April 5, 2016
The Paris office of Gibson, Dunn & Crutcher LLP is pleased to provide this French legal briefing covering France for the first quarter of 2016.
The French government elected in 2012 initially took a very adverse stand against financial and international businesses in general. As you are likely aware, this translated into higher taxes, numerous regulations affecting foreign investments into France, and a general attitude perceived as hostile to multinational corporations and reducing France’s attractiveness to foreign investors. This has evolved substantially since the early part of 2015, notably following a change of the minister of economy. A more liberal approach of the business world has been advertised. In line with this new direction and a stated desire to reassure investors, substantial legal reforms have been launched. The purpose of this briefing is to provide a summary of some of the latest examples of these new directions in three areas:
The French government is proposing a set of labor law reforms aimed at offering greater flexibility to increase employment and sending a positive signal to foreign investors to implement their businesses in France, which still needs to be discussed in parliament before being enacted.
Facilitate dismissals conditions in order to boost hiring
The proposed reform would allow companies to dismiss workers on economic grounds based on the financial situation of the companies’ activities in France, irrespective of the situation and financial results of their foreign branches and of their group activities abroad. This proposal is a strong signal sent to investors who conduct activities in France: any company facing economic difficulties (to be assessed in accordance with legal guidelines) will be able to shed jobs even though the company is financially sound outside of France. Previous legislation and case law imposed to look at the entire group.
The reform would also set new caps on the amount of compensatory damages that can be awarded by labor courts for dismissals without actual and serious grounds. Capping court-ordered severance would allow costs of workers lay-offs to be more foreseeable. Under pressure, the government eventually turned these caps into simple guidelines. The effectiveness of this approach will thus rest with the courts and depend on how judges follow these guidelines.
Furthermore, the reform proposes that agreements entered into by employers at the company level to maintain or develop employment may prevail over employment contracts’ inconsistent provisions. This could apply to compensation and working hours, provided that they do not generate a decrease of the employee’s monthly salary. If an employee was to reject the company level agreement, the employer could validly terminate his or her contract of employment on that basis.
Greater flexibility is sought by increasing the worktime limit (per week up to 46 hours) and partly deregulating overtime.
As a derogatory regime from the 35-hour workweek system, the reform sets a weekly worktime limit of 44 hours over a period up to 12 weeks, which can go up to 46 hours. This may be achieved at the level of each company, without the need to comply with an industry-wide collective agreement as currently required.
For greater flexibility, overtime rates and working time over periods of up to 3 years (instead of up to 1 year now) may also be negotiated at the company level.
The reform favors collective bargaining and upstream negotiations
Majority collective agreements (i.e., agreements entered into with unions having obtained more than 50% of votes during the previous Works Council elections) are generalized. To circumvent union’s blockage in the negotiations of these types of collective agreements, it is now proposed that minority collective agreements (i.e., entered into with unions gathering at least 30% of votes but less than 50% thereof) can still be validated by an employees’ ballot (such possibility to be opened only for agreements relating to working time, as a first step).
The reform also enables employers to set anticipated adjustment agreements or substitution agreements in the event of a legal change in the company (merger, sale etc.). In other words, employers contemplating corporate restructuring transactions are encouraged to negotiate upstream with unions in order to simplify and favor social measures.
Despite the government backing down under unions’ pressure on some significant changes (such as the possibility for employers in companies with less than 50 employees to individually enter into flat rate pay agreements covering days worked outside any collective agreement), the draft bill is viewed as heading in the right direction and is supported by some of the major employers’ unions (including the MEDEF). However, the proposals developed here above are not yet final and may still evolve.
The so-called "Macron Law" substantially alleviates the conditions and constraints applicable to free share awards in France, by reducing the minimum legal vesting and holding periods. Free shares can now vest 1 year after their grant date, provided that the combined vesting and holding periods are at least equal to 2 years (previously, the specific regime was available only for free shares awards subject to a minimum 2-year vesting period and a minimum 2-year holding period, amounting to a minimum aggregate period of 4 years).
