February 24, 2016
2015 has been an extraordinary year for M&A on a global scale. Despite a 3.2% decrease in deal volume, total deal value reached US$4.3tn, an astounding 30.5% increase from last year. Sixty-nine M&A deals surpassed US$10bn in worth, designating 2015 the year of mega-deals. This high valuation trend is expected to continue into 2016; however, a number of political and economic uncertainties may also trickle into the New Year, most notably the Chinese recession, EU political issues, and the hike in US interest rates.
Though not quite as unequivocally successful in terms of year-to-year comparison, M&A activity in France maintained the recovery trend from the 2012 low, even though a vast majority of deals were small to mid-size transactions. By deal count, the most active acquirer was the US, with 59 deals worth EUR11.8bn, including XPO Logistics US$3.54bn acquisition of Norbert Dentressangle in the transportation sector. Outbound deal activity (US$48.4bn, 358 deals) maintained 2014’s momentum. French investors mainly targeted US businesses, securing 52 deals worth US$23.8bn, which represents 50.2% of the total value invested abroad.
In 2016, the allure of France is expected to grow as the effects of the legislative measures crafted at the end of 2015 will begin to manifest. These laws were designed to not only buffer the volatility of the global marketplace, but also stimulate a national ethos of productivity, dynamism, and entrepreneurship. Most significant is the Macron Act, which is founded on the belief that innovation and freedom to take risks are keys to a start-up-friendly milieu and, ipso facto, to GDP growth in France. The new Act simplifies the French labor and commercial codes, dismantles overbearing legal and tax regulations in various sectors, and generally removes the barriers that have hindered French companies ability to compete in the global marketplace. The Macron Act also includes provisions to attract foreign investors and enhance the ease of doing business ranking in France. Furthermore, the depreciation of the Euro will continue to attract investors from the US and beyond.
Looking ahead, businesses will need to pay attention to political events that may influence their industries. Elections will concurrently take place in France, the US and Germany. On one hand, election cycles often slow legislative action. This means that legislation limiting tax benefits or reinstalling economic and legal restrictions will probably not be put into force in the near future. On the other hand, the election cycle means that M&A transactions in politically sensitive sectors such as digital, energy, telecoms, pharmaceuticals and health care may face more scrutiny, media attention, and requests for information sharing. Therefore, investors will need to consider whether proposed transactions will be compatible with the larger policy objectives at play in the relevant jurisdictions.
The Paris office of Gibson Dunn & Crutcher is pleased to present this brief overview of 2015’s major legal changes and relevant world developments, as well as what to expect in the New Year. Whether you’re a member of a French company or a potential foreign investor, we hope you find this newsletter useful when considering an operation in France.
Please note that French legal concepts are translated into English for information only and not as legal advice. The concepts expressed in English may not exactly reflect or correspond to similar concepts existing under the laws of the jurisdictions of the readers.
5. Real Estate
8. Public Law
1.1 Corporate, M&A, Private Equity – New legal and tax regime improvements applicable free shares awards
On August 6, 2015, Parliament adopted a bill designed to promote growth, activity and equal opportunity in France. This legislation, known as the "Macron Act," called for a number of amendments to the legal and tax regimes of free share allocations in order to improve the attractiveness of French equity-based incentive plans for employees and corporate officers. However, the provisions of the Macron Act, described below, shall only apply to free shares, the granting of which has been approved by a decision of the extraordinary shareholders’ meeting held after August 7, 2015.
Shortened vesting and holding periods. Under the former legal regime, allocations of free shares were subjected to minimum vesting and holding periods in order for the employer and the beneficiaries to benefit from the preferential tax and social treatment. In fact, both the vesting period – at the expiration of which the free shares are acquired by their beneficiaries – and the subsequent holding period – during which the free-share beneficiaries having acquired said shares are unable to dispose of them – had to last for a minimum of two years amounting to a minimum aggregate period of four years. Under the new Macron Act regime, the vesting period has been reduced to a minimum one-year period and the holding period has become optional, provided that the cumulative duration of both periods must be at least two years.
Employer and Employee social security contributions. The employer social security contribution rate has been reduced from 30% to 20% and is only due in the month following the date of the beneficiary’s acquisition. The positive effect of this new rule is that the employer social contribution will only be due if the beneficiary effectively acquires the free shares. The correlative drawback is that the cost of the awards for the employer will be uncertain at the date of the grant since the employer social contribution will be assessed based on the market value of the shares upon vesting. Moreover, the due date for the employer social security contribution has changed from the award date to the vesting date.
The Macron Act has also granted free share allocation plans’ beneficiaries with an exemption from the 10% employee social security contribution. However this exemption is compensated by an increase of the social security withholding due by the employee on the acquisition gain (see below).
Taxation on acquisition profit. The acquisition profit made by the free share allocation beneficiary is now taxed as a capital gain (as opposed to a taxation on the salaries, wages and allowances) which offers the advantage of giving rise to tax reliefs based on the free share holding period, specifically, a 50% tax base reduction if the shares are held for at least 2 years, and a 65% tax base reduction if the shares are held for more than 8 years. The acquisition profit will now accordingly fall under a 15.5% social security withholding (instead of 8% previously).
