administration or judge for the new rulings. The experiment will last for a period of three years starting the date of publication of a specific decree.
These procedures aim at improving legal safety (even if it can be alleged that the drawback of the multiplication of these rulings may lengthen the process).
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).
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
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
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