French Legal Briefing – France Continues to Adopt the Highest International Standards to Attract Investors

February 21, 2017

Despite a net fall in the global M&A activity in 2016 (the total deal value amounted last year to US$ 3.7tn, down 16 % compared to 2015[1]), French M&A market has been supported by a few domestic deals while the level of in-bound investments has dramatically dropped. Another distinctive feature of the 2016 M&A market, both globally and in France, has been an exceptional activity during the last quarter suggesting that French M&A market may be poised to accelerate and gain a new momentum in 2017.

Several significant factors of uncertainty do remain, including in relation to the Brexit and Trump’s victory. In addition, the as-of-now unpredictable outcome of major elections to come later this year in the Netherlands, France and Germany may trigger political and economic disturbances. Combined, they may hamper 2017 perspectives for the EU and France.

In this uncertain environment, businesses will need to be stronger and over-performing. Recent surveys[2] show that companies are, thus, likely, first, to refocus on their core businesses (leading to an increase of divestitures). Second, they will be required to remain alert to potential technology shifts. As in 2016, digital and technology will remain in fashion and should surge as top strategic drivers of M&A activity this year.

In this context, France has continued to adopt in 2016 the highest legal international standards whether it be in terms of governance, by enacting the say-on-pay, or fight against corruption by modernizing and strengthening its judicial arsenal which will now have an extra-territorial reach. It has also chosen to be at the forefront of the protection regarding personal data.

To assist French and foreign investors navigating through these important recent changes, the Paris office of Gibson, Dunn & Crutcher LLP is pleased to provide this French legal briefing.

Executive Summary:

• Anti-corruption Compliance. The "Sapin 2 Law" adopted on December 9, 2016, broadly inspired by the US and UK regimes, intends to bring France to the highest standards in the areas of transparency and anti-corruption, setting up, among other things, new obligations for companies to establish adequate procedures to prevent and detect corruption and influence peddling.
• Corporate Governance / Directors’ Compensation: One of the other key provisions of the "Sapin 2 Law" provides for a binding say-on-pay for French listed companies, which will have an impact as from this year’s annual general meetings.
• Equity Incentive Plans: The tax and social regime of French equity-based incentive plans has gone through its 3rd reform since 2012, in a less favorable direction this time, including for foreign issuers. However, the negative effects of this reform may not be felt immediately as future grants may still benefit from the previous regime set up by the Macron Law provided that they are made pursuant to an authorization granted by a shareholders’ resolution adopted prior to January 1, 2017.
• Data Protection: The Law for a Digital Republic adopted on October 7, 2016 intends to strengthen the protection of personal data and anticipate the forthcoming entry into force of the European Union Regulation 2016/679 adopted on April 27, 2016.

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1.   Anti-corruption Compliance: The announcement of a more robust era in French anti-corruption enforcement and compliance expectations.

On December 9, 2016, a new major statute on transparency, the fight against corruption and the modernization of the economy (better known as the "Sapin 2 Law") was enacted. The Sapin 2 Law, mainly inspired by the US and UK regimes, intends to bring France to the highest standards in the areas of transparency and anti-corruption. 

Creation of a French Anti-Corruption Agency. The French Anti-Corruption Agency will replace the Central Service for the prevention of corruption which did not have any investigation or sanction powers. The new agency is the result of the French government’s aspiration to set up an independent and fully effective body (somewhat equivalent to the French financial markets authority (the Autorité des Marchés Financiers) or the French authority for the supervision of prudential insurance and reinsurance (the Autorité de Contrôle Prudentiel et de Résolution)). The Agency will include an Enforcement Commission ("commission des sanctions") vested with disciplinary powers and the ability to fine non-compliances (which are in addition to the existing criminal sanctions). One of the initial priorities of the Agency will be to assist French corporations in implementing the new arsenal by releasing recommendations.

Obligation to establish adequate procedures to prevent and detect corruption and influence peddling.

Which corporations are concerned? French companies with at least 500 employees and an annual turnover exceeding €100 million (such threshold being assessed on a consolidated basis with respect to group of companies the parent company of which is headquartered in France). Anti-corruption measures will have to be implemented in such companies and in their subsidiaries (even located outside France).