New "Macron Act" Regime
Employer social contribution
30%due on market value of free shares on the grant date
Employee social contribution
15.5% social security contributions due on acquisition gain
Employee Income tax
Acquisition profit subject to income tax (impôt sur le revenu) (at rates of up to 45%)
Acquisition profit subject to income tax (at the applicable progressive rate) with a 50% tax base reduction when the shares are held for at least 2 years and a 65% tax base reduction when the shares are held for more than 8 years
Total cost for employees (marginal rates)
Easing of the one-to-five ratio rule. When free-share award plans benefiting each and every company employees represent more than 10% of the company share capital (or 15% of the share capital of small and medium sized companies, provided such a cap has been included in their by-laws) the maximum ratio rule applies (i.e., the difference between the number of awarded shares to each individual employee could not exceed a 1 to 5 ratio).
Foreign company free-share awards. The French free-share award regime (and aforementioned improvements brought by the Macron Act) applies to free-shares awarded by foreign companies to French tax residents. However, as for French groups, future awards of free shares by foreign companies to French tax residents can be subject to the improved tax and social security treatment established by the Macron Act only if such new awards have been authorized by a resolution of the extraordinary general meeting of the shareholders of the foreign issuer passed on or after August 8, 2015.
1.2 Corporate, M&A, Private Equity – Applicability of the ne bis in idem principle to administrative and criminal violations involving identical facts under French law: draft bill concerning financial crimes’ prosecution
See also our client alert published on May 19, 2015: http://www.gibsondunn.com/publications/Pages/Double-Prosecution-System-Abandoned-for-French-Market-Abuse-Related-Offenses.aspx.
Following a recent landmark Conseil Constitutionnel (the French Constitutional Council) decision – in line with the European Court of Human Rights’ (the "ECHR") jurisprudence condemning double prosecution systems with regards to market abuse offences – a draft bill aiming to reform the financial crime prosecution regime was submitted to the French Senate on October 7, 2015.
In fact, pursuant to the above-mentioned European and national jurisprudential decisions, an alleged offender may no longer be prosecuted and condemned twice for substantially the same market abuse crime by both the Autorité des marchés financiers’ (French financial markets authority) Commission des sanctions (Enforcement Committee) and a French criminal court. The French legislature has thus been given an interim period expiring on September 1, 2016, to draft and adopt new rules which will likely reform the French market abuse regime and sanctions profoundly.
This bill proposal – consistent with ideas previously suggested by the Autorité des marchés financiers’ (French financial markets authority) – essentially provides for the allocation of market abuse litigations between authorities following a severity criterion and excludes the proposal (deemed to be too complicated and excessively ambitious) to establish a specific judicial court dedicated to financial crimes.
End of the market abuse double-prosecution system. The draft bill applies the principles deriving from the above-mentioned Conseil Constitutionnel decision by formally enacting the prohibition, with respect to market abuse offences, to prosecute and condemn the same person twice, for the same facts, by both the Autorité des marchés financiers’ Commission des sanctions and a French criminal court.
Allocation of market-abuse prosecutions between the Autorité des marchés financiers and French criminal courts. The bill provides for a market abuse offence prosecution allocation system according to which criminal courts would be entrusted with the power to prosecute and punish all offences deemed most serious and deliberately committed. The bill thus also lays down the framework of a case-allocation cooperation process between the Autorité des marchés financiers and the Parquet national financier (French National Financial Prosecution Office). In the event of a case-allocation dispute between the Autorité des marchés financiers and the Parquet national financier, the bill includes a deadlock mechanism according to which all such conflicts would be settled by an external, representative and neutral body composed of – in equal proportions – Cour de Cassation (France’s highest court in commercial, civil and criminal matters) and Conseil d’Etat (France’s highest court in public law matters) judges. This body would be judicial in nature, its rulings would be final, meaning neither court would have the option to appeal. This last element could prove to be controversial.
Autorité des marchés financiers’ and Parquet national financier’s strengthened investigation cooperation. Furthermore, the proposed bill suggests strengthening the cooperation between the Autorité des marchés financiers and the Parquet national financier at the investigation stage with two provisions: a reciprocal and systematic exchange of information on ongoing investigations (before initiating proceedings) and the possibility for each of the investigative authorities to request expertise from the other.
Cap raised for market abuse criminal sanctions. The bill would intensify criminal sanctions (which are currently deemed insufficiently dissuasive) thereby increasing their dissuasive power. Maximum prison sentences for insider trading offences would increase from two to five years, while other market abuse offenses would increase from one to three years. Also, criminal courts would be entitled to impose financial penalties up to EUR 15 million upon individuals, and, up to 15% of the annual revenue for corporate entities. The above sanctions would be more severe when market abuse offences are committed by an organized group.
Cap raised for market abuse Autorité des marches financiers and Autorité de contrôle prudentiel (French Prudential Supervisory Authority) induced sanctions. The bill has uniformly proposed a new cap based on a percentage of the incriminated company’s (or group’s) turnover, which shall be added to the existing and unchanged absolute value cap of 100 million euros. Set at 15% of the turnover, this cap would enable the enforcement committees of both the Autorité des marches financiers and the Autorité de contrôle prudentiel to prosecute companies, for which the 100 million-limit is quite low, in a notably more severe and dissuasive manner
1.3 Corporate, M&A, Private Equity – French financial markets authority position-recommendation on the disposal and acquisition of major assets by French listed issuers
See also our client alert published on July 29, 2015: http://www.gibsondunn.com/publications/Pages/French-Financial-Markets-Authority-Position–Disposal–Acquisition-of-Major-Assets-by-French-Listed-Issuers.aspx.
