four lessons on new trends in french ... -...

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LUISS GUIDO CARLI ROMA

MAY, 8-9

FOUR LESSONS ON NEW TRENDSIN FRENCH CORPORATE LAW

by Alain COURETProfessor, University Paris-I Panthéon-Sorbonne

Director of the Financial Law CentrePARTNER CMS-BFL

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I - INTRODUCTION

1° – SPECIFICITY OF THE FRENCHCASE

• Weakness of the concepts of corporation law• Oppeness to foreign concepts• Weakness of the french capitalism Strength of the foreign investors 48 % of the listed market

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2° – CURRENT LEGAL FRAMEWORKOF THE CORPORATE GOVERNANCE

• SELF REGULATION VIENOT Report 1 July 1995 | FRENCH CODE VIENOT Report 2 July 1999 | OF CORPORATE BOUTON Report 2002 | GOVERNANCE

• LEGAL RULES Act NRE May 2001, 15 Act FINANCIAL SAFETY August 2003, 1

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II – ISSUES RELATED WITHCORPORATE GOVERNANCE

Lesson 1 – Directors’ remunerations regulationLesson 2 – In search of a legal framework

for conflicts of InterestLesson 3 – The Failure of Shareholders

DemocracyLesson 4 – Toward a liability of the holding

companies for activities of the affiliates :considering the sustainable development

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LESSON 1

DIRECTORS’REMUNERATIONS

REGULATION

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I – THE KEYWORDS OF THE FRENCHLAW

A – REGULATION OF STOCK-OPTIONSB – TRANSPARENCYC – FORMALIZATION BY CONTRACTD – LINK WITH PERFORMANCESE - TAXATION

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II – CONCEPTS THAT SHOULD BEKEYWORDS

A – UPPER LIMITSB – SELF REMUNERATIONC – DUAL ROLES

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A – REGULATION OF STOCK OPTIONS

● Thanks to the stock-options, theFrench directors are at the top of theLeague Table in the EUROPEAN UNION

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B – TRANSPARENCY

> List of the ten highest salaries inthe company> Individual information on theremunerations of each director andeach member of the board. Thisinformation is given in the annualreport

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B – TRANSPARENCY

NEGATIVE EFFECTS OF THETRANSPARENCY

● The aim of the rule was to initiate areduction in the remunerations● In fact, the result of the transparencywas to push-up the remunerations

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I – THE KEYWORDS OF THE FRENCH LAWC – FORMALIZATION BY CONTRACT

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C – FORMALIZATION BY CONTRACT 1° - BRETON ACT (Art. L225-42-1) in 2005

« In companies whose securities have been admitted totrading on a regulated market, the commitmentstaken to the benefit of their chairmen, generaldirectors or delegate general directors by thecompany itself or by every controlled company orcompany controlling it and corresponding withelements of remuneration, indemnities oradvantages owed or supposed to be owed becauseof the cessation or change of these functions, orafter those, are subject to provisions of SectionsL225-38 and L225-40 à L225- 42 ».

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1° - BRETON ACT (Art. L 225-42-1)July 2005

FOUR STEPS :

● DRAFT OF THE AGREEMENT● GOAHEAD OF THE BOARD● SIGNATURE OF THE AGREEMENT● REPORT OF THE AUDITORS● GOAHEAD OF THE GENERAL MEETING

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2° - TEPA ACT (August 2007)[Act in favour of Work, Employment

and Purchasing Power]Law :

«The authorization given by the board of directors will be disclosed.«The submission to the general meeting’s approval is the purpose of aspecific resolution for each recipient. This approval is required at eachrenewal of the mandate fulfiled by persons mentioned under the firstparagraph.«No payment whatever nature may be made before the board ofdirectors ascertains, at or after the cessation or the effective changeof functions, the compliance with the requirements provided for. Thisdecision will be disclosed. Every payment made in ignorance of theprovision of the present paragraph is null as of right».

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D – LINK WITH PERFORMANCES

Law : « Are forbidden elements of remuneration, indemnities

and advantages whose benefit is not subject torequirements linked with the recipient’sperformances, assessed with regard to thecompany’s of which he chairs the board of directorsor exercises the director-generalship or delegateddirector-generalship.

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D – LINK WITH PERFORMANCES

QUESTIONS :1. How identifying the individual

performance ?

