Jerôme Kerviel trader’s case: 19 December 2018

On 19 December 2018, the French Court of Appeal of Paris (RG 16/09186) stated that the dismissal of Jerôme Kerviel, French trader from SGCIB (Société Générale Corporate and Investment Banking), the investment bank of Société Générale is fair (on the basis of a gross negligence – faute grave).

This overrules the decision (jugement) of the Conseil de Prud’hommes (French jurisdiction dedicated to labour law) dated 7 June 2016, whereby the dismissal was considered unfair (i.e. without a material and true reason) (cause réelle et sérieuse). In this first instance, Jerôme Kerviel obtained not only €100,000 because of the unfair dismissal but also (i) €20,000 due to the vexatious nature of the dismissal, (ii) €18,083.32 as regards to compensation in lieu of notice (indemnité compensatrice de préavis), (iii) €1,808.33 in relation to unpaid vacation pay (congés payés), (iv) €13,609.23 in connection with conventional severance pay (indemnité conventionnelle de licenciement) and (v) €300,000 as to the unpaid bonus for 2007 (plus €2,000 in relation to article 700 of the French Code de procédure civile).

The ratio decidendi of the Court of Appeal of Paris is based on the characterization of the conduct of Jérôme Kerviel during his contract. The blames in the letter of dismissal are considered grounded by the Court of Appeal of Paris (even if previously been ruled purged due to the knowledge of them by the employer). In particular, the blame considered crucial by the Court is the taking of directional positions (i.e. at a highest analyzed value), while at the same time going over authorization (€50 billion for an authorization of €125 million for the whole desk only).

The Court of Appeal of Paris states however that the wilful misconduct (faute intentionnelle) is not characterized: Jérôme Kerviel did not mean to cause the loss of the estimated circa €5 billion. The position of the Court is in line with the statements of Jérôme Kerviel who considered himself as being part of a spur gear (as mentioned in his book “L’engrenage, mémoire d’un trader”). This decision gives a warning to the traders: taking inconsiderate risks could lead to a dismissal (with maybe prison), and at the same time a balance: a bank which loosens internal regulations (or admits implicitly / explicitly / or maybe intentionally some inappropriate derogations) cannot fully blame a trader.

The ratio decidendi of the Court of Appeal of Paris is also grounded on the force of res judicata (for res judicata pro veritate habetur – autorité de la chose jugée). This means that, once the decision is final, such a decision is considered as representing the judicial truth. Jérôme Kerviel was indeed convicted with offences (délits pénaux) by a distinct decision of the French Cour de cassation dated 19 March 2014 (Ch. Crim., pourvoi n°12-87416). In this respect, the Court of Appeal of Paris qualifies the force res judicata principle, as absolute. As a consequence, other civil French pending decisions are to be linked (and bound) by the decision of the French Cour de cassation. In this perspective, the conviction of the trader by the French Cour de cassation influes on, and binds the decision of the Court of Appeal of Paris, ruling the labor decision.

It should however be considered that the absolute feature of the force res judicata, as stated in the ruling of the Court of Appeal of Paris, should be subject to challenge. As such, since any legal concept, even considered as absolute, are, in a democratic country, subject to other legal concepts tempering (within the meaning of qualifying) such absolute rights.

It should also be considered that this characterization by the Court of Appeal of Paris is more in line with what would be acceptable in a context where the bank is considered as being itself in default, since being itself convicted by the French banking regulator – Commission Bancaire for the lack of control and monitoring of the trading systems.

In light of this, the Court of Appeal of Versailles ruled on 23 September 2016 (room 9 – RG: 14/01570) (ruling by a review of the case decided by the French Cour de Cassation dated 19 March 2014 (Ch. Crim., pourvoi n°12-87416)) that Jérôme Kerviel is only partially responsible for the prejudice caused to the Société Générale and convicts him to pay €1 million only (instead of circa €5 billion).

Up to date 19 December 2018

Corporate law (exclusion of partners)

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

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

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