The Autorité des marchés financiers (French financial markets authority) (the "AMF") released new rules advocating prior shareholder consultation with respect to major asset disposals by French listed issuers. These rules also clarify the regulator’s expectations in terms of market disclosure when major disposals or acquisitions are envisaged.
1.4 Corporate, M&A, Private Equity – Public consultation on the possibility for an investment fund to originate loans
The Autorité des marchés financiers (French financial markets authority) (the "AMF") has recently issued a public consultation to gather opinions of all directly interested parties about the possibility for French investment funds to grant loans to certain companies.
Following the entry into force of the European Regulation n°2015/760 on European Long-Term Investment Funds ("ELTIF") which authorizes European long-term funds to grant loans under restrictive conditions, the AMF is considering the possibility of adapting the French rules to allow French funds to grant loans in order to ensure investors protection and competitiveness of the Paris financial market.
In French law, a banking monopoly exemption (provided by article L.511-6 of the Monetary and Financial Code for UCITS and some AIF), allows certain funds to acquire unmatured loans. However, this exemption is not wide enough to authorize the funds to lend money.
The AMF’s consideration of the possibility for funds to lend money is mainly based on the ELTIF Regulation and on the regulatory provisions applicable to insurance companies to ensure uniform treatment between lenders within a secure legal framework.
However, AMF’s proposals contain various restrictions:
(i) Restrictions on funds: specialized professional funds, securitization vehicles, and professional private equity investment funds would be the only funds that could grant loans. These funds should be closed to redemptions or should limit redemptions to previously limited part of assets defined in a prospectus;
(ii) Restrictions on loans: funds granting loans would not be allowed to use leverage, short-selling, lending of financial securities or derivatives except for hedging purposes;
(iii) Restrictions on eligible companies for loans: loans would be granted only to non-financial companies and for a maturity greater than two years and less than the life of the fund. Loans should not be granted to individuals or be used for the financing of a financial company (insurance, credit institution, or other financing company) whose purpose is not to finance a commercial, industrial, agricultural, craft, real estate company nor a physical asset. However, an exception is proposed to allow lending through a holding company that would invest in a commercial company or physical assets; and
(iv) Restrictions applicable to management companies which want to grant loans for their funds: management companies wishing to grant loans would need to be authorized in accordance with directive 2011/61/EU on Alternative Investment Fund Managers (the "AIFM" Directive) and have an authorized activity program to manage loans.
The AMF has not yet published the results of this public consultation and the potential date of this publication is unknown at this time.
1.5 Corporate, M&A, Private Equity – Simplification of French Company Law
New Order n° 2015-1127 dated September 10, 2015 simplifies the legal regime of French non-listed sociétés anonymes.
As of September 12, 2015, the minimum number of shareholders required to incorporate a new société anonyme has been reduced from seven to two. This simplification has been expected for a long time, since the previous rule had no particular rationale.
The 7-shareholder rule is still in force for sociétés anonymes the shares of which are listed on a stock exchange.
2.1 Capital Markets and Financial Regulation – Revised Transparency Directive: transposition completed
The Law No. 2014-1662 dated December 30, 2014 (the "Law") transposed certain provisions of Directive No. 2013/50/EU dated October 22, 2013 which modified notably the Directive No. 2004/109/EC (the "Revised Transparency Directive") and empowered the Government to take the legislative measures necessary to complete the transposition of the Revised Transparency Directive.
These legislative measures mainly regard (i) the issuers’ financial information, (ii) the definition of Home Member State and (iii) the transparency of notifications and disclosure of major shareholdings.
Changes to Issuers’ Financial Information
The French monetary and financial code and the General Regulation of the Autorité des marchés financiers (French financial markets authority) (the "AMF") have been amended to introduce the following changes regarding the issuers’ financial information:
Clarification of the Definition of Home Member State
Article L. 451-1-2 of the French monetary and financial code and Article 222-1 of the General Regulation of the AMF have been modified to clarify the definition of Home Member State ("HMS"). Designation of the HMS is essential as it determines the applicable financial reporting obligations on an issuer. The main modifications are as follows:
Strengthening of Crossing Thresholds Disclosures
Following highly publicized precedents of "creeping" acquisitions of share capital in listed companies via equity swaps and total return swaps, French legislation had been amended in 2012 to include cash-settled derivatives in the calculation of major shareholding disclosures, i.e., before the revision of the Transparency Directive in which occurred in 2013. Consequently, transposition of the Revised Transparency Directive under French law has been limited.
Despite that, Ordinance No. 2015-1576 (the "Ordinance"), dated December 3, 2015, has finalized the transposition under French law of the Revised Transparency Directive and of the EC Delegated Regulation No. 2015/761 dated December 17, 2014, regarding disclosure of major shareholdings, as follows:
2.2 Capital Markets and Financial Regulation – Transposition of the Solvency II Directive under French Law
The Ordinance No. 2015-378 (the "Ordinance") dated April 2, 2015, as completed by the Decree No. 2015-513, dated May 7, 2015, transposed under French law, the Directive No. 2009/138/EC (the "Solvency II Directive") dated November 25, 2009, as amended by Directive No. 2014/51/EU (the so called "Omnibus 2 Directive"), and therefore modified significantly French insurance and reinsurance regulations.
These new rules entered into force on January 1, 2016.
These regulations are supplemented by the Delegated Regulation No. 2015/35/EU, dated October 10, 2014 which are directly applicable under French law.