What key measures will be implemented? Besides the introduction of a full set of anti-corruption procedures such as codes of conduct, training program for employees, accounting control systems or clients risk-based assessment procedures, the Sapin 2 Law also introduces two innovative measures:

• A risk mapping of external solicitations for corruption purposes to which the company may be exposed: this risk mapping will be key. It will need to be adapted to the industries and countries in which the corporation operates as well as to its clients, suppliers and intermediaries. It will need to be regularly monitored to take into account changes in business and risks. Therefore, corporations will be likely required to (a) identify actual and potential risks, (b) assess the risks, (c) elaborate appropriate measures to prevent and eradicate the identified risks and finally (d) implement those specific measures;
• Appropriate internal control procedures will need to be applied. These will likely require implementation of three types of processes (i) controlling operations, (ii) risks monitoring and managing and (iii) documenting internal controls to ensure compliance traceability.

  Failure to implement the corruption prevention plan may entail the liability of both the corporations and their legal representatives. Corporations may be fined up to EUR 1 million and individuals up to EUR 200,000. The Sapin 2 Law is somewhat similar to the United Kingdom Bribery Act (and also the Swiss regime) pursuant to which corporations may be sanctioned if they have not taken sufficient measures to prevent bribery (failure of commercial organizations to prevent bribery).

Reinforcement of whistleblowing protection. The new statute strengthens the protection offered to whistleblowers by guaranteeing their confidentiality and offering an increased safeguard against retaliation. It extends whistleblowing protection to situations where the whistleblower has reported "a serious threat or damage to the public interest" and not only a violation of applicable laws. However, despite what was first enacted by the Sapin 2 Law, no financial assistance to the whistleblower to cover his/her proceedings costs will be provided as the French Constitutional Council considered this provision as unconstitutional.

New extraterritorial reach of French anticorruption laws. The Sapin 2 Law considerably extends the jurisdiction of French criminal courts. It enables them to prosecute acts of corruption committed abroad by anyone who "carries on its business or a part of its business in France". This will need to be taken into account by foreign companies which conduct even part only of their business in France.

Adoption of a judicial agreement process. The Sapin 2 Law introduces a new legal agreement mechanism, named public interest judicial agreement (convention judiciaire d’intérêt public) and resembling the DPA process in the United States. Under such mechanism, so long as prosecution has not been set in motion, the Public Prosecutor may offer companies accused of corruption, influence peddling or laundering of tax fraud proceeds to enter into a judicial agreement imposing payment of a financial penalty up to a maximum of 30% of the company’s average turnover over the past three years and/or the implementation of a three-year maximum anti-corruption compliance program supervised by the French Anti-corruption Agency. In addition, the agreement shall provide for indemnification of identified victims. If validated by the court following a public hearing, the judicial agreement is published on the French Anti-corruption Agency website. However, there is no recognition of guilt from the companies concerned and the judicial agreement is not recorded in the companies’ criminal record.

In anticipation of the French Anti-Corruption Agency’s expectations, companies will have to implement adequate procedures (particularly internal control and risk-mapping) which will be broadly inspired by the US and UK regimes, as well as the best risk management practices already implemented by French insurance and banking institutions.

2.   Corporate Governance / Directors’ compensation: A new French binding say-on-pay

Scope of the say on pay

The say-on-pay process will concern compensation granted to the chairman of the board of directors, CEO or deputy CEO, members of the executive board ("Directoire") or members of the supervisory board ("Conseil de Surveillance") of a French société anonyme listed on a regulated market (Euronext). Surprisingly, the new scheme does not apply to the members of the board of directors ("Conseil d’administration") but this is likely due to the fact that the determination of the amount of attendance fees to be received by board members already lies within the power of the shareholders. No say-on-pay process is required with respect to the compensation received by the managers pursuant to an employment agreement.

