After an evolution in the legal structures used for companies, this article describes an imminent change in the legal regime of mergers and corporate governance for public companies.

Evolution in the legal structures used for companies

The “Loi du 4 août 2008” (hereinafter “LME”) will undoubtedly be remembered as the Act which finally created the “Société par Actions Simplifiées” [Simplified Joint Stock Company*] which was intended by its instigators to become a universal form of commercial company.

As of January 1st, 2009, the requirement to have a minimum share capital of €37,000 disappeared, to be replaced by the requirement to have “such a share capital as is set out in the articles of association and/or the bylaws” (C. com., art. L. 277-2). Further, the duty to inform shareholders of the total number of voting rights which may be exercised in general meetings no longer exists.

As regards Simplified Joint Stock Companies which have only one director*, where the said director is also its president, it is no longer mandatory to file a management report at the clerk’s office (Greffe). But the report must be available for inspection, on request, by any individual (Commercial Code, art L232.23). The procedure by which a sole director may ratify the accounts has also been simplified – he may do so at any time within six months of the end of the company’s financial period, then filing them at the Greffe. This simplified procedure may not be as advantageous as it first appears: filing accounts which detail inventory may jeopardize the confidentiality of the company’s commercial dealings and does not, ultimately, exempt the sole director from filing the reports. The efficacy of the reform is, therefore, open to debate.
An SSJC can now issue non-transferable shares in consideration for contributions in kind* (Commercial code, L227-1). The articles of association or bylaws will set out the terms of subscription and redemption. The assets the subject of that contribution cannot be considered in determining the level of the company’s share capital, offering only the right to a share of the profits and net assets, and an obligation to assume a part of the liability for any losses. Such shares are to be re-valued after such period as is stipulated in the articles of association.

This revaluation – which may seem surprising, because the value of a contribution is generally understood as being its historical value – attempts to take account of possible changes in the value of the contribution in consideration for which the shares were issued. This technique is derived from financial law, which already permits non-cash consideration payments in return for the issue of shares, subject to the verification of the methodology used by the issuer’s auditor for calculating such variation. By transposing this technique, it is possible to envisage corresponding variation clauses in the articles of association or bylaws.

In respect of account auditing, the nomination of an auditor is only mandatory for an SJJC that equals or exceeds TWO or more of the following thresholds:

– consolidated balance sheet – €1m;

– turnover net of taxes – €2m; and

– average number of workers during the company’s last financial period – 20.

It should be noted that these thresholds are the subject of current legal review. Remaining unmodified they fall substantially below those applicable to a SARL (Limited Liability Company). Therefore, an SAS (Simplified Joint Stock Company) will more easily trigger the mandatory requirement to hire an auditor, than a SARL. The Commercial Code further states that the waiver is not applicable to an SAS which has control of one or more companies, or which are controlled by one or more companies, “control” defined as being either joint (Type II) or exclusive (Type III) [Commercial Code, L233-16].

With respect to a Société Anonyme (Public Limited Liability Company), the reform is more limited. As of January 1st 2009, only its articles of association or bylaws may require members of the board of directors or supervisory board to hold a specified minimum number of shares. Where the rules set out in the articles of association or bylaws have been infringed, the company’s officers are permitted 6 months to remedy the default.

Despite academic controversy, the legal regime regarding the right of double vote (each merging entity having the right to vote on the approval of the merger) is modified to facilitate the neutrality of the merger, subject to any provision to the contrary in the company’s articles of association or bylaws.

From January 1st, the board of directors will also be able to give proxy powers to the chief executive officer or, if there is an agreement with the latter, to one or more executive officers, so that in the month following the end of the company’s financial period, he/they may establish the number and market value of shares issued after all share options capable of being exercised have been so exercised, and in accordance with those figures, to amend the bylaws and/or the certificate of incorporation accordingly.

With respect to SARL’s (Limited Liability Companies), the Act brings the relevant law applicable thereto, as regards the use of videoconferencing for the approval of accounts while a sole shareholder is absent, in line with that applicable to SAS’s (SSJC’s) and SA’s (Public Companies).

Change in the legal regime for mergers

Domestic Mergers

The shareholders of a company conducting a merger may, by unanimous vote, appoint an auditor to the merger. The requirement of unanimity effectively circumscribes this new right.

Where a merger is to be effected for non-cash consideration, and no auditor has previously been appointed to the merger, an auditor must be appointed and charged with the valuation of that consideration (C. com. Art. L236-10, I). However, in the case of a simplified merger between an SA (Public Company) and its subsidiary, where that subsidiary is both itself an SA and wholly-owned, the company is exempt from so nominating an auditor for the valuation of such consideration. As in the previous situation, neither the directors nor the executive officers have to expressly approve the merger.

Cross-border Mergers

A. The Act’s overarching principle with respect to cross-border mergers is to apply domestic regulations. However, several provisions are worth noting: a cross-border merger may comprise a cash consideration element in excess of 10% of the nominal value of the [share consideration/shares acquired] if the national law of at least one of the States in which the entities are incorporated so permits. This rule is subject to two qualifications:

– The company must thoroughly research the applicable law.

– In the absence of tax neutrality, this innovation is quite limited.

B. There is also a specific legal regime with respect to the effective date of the merger:

– If the merger entails the creation of a new company, the effective date will be the date on which that company is registered at the RCS (Trade and Commercial Registry – Registre de commerce et des sociétés).

– If there is transmission of one of the existing companies, the effective date of the merger will be during the interval between the control of legality by the Greffe and the end of the purchaser’s financial period. However, the Act is unclear on this point and it is possible that the clause may have retroactive effect with respect to the tax and accounting implications of the merger, subject to confirmation by the administrative authorities on this last issue. We anticipate further developments.

Corporate Governance Rules

As regards public companies, the Chief Executive Officer’s corporate governance report must include:

– The composition, organisation and preparation of each board meeting; and

– The code of corporate governance that the company has nominated for use, or if not applicable, a description of the company’s practice of corporate governance. The application of this provision is difficult because French law lacks a singe comprehensive corporate governance code. Reference points include the French AFEP-MEDEF model code (Association Française des Entreprises Privées, the MEDEF being an association of employers), as well as international codes, such as the ICGN (International Corporate Governance Network) and OECD model code.

Maybe because of the ongoing financial crisis, the prospective national corporate governance code is still a mystery. On October 6th, 2008, Jean-Martin Folz, chairman of the AFEP, Laurence Parisot, chairman of the MEDEF, presented their “Recommendations on the remuneration of executives of companies listed on a stock-exchange”.

Concerned as to public opinion regarding executive remuneration, the French Government released a communiqué on 7th October, explaining that the above Recommendations had to be understood as being potentially subordinate to the corporate governance code, set forth under the Act of July 3rd (Loi du 3 juillet). Though, of course, an important communiqué, it does not substantively clarify the matter at hand, namely the ultimate substance of the prospective national code. Perhaps the public is entitled to expect more transparency in respect of executive remuneration? We anticipate further developments.