In addition, the European Insurance and Occupational Pensions Authority (the "EIOPA") proposed guidelines which shall be adopted by each Member State, subject to a comply-or-explain process, aiming to ensure consistent implementation and cooperation between member states. The French supervisory authority (Autorité de contrôle prudentiel et de résolution) (the "ACPR") adopted the EIOPA’s guidelines on December 17, 2015.
The Solvency II rules only apply to insurance and reinsurance undertakings which meet size, activity and affiliation criteria. In addition, Solvency II regulations described below are adjusted when they apply to insurance and reinsurance undertakings which are part of an insurance group.
Although Solvency II is an EU regulatory initiative, it should not be viewed as a regulatory framework affecting only European companies. First, it has direct implications for U.S.-based insurers that are subsidiaries of a European parent or for U.S. parent companies that own an EU insurance company. Second, it has already resulted in U.S. insurance companies facing an indirect impact from changes in market competition or rating agencies’ expectations.
Solvency II framework, like Basel II framework, is divided into 3 pillars:
Pillar 1: quantitative requirements
Pillar 1 gathers rules to value assets and liabilities, to calculate capital requirements and to identify eligible own funds to cover those requirements. Solvency II regulations stress the importance for capital requirements to target the specific risks borne by insurers and reinsurers. If the principle is simple, the implementation of the Solvency II regulations involves technical complexity.
Among the salient points, it can be noticed that assets and liabilities are valued at their fair market value, i.e. at the amount for which they could be exchanged (for assets) or transferred/settled (for liabilities) between knowledgeable willing parties in an arm’s length transaction.
The own funds are composed of basic own funds (including excess of assets over liabilities) and ancillary own funds (including letters of credit or unpaid share capital) which are classified into 3 tiers. The tier determines the capacity of the insurer or reinsurer to comply with the capital requirements including the Minimum Capital Requirement (i.e., minimum level of eligible own funds below which the amount of financial resources should not fall) and the Solvency Capital Requirement (i.e., the risk-based level of eligible own funds which enables an insurance or reinsurance undertaking to absorb significant losses and to limit its risk of failure to 0.5%).
Pillar 2: qualitative requirements (risk management and supervision)
Pillar 2 details requirements for risk management, governance, and supervisory process with competent authorities. Solvency II regulations stress the importance of implementing an effective system of governance which provides for sound and prudent management of the business, including effective risk-management and qualitative information reporting systems.
Among the ACPR’s general requirements (based on the EIOPA’s guidelines) with respect to governance, the following can be noted:
Solvency II regulations also stress the importance for any (re-)insurance undertaking to implement a risk management system and a forward looking assessment of its own risks (based on the Own Risk and Solvency Assessment principles, known as "ORSA").
Pillar 3: Public disclosure and regulatory reporting
Pillar 3 aims at increasing the levels of transparency to the supervisory authorities and the public.
Insurance and reinsurance undertaking shall report to the ACPR essential information on their solvency and financial condition which shall also be disclosed to the public (SFCR - Solvency and Financial Conditions Report), their annual and quarterly quantitative reports, plus a regular report to their supervisory authority (RSR – Regular Supervisory Report) and the ORSA.
The ACPR shall provide a yearly report to the EIOPA on the (re-)insurance undertakings it controls.
3.1 Insolvency Laws; Restructuring – Changes brought by the Macron Act
The recent statute n°2015-990 (the Macron Act), dated August 6, 2015, designed to promote economic growth, activity and equal opportunity (loi pour la croissance, l’activité et l’égalité des chances économiques) brought some changes to French insolvency law. Among them, (i) the specialization of certain commercial tribunals in dealing with the most sensitive cases (from an economic and employment standpoint) and (ii) the ability for commercial courts to order an increase in capital or the sale of the share capital owned by shareholders refusing such an increase.
"Specialized" insolvency courts to deal with major cases
From March 1, 2016, among the commercial courts dealing with insolvency proceedings, the largest ones will be vested in specific jurisdiction to take care of the most "sensitive cases" (i.e. largest companies, groups of companies and cross-border proceedings).
The purpose of such specialization is to limit the number of courts ruling on insolvency proceedings involving complex matters, notably those related to the largest firms, the insolvency of which may have a substantial impact on economy and employment. By developing a higher level of expertise for some judges (noting that commercial courts judges in France are non-professional ones) and unifying case law on such matters, the creation of such specialized insolvency courts aims to increase the predictability and the quality of the legal handling of such cases.
Specialized insolvency courts will automatically be in charge of safeguard proceedings, reorganization proceedings – redressement judiciaire – and winding-up proceedings – liquidation judiciaire – for:
The governmental decree listing specialized insolvency courts has yet to be published. No indication on the number of such specialized courts has been given by the Macron Act itself. However, the list should take into account geographical areas where the density of employment and economic activity is especially high.
Forced increase in capital or forced sale of existing share capital in reorganization proceedings (redressement judiciaire)
The Macron Act also vested new powers in commercial courts allowing them, for larger debtors, to order the sale of the equity held by some of the current shareholders who oppose a capital increase in favor of third-parties, when such capital increase is deemed by the court necessary for the success of a reorganization plan (plan de redressement). Such forced sale can only be imposed on a shareholder (i) holding, directly or indirectly, a fraction of the share capital in the debtor company granting it the majority of the voting rights, (ii) exercising alone the majority of the voting rights in the company pursuant to agreements with other shareholders or (iii) holding a blocking minority in the shareholders meetings.