2. What kind of performance ?

3. Past-performance or futureperformance ?

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E – TAXATION● There is not a specific taxation of thegolden parachutes● There is a limit to deduct theiramount of the company profits● There is a new taxation of stock-options

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II – CONCEPTS THEY SHOULD BEKEYWORDS

A – UPPER LIMITS

1° - BY THE LAW

2° - BY THE JUDGE→ misuse of assets

3° - BY THE TAX OFFICE

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B – SELF REMUNERATION

1°- Institutional nature of the remuneration

2°- Exclusive competence of the board

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C – DUAL ROLES

1° - Ability to have a seat on the board andto maintain the state of employee

2° - What happens with the relation ofsubordination ?

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LESSON 2

IN SEARCHCONFLICTS OF INTEREST

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DEFINITION

A manager who deals for the companydecides to use his powers with the aim tosatisfy a personal interest external to thecompany or to claim an advantage to theprejudice of the company

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CONFLICTS OF INTEREST WHICHTYPICALLY ARISE WITHIN COMPANIES

● Relationship between managers andshareholders● Relationship between majority and minorityshareholders● Relationship between shareholders and creditors● Relationship between shareholders andemployees● Relationship between shareholders and auditors

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CONFLICTS OF INTEREST : ECONOMICBACKGROUNDS

TWO SITUATIONS :

SITUATION 1 :

> SCATTERED CAPITAL> STRONG MANAGERS> WEAK SHAREHOLDERS

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CONFLICTS OF INTEREST : ECONOMICBACKGROUNDS

TWO SITUATIONS :

SITUATION 2 :

> CONCENTRATED CAPITAL> WEAK MANAGERS> STRONG BLOCK HOLDERS> UNPROTECTED MINORITY SHAREHOLDERS> RISK OF TUNELLING

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I – CLASSIC SITUATIONS OF CONFLICTOF INTEREST

A – Remuneration of the Directors andOfficers

«… remuneration is one of the key areas whereexecutive directors may have a conflict ofinterest and where due account should be takenof the interests of shareholders. Remunerationsystemes should therefore be subjected toappropriate governance controls, based onadequate information rights»

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B – Ability to hold a number of similarmandatesC – Related Party Transactions

● Such transaction carries the riskthat the related party will try to reapbenefits to the detriment of thecompany

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D – The fact to be an administrator onbehalf of an entity which as concurrentsinterests

E – The occurrence of an Take-over

F – The question of corporateopportunities

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II – THE STEPS FOR AN APPROACH OFTHE CONFLICTS OF INTEREST

A – IDENTIFICATIONB – PREVENTIONC – PROCESSINGD – SANCTION

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III – REGULATION «EX ANTE»

A – Prohibition of high risk situationsB – Reinforcment of the overseersC - Duty to disclose the conflict of interestD – Duty to refrain from votingE – Duty to give voting explanationsF – Duty to appoint an independant expert

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A – PROHIBITION OF HIGH RISKSITUATIONS● Prohibition for an director executive

or not executive to borrow or to beguaranteed by the company

● Prohibition for a civil servant to be adirector or an officer

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B – REINFORCMENT OF THE OVERSEERS

«The supervisory role of non-executive orsupervisory directors is commonly perceived ascrucial in three areas, where the potential forconflict of interest is high, especially when suchmatters are not a direct responsability forshareholders : nomination of directors,remuneration of directors, and audit»Commission Recommendation 2005/162/EC

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II – REGULATION «EX ANTE»

C – DUTY TO DISCLOSE THE CONFLICTOF INTEREST● There is not a general duty to

disclose in French Law● This duty is a soft law duty

> VIENOT REPORT 1995> COB ANNUAL REPORT 1995

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D – DUTY TO REFRAIN FROM VOTING

●There is no written rule of abstention● They are only specific legal cases for

abstention> AGREEMENT BETWEEN THE COMPANY AND A MEMBER OF THE BOARD

● Duty to refrain from debating ?

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D – DUTY TO GIVE VOTING EXPLANATIONS L 533-4-8° of COMOFI

> Portfolio management companies must exercise their votingrights in the exclusive interest of shareholders and OPCVM [~ UCITS-Undertakings for Collective Investment in TransferableSecurities] holders.

> They must report their voting practices.

> Where they don’t exercise their voting rights, they explain theirmotives to shareholders or UCITS holders.

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E – DUTY TO APPOINT AN INDEPENDENT EXPERT

> Requirement of a fair opinion in the event of aconflict of interest

> Section 261 p. 1 from the Authority for FinancialMarkets Regulation.

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F – DUTY TO APPOINT AN INDEPENDANT EXPERT

> Requirement of a fair opinion in the event of aconflict of interest

> Article 261 al. 1 du RG AMF

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