Two votes by the shareholders

• Prior vote. The principles and criteria for fixing, allocating and awarding the total compensation (including fixed, variable or exceptional compensation) to be paid to the managers shall be approved by the shareholders at each annual general meeting. A new vote is required (i) in case of any modification of such compensation policy and (ii) at each renewal of the managers’ office. In case of a negative vote of the shareholders, the principles and criteria approved for the preceding fiscal year shall continue to apply. If no principle or criteria was previously approved or in the absence of prior compensation paid to the managers, compensation shall be determined "in accordance with the existing practices of the company". Compensation committees of French listed companies will need to adopt such practices as soon as possible in view of the next ordinary general meeting of 2017, in the absence thereof.
• Subsequent vote. The shareholders will subsequently have to approve the total amount of compensation granted to the executive for the preceding year. In case of a negative vote of the shareholders, the fixed portion of the compensation will not be at risk but the variable and exceptional remunerations could not be paid. One should note that a subsequent vote is not required for the members of the supervisory board (except for its chairman).

Practical considerations

The provisions regarding the prior vote will apply from the annual general meeting for the first fiscal year ended after the promulgation of the law (December 9, 2016). Regarding the subsequent vote, the rule will apply from the end of the fiscal year following the first fiscal year ended after the promulgation of the law.

In other words, companies which ended their fiscal year on December 31, 2016 will have to make a prior vote from their ordinary general meeting of 2017 and a subsequent vote in 2018.

This new statute intends to reassure investors in French companies by preventing the allocation of abnormal compensation. However, this new statute could lead to emphasis being placed on fixed compensation (guaranteed by the prior vote) rather than variable compensation. This would go against established corporate governance principles which recommend to index officers’ compensation on the company’s financial performance by using variable and exceptional remunerations. It is likely that companies will have, during the next annual general meeting, to determine a level of fixed remuneration that will ensure the presence of the officers for the next years.   

Depending on the level of constraint imposed by the shareholders when implementing this new say-on-pay process, the management of listed companies may also be keen to find out ways to circumvent it. To this end, they may try to use foreign companies to compensate their group officers. If that happened, this would obviously not improve transparency.

The conditions of this new binding say-on-pay will be soon specified in a decree. However, listed companies should already take into consideration the "Sapin 2 Law" while organizing their new strategy and financial communication.

3.   Equity Incentive Plans: Free shares allocation – a step backwards the negative effects of which may be delayed.

On December 29, 2016, the French Parliament adopted the Finance Act for 2017 (the "Finance Act"), which partially amends the legal and tax regimes of free shares allocation. The free shares allocation legal framework had been substantially improved by the so-called "Macron Law" enacted on August 6, 2015, with a view to improve the attractiveness of French equity-based incentive plans for employees.

The new regime resulting from the Finance Act will apply to awards authorized by a resolution of the extraordinary general meeting of the shareholders passed on or after January 1, 2017 only. Consequently, new awards of free shares that have been authorized by a shareholders’ resolution passed between August 8, 2015 and December 31, 2016 (included) will still benefit from the favorable regime provided by the Macron Law, regardless of the date on which such awards will effectively be granted. Therefore, the negative effects of the reform may be delayed for issuers using multiannual stock inventive plans, as is commonly the case for foreign issuers, so long as they have been adopted prior to or on December 31, 2016 (but as from August 8, 2015).

Vesting and holding periods

The provisions related to the vesting and holding periods remain unchanged. Therefore, free shares can still vest 1 year after their grant date, provided that the aggregate vesting and holding periods are at least equal to 2 years.

Increase of employers’ social security contribution

Under the Finance Act, the employer social security contribution rate is increased from 20% to 30%, bringing it back to the former rate into force before passing of the Macron Law. The contribution remains due within the month following the date of the effective acquisition of the shares by the beneficiary. The employer contribution applying to small and medium-sized companies that have not distributed any dividend in the past five years shall remain unchanged at the rate of 20%.

An increased taxation for the portion of the acquisition gain exceeding EUR 300,000

Contrary to the Macron Law, which provided for the taxation of all of the acquisition gain realized by the beneficiary as a capital gain, the 2017 Finance Act states that only the portion of such profit not exceeding EUR 300,000 per year will be treated as capital gain. The fraction of the acquisition gain exceeding EUR 300,000 per year will be taxed as employment income, losing the benefit of the 50% tax base reduction when the shares are held for at least 2 years and the 65% tax base reduction when the shares are held for more than 8 years.