The beneficiaries of such forced sale might be, for example, creditors, whose accounts receivable have been admitted as liabilities of the company under the proceedings.
Such provision entered into force on August 8, 2015, for reorganization proceedings opened as from this date.
In practice, cases in which such forced dilution/sale can be ordered seem limited. Indeed, the following requirements need to be met:
The court can either (i) appoint an ad hoc trustee in charge of summoning the shareholders’ meeting and voting, in lieu of the reluctant shareholders, the share capital increase provided in the draft reorganization plan or (ii) order the sale of all or part of the shares held by the shareholders who have opposed such share capital modification. In the first case, the existing shareholders’ preferential subscription right is however maintained (and can apparently not be cancelled or waived).
In case of forced sale of existing shareholders’ equity, rights of approval of the new shareholders by corporate bodies or the existing shareholders do not apply and non-opposing minority shareholders benefit from an "exit" right whereby they can force the acquiring shareholders to purchase their shares.
However, one can note that only the court-appointed administrator (administrateur judiciaire) or the public prosecutor can apply for such forced dilution/sale with the commercial court. This will most likely limit the cases in which this provision is to be enforced.
3.2 Insolvency Laws; Restructuring – Admissibility of an individual action for damages of an employee dismissed under insolvency proceedings
By a June 2, 2015 ruling (Cour de cassation, com. ch., June 2, 2015, No. 13-24.174), the Commercial Chamber of the French Supreme Court acknowledged the admissibility of an employee’s individual action for damages in connection with dismissal under insolvency proceedings. Such an action is to be distinguished from those that can only be initiated by a court-appointed representative of the creditors with the aim to recreate a general pledge.
According to this decision, if an employee’s complaint (typically unfair dismissal) is intrinsically linked to the employer company’s opening of insolvency proceedings, the employee may claim damages from those who may be liable, under French law, for the company’s difficulties. The Supreme Court’s new indemnification mechanism may give rise to a surge of individual actions by employees in the future.
The opportunity for individual action may be somewhat limited by a 2005 piece of legislation, which narrowed the scope of actions allowed against third-parties. The reason for the action must fall under the category of abusive financial support (soutien abusif), which include cases of (i) fraud, (ii) interference in the company’s management or (iii) excessive guarantees granted in connection with the financial support. In the past, the third-parties targeted for these types of actions have typically been bankers or shareholders. However, the provisions of the June 2, 2015 ruling may widen the scope of third-parties that can be legally held responsible for an employees’ damages, for instance, by admitting actions (de jure or de facto) against managers whose actions led to the company’s difficulties.
To go further
Following a financial scheme set up by a bank to reorganize a company, the latter became insolvent and reorganization proceedings were opened. The sale of the company under a sale plan resulted in several hundred of employees being laid-off. Following the sale of the business, several former employees became parties to legal action against the bank for abusive financial support (soutien abusif) seeking compensation for the damage suffered, following the sale of the business, due to their lay-off and to the loss of opportunity of benefiting from a redundancy plan implemented within the group to which the company used to belong.
The lower courts declared their action inadmissible due to the monopoly held by the commissioner in charge of the implementation of the sale plan (commissaire à l’exécution du plan – who succeeds to the court-appointed creditors’ representative after a reorganization/winding-up plan is approved by the court), the loss suffered by the employees being, for the lower courts, "inherent" to the insolvency proceedings (and therefore similar to the loss suffered by any other creditor).
Indeed, as a principle under French insolvency laws, the individual action of a creditor seeking compensation for damage suffered identically by every creditor of the company subject to insolvency proceedings (e.g. for insufficiency of assets leading to their receivables not being paid) is inadmissible, since the court-appointed creditors’ representative (and then the commissioner in charge of the implementation of the plan) has a monopoly over any legal action aiming at protecting the interests of the body of creditors and notably, at recreating the general pledge on which they are paid.
In a landmark decision on June 2, 2015, largely publicized by the French Supreme Court, the commercial chamber overturned the ruling of the lower courts and decided, on the contrary, that the employees’ action regarding the damages related to their lay-off and redundancy plan benefits was based on a personal interest, distinct from the collective loss suffered by the body of creditors, and was therefore admissible. This firmly confirms the solution already drawn by the chamber of the Supreme Court in charge of employment matters, in a less publicized 2007 decision.
4.1 Tax – Recent tax changes (2015 and 2016 Financial Laws)
Some of the main 2015 and 2016 tax changes resulting from the Financial Laws passed in December 2015 by the French Parliament include the following:
4.2 Tax – Renegotiation of the France and Luxembourg Tax Treaty; Taxation of Real Estate Capital Gains Expanded only as of January 1, 2017
A fourth amendment to the tax treaty between France and Luxembourg was signed on September 5, 2014. It gives the State where real estate assets are located the right to tax capital gains on the sale of shares in companies owning such real estate assets. Although the effective date for the amendment was previously unclear, it is now apparent that this amendment will come into effect no earlier than January 1, 2017.
The amendment may prompt a growing use by investors of tax-favored real estate vehicles such as OPCI (organisme de placement collectif en immobilier), which are not taxed on real estate income as long as they comply with certain profit distribution requirements and which should remain eligible to the benefit of reduced withholding tax rate on dividends paid to Luxembourg shareholders in accordance with the provisions of the France Luxembourg tax treaty.