The Macron Law also significantly improves the tax and social treatment for both the employer and the beneficiaries. It provides that gains realized through the allocation and sale of free shares can be treated as capital gains, instead of being treated as salary for French tax and social security purposes as before, as shown in the table below.
|
|
Previous Regime |
New "Macron Law" Regime (1) |
|
Employer social contribution |
30% |
20% |
|
Employee social contribution |
10% |
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(3) |
60.7% |
35.8% |
(1) The new regime only applies to free shares the granting of which has been approved by a decision of the extraordinary shareholders’ meeting held on or after August 8, 2015.
(2) The positive effect of this new rule is that the employer social contribution will only be due if and when the beneficiary effectively acquires the free shares. Its 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.
(3) Based on marginal rates.
The new French regime of free share awards remains available for free shares awarded by foreign companies to French tax residents.
The improved tax and social security treatment is subject to the new awards having been authorized by a resolution of the extraordinary general meeting of the shareholders of the foreign issuer passed on or after August 8, 2015. Since last summer, a number of domestic and foreign issuers have already taken all necessary steps to take advantage of the new favorable regime for their employees and corporate officers residing in France.
On February 10, 2016, the French Government issued an Ordinance enacting new provisions of the Civil Code which will enter into force on October 1, 2016, subject to Parliament’s ratification. This reform is generally praised for the quality of its drafting and the improved legal certainty offered to business operators.
Improvement of legal certainty and security
On top of rejuvenating rules dating back to Napoleonic times, a number of new provisions increase contractual certainty and security which in some cases had been weakened by case law. As a matter of example, the legal effect of unilateral promises (promesses unilatérales) such as calls and puts are reinforced and the promisor may no longer usefully revoke its promise before acceptance by the beneficiary (Article 1124).
Recognition of the concept of significant imbalance in standard contracts
The reform also codifies certain provisions aiming at protecting the weaker party in a contract. For instance, Article 1171 extends the concept of significant imbalance concept for all adherence contracts (i.e., contracts based on "general terms" or "terms of use" which have not been negotiated between the parties), irrespective of the identity and quality of the parties. Previously, this principle could be invoked in consumer contracts or contracts between traders (commerçants) only. Its scope will, thus, be much broader and will now encompass loan agreements, distribution agreements, supply contracts, etc.
The effect is that any provision creating a significant imbalance between the parties’ rights and obligations is deemed unwritten.
Contrary to what exists with respect to contracts between traders, the imbalance may, however, not be assessed based on the price of the contract nor on the main subject matter of the contract. Another limitation aiming at safeguarding legal certainty resides in the proportionality test that will be carried out by the judge, since only significant imbalance can be sanctioned.
To conclude, this reform creates an efficient protection against excessive non-core contractual provisions (such as dispute resolution clauses, termination clauses, non-compete or exclusivity provisions, non-affiliation clauses, etc.) which will be available to all economic operators.
The introduction of the "unforeseeability doctrine" under French law
Pursuant to new Article 1196, when performance of a contract is rendered excessively onerous for a contracting party due to unforeseeable circumstances, the affected party may ask for the renegotiation of the contract. If the other party refuses or the renegotiation fails, both parties may jointly ask in Court that the contract be adapted to the new economic and financial situation. If the matter is not brought in Court, either party may ask for judicial termination.
While this renegotiation right constitutes a major change under French law, its impact may be limited. First, because the contract may provide that a party has accepted to bear a specific risk (such as a significant change in raw material prices), thus depriving this party from its renegotiation right. Second, because the contract may provide material adverse change clauses or hardship clauses enabling the parties to set in advance what the contractual changes should consist in, thus preventing a Court interference in the contractual relationship.
This new framework definitely needs to be taken into account for future contract negotiations, especially in the context of long-term contracts.
The following Gibson Dunn lawyers assisted in preparing this client update: Benoît Fleury, Bernard Grinspan, Ariel Harroch, Patrick Ledoux, Judith Raoul-Bardy and Audrey Obadia-Zerbib.
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):
Corporate/M&A/Private Equity
Bernard Grinspan ([email protected])
Benoît Fleury ([email protected])
Ariel Harroch ([email protected])
Jean-Philippe Robé ([email protected])
Patrick Ledoux ([email protected])
Judith Raoul-Bardy ([email protected])
Audrey Obadia-Zerbib ([email protected])
Labor and Employment
Bernard Grinspan ([email protected])
Jean-Philippe Robé ([email protected])
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