Accordingly, the 8% social security contribution applicable to activities income will apply to the portion of the annual acquisition profit in excess of EUR 300,000, instead of the 15.5% rate applicable to capital gains. The 15.5% social security withholding remains however applicable to any acquisition profit (or portion thereof) up to EUR 300,000.

The 10% employee social security contribution that had been fully abolished by the Macron Law is partially reinstated for the part of the annual acquisition gain in excess of EUR 300,000.

Summary table of the major changes to the free shares allocation legal and tax regimes

(1) Based on marginal rates.
(2) if shares held at least for 2 years and less than 8 years after vesting

4.   Data Protection – The Law for a Digital Republic: anticipating the EU Regulation on data protection?

The French Data Protection Act adopted on January 6, 1978 (the "French Data Protection Act") was amended twice in 2016. First, on October 7, 2016, when the French Parliament adopted the Law for a Digital Republic with the aim to create new rights for citizens in the digital environment. Amongst other rights, the Law for a Digital Republic intends to strengthen the protection of personal data.

Secondly, on October 12, 2016 with the adoption of the Law for the modernization of justice.

Interestingly, some provisions of these pieces of legislation anticipate the European Union Regulation 2016/679 adopted on April 27, 2016 relating to the protection of personal data and which will be applicable only as of May 25, 2018.

Reinforcement of data subjects’ rights

First of all, the Law for a Digital Republic creates specific provisions in the French Data Protection Act extending the right to be forgotten for minors. Indeed, the general right for data subjects to have their data deleted applies only where the data is "inaccurate, incomplete, equivocal, outdated or which processing is forbidden." According to the new provisions arising out of the Law for a Digital Republic, any individual can ask for the deletion of his/her data where such data was collected when he/she was still minor without having to demonstrate that he/she has a legitimate interest. Companies receiving such requests would be due to delete the data without undue delay.

If the right mentioned above should have limited impact on our clients’ direct obligations, two other provisions of the Law for a Digital Republic should be considered closely as they need to be taken into account directly in companies’ data protection compliance measures.

Companies are indeed expected to enable data subjects to exercise their rights directly online wherever possible. In practice, this means that all companies should create a specific email address dedicated to the handling of data subjects’ requests but also need to make sure that it creates a mechanism to ensure that such requests are actually handled.

With always the idea to enable data subjects to master the use of their personal data, the French legislator also provides for additional obligations of information for companies processing personal data. As a result of this provision, companies are now expected to inform data subjects about (i) the data retention period of the data collected and processed and (ii) the right of data subjects to give instructions in relation to the processing of their personal data after their death. Such information shall be provided as part of the information notice which companies were already required to provide under the French Data Protection Act.

Therefore, companies shall make sure that their existing and future information notices are compliant with these new provisions.

The Law for a Digital Republic also granted data subjects with the right to data portability (i.e. the right to recover for free all the personal data and files). At this stage, companies shall therefore anticipate this new obligation by starting to consider the procedure they should implement to ensure that this right of portability is actually applied and what would be the consequences from a business point of view. However, this should be only initial thoughts since a decree shall further detail this upcoming obligations for companies.

Finally, the Law for the modernization of justice has extended the right to class action in particular regarding the right for data subjects to bring a class action in case of data breach. Data protection litigation may therefore increase considerably – this will need to be taken into consideration by companies in their risks assessment.

Strengthening of the CNIL enforcement authority

According to the Law for a Digital Republic, the French data protection authority (the "CNIL") can now impose to companies a maximum fine of 3 million euros while it was previously limited to 150,000 euros. The amount of the penalty should be proportionate to the seriousness of the breach committed and the CNIL will take into consideration notably the intentional nature of the infringement, the measures taken by the data controller to mitigate the damage suffered by the data subjects and the degree of cooperation with the Commission to remedy the infringement.

The Law for a Digital Republic shall therefore be considered by companies as a first step toward the EU Regulation 2016/679 which reinforces even further companies’ obligations and on which we will comment in future alerts.

[1]      Source: Thomson Reuters.

[2]      Notably, Deloitte’s M&A trends report 2016.