For further details on this new Decree, please see the Gibson Dunn Client Alert of November 23, 2015: http://www.gibsondunn.com/publications/Pages/Amendment–France-Luxembourg-Tax-Treaty-Will-Not-Tax-Sale-of-Companies-Owning-French-Real-Estate-Before-2017.aspx
5.1 Real Estate — New Regime Applicable to Commercial Leases in France: Difficulties of Implementation
The 2014 Year-End French Law Update briefly described a new regime applicable to commercial leases, created by the Statute n° 2014-626 (the Pinel Act) dated June 18, 2014. The Statute n° 2015-990 (the Macron Act) dated August 6, 2015, has slightly modified the new regime in order to facilitate the processes of renewal and termination of leases and the relations between lessors and the lessees by allowing the use of registered letters with acknowledgement of receipt instead of burdensome and expensive notarial deeds.
However, the new legal regime is very difficult to implement. Various provisions leave room for interpretation, which creates legal uncertainty that could lead to rent increases or evictions. Several issues are debated among authors and scholars, including the following:
The judges, especially those of the Cour de Cassation, have started making decisions regarding the interpretation of the new set of rules. They will have an important role in bringing legal certainty (especially in respect of the application of existing leases under the new regime) and making this new regime efficient.
6.1 The Macron Act: Presentation of key measures in French Labor Law
On August 6, 2015, act n°2015-990 designed to promote economic growth, activity and equal opportunity (the Macron Act) overhauled several key labor law concepts, including inter alia the functioning of labor courts, the procedure applicable to collective dismissals on economic grounds, the implementation of a cap applicable to the amount of damages in case of unfair dismissal (licenciement sans cause réelle et sérieuse), employee incentive schemes and profit sharing and the possibility to work on Sundays. The following provides an overview of the main amendments to French labor law introduced by the Macron Act.
Strengthening mediation procedure and accelerating labor proceedings
The Macron Act encourages the use of mediation prior to initiating a dispute before labor courts, notably by strengthening the authority of the mediation procedure which is mandatory prior to certain rulings and by providing the conciliation bureau (bureau de conciliation) with greater prerogatives. In particular, failure for a party to appear or be represented by counsel before the conciliation bureau may result in having the bureau rule on the dispute as it currently stands. In addition, the Macron Act allows contractual mediation for disputes arising out of the employment relationship, a recourse that was previously limited to cross-border employment relationships. Generally speaking, the series of measures implemented by the Macron Act seeks to speed up labor proceedings.
Collective dismissals on economic grounds
The Macron Act slightly modified the stringent procedure applicable to collective dismissals on economic grounds of more than ten employees over a period of 30 days with a view to correct prior contradictions and alleviate certain requirements. In particular, the Macron Act now authorizes the employer to determine the geographical scope of the criteria determining the order of dismissals, which may now cover a smaller perimeter than the company level. In addition, the obligation which is imposed on employers that contemplate the collective dismissal on economic grounds of more than ten employees over a period of 30 days is slightly alleviated. Such redeployment obligation covers all positions at the company and group level, including abroad. However, before the Macron Act, the employer was required to ask its employees whether or not they agreed to receive job offers abroad. The Macron Act has shifted the initiative of such request to receive foreign job offers to the employee from now on.
Introducing caps on damages in case of wrongful termination
In case of unfair dismissal (licenciement sans cause réelle et sérieuse), an employee with at least two years of seniority within the company is granted a severance indemnity amounting to at least six months of compensation , while no threshold is set for employees with less than two years of seniority. In practice however, labor courts do not hesitate to allocate an indemnity amounting to up to 18 months of compensation in the context of large companies. Initially, the Macron Act imposed a mandatory grading scale capping the amount of damages to be allocated to the dismissed employee on grounds of (i) the employee’s seniority and (ii) the company’s size. However, the French Constitutional Council (Conseil constitutionnel) overturned such grading scale, arguing that the reference to the company’s workforce violated the constitutional principle of equality before the law. However, the French Constitutional Council did not reject the concept of a grading scale per se, and it appears that the French government currently intends to establish a revised scale based only on the employee’s seniority, age and employability in its draft bill reforming the French labor code. If adopted, such scheme will likely have a deflationary impact on the amounts of severance packages especially in large companies.
Alignment of deadline and headcount thresholds for employee incentive and profit-sharing schemes
The Macron Act intends to harmonize employee incentive and profit-sharing schemes (intéressement et participation). Under French law, it is mandatory for companies of more than 50 employees to implement employee profit-sharing schemes. The Macron Act notably simplified the calculation of the 50-employee threshold, which shall now be reached for 12 months (whether consecutive or not) over a period of 3 years, thereby aligning this threshold with the one determining whether a company is under the obligation to implement a works council. In addition, the Macron Act modified the tax regime (forfait social) applicable to employee incentive and profit sharing schemes, in particular providing for a lighter tax regime for companies of less than 50 employees that voluntarily implement such a profit-sharing scheme.
The Macron Act created new derogatory regimes for retail businesses located in specific zones drawing a large number of international tourists (so-called "international touristic zones") or with significant commercial demand (so-called "commercial zone"), which are now entitled to have their employees work on Sundays, under specific conditions. These conditions notably pertain to the negotiation of a collective agreement setting forth salaried compensation and measures implemented to alleviate the burden of working Sundays (in particular, measures designed to ensure work-life balance or to cover expenses incurred with child care, etc.). Although the implementation of working Sundays may be initiated by the employer, the regime relies on the written consent of concerned employees. In addition, the Macron Act also increased from five to twelve the number of working Sundays granted by city mayors. Of note: with regard to working Sundays, the Macron Act does not constitute a sweeping reform since it merely expanded the scope of pre-existing provisions.
7.1 Compliance; Anti-Money Laundering Laws – Two new European instruments in the fight against money laundering and terrorist financing
The Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the "Directive") and the Regulation (EU) 2015/847 (the "Regulation") on information accompanying transfers of funds were published in the Official Journal of the European Union on June 5, 2015. The Regulation entered into force on June 26, 2015 while the Directive shall be implemented into national law by June 26, 2017. This new framework aims notably at complying with the recommendations of the Financial Action Task Force (FATF) adopted in February 2012 and demonstrates a willingness of the European legislator to ensure a balance between the fight against money laundering and terrorist financing and the need to preserve the free movement of capital within the Union.
(a) Main novelties of the Directive
Who is affected
The Directive primarily applies to the financial sector (including credit and financial institutions), trusts and estate agents, auditors and accountants, tax advisors, notaries and lawyers. The Directive also broadens the scope of the anti-money laundering scheme by including providers of gambling services and persons trading goods when the payments made or received in cash are equal or exceed EUR 10,000 (threshold previously set at EUR 15,000).
Summary of the main innovations
Focus on risk assessment and corresponding risk based approach and increased coordination
The Directive describes several risk factors which obliged entities (among which credit and financial institutions, professionals of the financial sector, auditors, accountants, tax advisors, notaries, lawyers, trusts, estate agents, …) must take into account for their risk analysis in order to individually assess what level of customer due diligence (standard, enhanced or simplified) they must perform. It stresses the role of coordination in risk identification, conferring certain powers to the European Commission (the "Commission") in matters of identification of "high risk" jurisdictions. In addition, each Member State shall take appropriate measures to identify, assess, understand and lower the AML risks to which it is exposed, and shall keep such assessment up-to-date.
The Commission is now responsible for the coordination, identification and assessment of the risks affecting the internal market and related to cross-border activities and will, every two years (and for the first time by June 26, 2017), issue a report identifying, analyzing and evaluating such risks. Member States and obliged entities will then be able to refer to this global approach to identify new threats, reinforce their AML system and adapt their vigilance.
Transparency on beneficial ownership
The Directive puts an obligation on Member States to create central public registers with information on beneficial ownership, including the details of the beneficial interests held in corporate and other legal entities. Beneficial owners are defined as the natural persons with ultimate ownership or control over a legal entity and/or on whose behalf a transaction or activity is being conducted. Beneficial ownership information, stored in central public registers, will be available for access by FIUs, obliged entities, and any person or organization with a legitimate interest with respect to money laundering, terrorist financing, and the associated predicate offences. Member States shall ensure that such access is in accordance with data protection rules.
Member States will also have to ensure that entities incorporated within their territory hold adequate, accurate and current information on their beneficial ownership. Trustees also have an obligation to collect, hold and communicate information on beneficial owners to the competent authorities and FIUs, without alerting the parties to the trust.
The notion of Politically Exposed Persons (PEPs) is broadened to domestic PEPs
Under the Directive, any person exercising or having exercised important public duties on the national territory will be subject to enhanced due diligence measures. For all business relationships with these individuals, obliged entities will need to determine the source of wealth and funds and get approval from senior management to establish or maintain business relationships.
A range of additional sanctions are made available to competent authorities, including for serious, repeated or systematic violations of certain provisions. A financial institution which does not respect its obligations under the Directive could thus be subject to an administrative pecuniary sanction of up to EUR 5 million or 10 % of its annual turnover, or a fine of up to EUR 5 million in the case of natural persons, since the Directive allows Member States to impose sanctions against members of the management of the obliged entity or any other individual responsible for the breach.
(b) Key change arising from the Regulation
The Regulation on information accompanying transfers of funds focuses on payment traceability through the identification of the parties. The Regulation now requires payment service providers to ensure that transfers of funds are accompanied by information about the payer and the payee (as opposed to information regarding the payer only).
7.2 Compliance; Anti-Money Laundering Laws – French new Action Plan against Terrorist Financing and Money Laundering
On November 23, 2015, French ministry of finance announced a new action plan to fight terrorist financing and money laundering. Among the key measures is access by TRACFIN, the French unit fighting illegal financial operations, money laundering and terrorism financing, to the file of wanted persons, including individuals listed for State Security Risk. Stronger cooperation between intelligence services and the adoption of measures to fight against the illegal art trade have also been announced.
These measures would complement an action plan presented in March 2015, which aimed at reducing anonymity to better trace financial transactions, strengthening monitoring measures, and expanding the possibilities to freeze assets held by terrorists or their financiers. Its main innovations are the following:
Rolling back anonymity in the economy to improve the monitoring of suspicious transactions
To help detect suspicious transactions, cash payments are capped to EUR 1,000. From January 1, 2016, cash deposits and withdrawals exceeding EUR 10,000 will need to be reported to TRACFIN. To strengthen control over cross border transfers, EU transfers will need to be reported.
The new "nickel" accounts, which may be opened upon presentation of an ID and a mobile number and were set up partly to offer banking to people barred from other banks, will be listed on the national bank accounts register. Also, the purchase of prepaid bank cards, presenting a risk due to the anonymity they permit, will be subject to an identity check. The identity of persons carrying out a foreign exchange transaction exceeding EUR 1,000 will be systematically checked. It was also recommended that financial institutions and companies be subject to enhanced vigilance measures (control over the source of funds, rationale of the transaction, or identity of the recipient…) when their operations relate to "unusually high amounts", a notion to be specified by further national regulations.
Extend measures to freeze terrorists’ assets to cover movables and immovable assets
These measures, which can concern any funds, financial instruments or economic resources held with agencies or belonging to any person who commits or attempts to commit terrorist acts, will be extended to include real estate holdings, vehicles, as well as benefits and other amounts paid by public authorities and social organizations.
8.1 Public Law - Ordinance of July 23, 2015: transposition of the European directives on public procurement in French law
The ordinance n°2015-899 of July 23, 2015 on public procurement transposed the European public procurement Directives n°2014/24/UE and n°2014/25/UE of February 26, 2014 into French law. The main new provisions that will enter into force by April 1st, 2016 are the following:
8.2 Public Law – The possibility of transferring an agreement regarding the temporary occupation of the public domain
Since September 18, 2015, and the "Société Prest’air" decision of the French Conseil d’Etat (n°387315), an authorization or a contract granting right for temporary occupation of the public domain may be transferred to a third party. Such a transfer is only permitted if the public entity administrating the domain has given its prior approval for it.
Prior to this ruling, the administrative case-law deducted from the personal and unassignable nature of these authorizations and contracts, the impossibility for the occupant to transfer its authorization.
9.1 Competition Law – New powers of the French Competition Authority (Autorité de la concurrence)
The bill for economic growth and activity (the Macron Act) adopted on July 10, 2015 expanded the powers of the French Competition Authority ("Autorité"). The main points that should be highlighted are the following:
The Competition Authority’s structural injunction power is extended to cover the entire territory (art. L. 752-26 and L. 752-27 of the French commercial code); this extension of powers shall develop the control of the companies abusing of dominant position in the retail trade sector.
The Macron Act introduced a procedure of prior notice of any new partnership agreement. These agreements, which do not usually fall under merger control, were not subject to the prior control of the Autorité.
The Macron Act extended and modified the competition procedures. The Autorité‘s powers of investigation are expanded and notably authorize the Autorité to obtain communication of data kept by telecommunication providers (art. L. 450-3 of the French commercial code).
The Macron Act introduced a settlement procedure. When companies do not contest the grievance sent by the Rapporteur general, the latter has the possibility to submit a proposal for settlement, which determines the maximum amount of the contemplated fine (art. L. 464-2 III of the French commercial code). If it accepts the proposal, the Autorité may decide on the penalty under a simplified procedure.
At last, the Macron Act also modified the French provision applicable to merger control (art. L. 430-2, L. 430-4, L. 430-5, L. 430-7 and L. 430-8 of the French commercial code). In particular, the Autorité may impose new injunctions when the parties to a merger did not comply with the injunctions or commitments contained in the authorization decision.
9.2 Competition Law – Decision rendered by the French Competition Authority
The French Competition Authority ("Autorité") was very active in the second half of 2015 and imposed significant fines. The total amount of the financial penalties imposed by the Autorité for 2015 will be superior to EUR 1.2 billion, eclipsing the 2014 record total.
Among the decisions rendered during the second half of the year 2015, one of them shall hold our attention.
On December 17, 2015, the Autorité fined Orange a total of EUR 350 million (approximately US$381 million) for practices that have been going on since 2000 relating to abuse of dominance and discriminations in the fixed and mobile telephony sector for professionals. The Autorité found (i) that abusive loyalty programs have been established, for which the obtainment was subordinated to volume or duration commitments, the latter having dissuaded companies to contract with other operators, (ii) and that Orange prevented its competitors to access to information which allowed the latter to commercialize their fixed telephony offers. This is the highest fine imposed by the Autorité to a single company. The Autorité considered that the duration of the practices and their reiteration are aggravating circumstances that allow it to increase the financial penalty. The Autorité also imposed injunctions in order to remedy the situation. Orange decided not to challenge neither the existence of the anticompetitive practices, nor the EUR 350 million fine and the injunctions aiming to stop the practices. It is considered that this case is a first application of the settlement procedure provided by the Macron Act.
 See decision n° 2014-423 dated March 18, 2015, by which the Conseil Constitutionnel (the French Constitutional Council) condemned the possibility to allow successive administrative and criminal proceedings to be brought for stock market offences. Pursuant to this decision, the French legislator has until September 1, 2016, to modify the existing legal and regulatory regime.
 Decision 15-D-20 ; see the decision http://www.autoritedelaconcurrence.fr/pdf/avis/15d20.pdf and the press release http://www.autoritedelaconcurrence.fr/user/standard.php?id_rub=606&id_article=2681
The following Gibson Dunn lawyers assisted in preparing this client update: Bernard Grinspan, Jérôme Delaurière, Ariel Harroch, Benoît Fleury, Patrick Ledoux, Nicolas Baverez, Jean-Philippe Robé and Judith Raoul-Bardy.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The Paris office of Gibson Dunn brings together lawyers with extensive knowledge of corporate, insolvency, tax and real estate, antitrust, labor and employment law as well as regulatory and public law. The Paris office is comprised of a dynamic team of lawyers who are either dual or triple-qualified, having trained in both France and abroad. Our French lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the Paris office by phone (+33 1 56 43 13 00) or by email (see below):
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