A new law which came into force on 8 August 2015 now permits a French court to enforce debt-for-equity swaps. Where the debtor company is in judicial reorganisation proceedings (redressement judiciaire) and if certain conditions are met, the court can either:
- appoint a mandataire whose role will be to convene a shareholders’ meeting to vote for the implementation of a debt-for-equity swap. At such meeting, themandataire will exercise the votes of a controlling shareholder or a shareholder with a blocking minority and will vote in favour of the reorganisation plan; and/or
- order controlling shareholders or those who hold a blocking minority to sell part or all of their shares and interests in the share capital of the distressed company to a person who is supportive of the reorganisation plan.
The new law follows reforms made in March 2014 which were seen as a first step towards the rebalancing of powers between the company, its shareholders and its creditors in the context of insolvency proceedings (see our briefing here). This latest reform is probably the most awaited reform of French insolvency laws of recent years.
The new law came into force on 8 August 2015 and applies to companies placed into judicial reorganisation proceedings after that date. It does not apply to judicial reorganisation proceedings opened before 8 August 2015 or to any other insolvency proceeding (including sauveguard).
The new mechanisms to force out shareholders
Context. Although many French restructurings over the past few years involved creditors taking over a distressed company through debt-for-equity swaps, such restructurings were only possible because the shareholders agreed not to exercise their veto right and be diluted. Without such an agreement from the shareholders, usually obtained after protracted negotiations, it would not have been possible to implement such restructuring plans.
The new mechanisms which are designed to force out shareholders when they oppose changes in the share capital which are required for the execution of the reorganisation plan are therefore of great interest to creditors as they are likely to speed up restructuring negotiations and facilitate the turnaround of the distressed company.
The new regime. The new law (the so called loi Macron) introduces a new article into the French Commercial Code and provides for two mechanisms to force out shareholders: (i) the forced dilution of shareholders; and (ii) the forced sale of the shares and other interests in the share capital held by opposing shareholders.
Both mechanisms require that the four following conditions be met:
- the company must have at least 150 employees or constitute, pursuant to the French Labour Code, an entreprise dominante over one or several other companies whose global staff amounts to at least 150 employees;
- the cessation of business of the company could have a material adverse effect (trouble grave) on the national or regional economy and to employment in this area;
- the change in the company’s share capital appears to be (after having considered the possibility of a partial or total transfer of the company) the only serious solution to avoid causing such a trouble grave and to enable the continuation of the business; and
- the change in the share capital provided for in the reorganisation plan is not approved during the shareholders’ meeting.
If these conditions are met, the judicial administrator or the public prosecutor may, after a period of three months following the opening of the judicial reorganisation proceedings, request the court to order the implementation of either of the two following mechanisms.
Dilution of shareholders. The court may appoint a mandataire whose task it will be to call a shareholders’ meeting and who will step into the shoes of the opposing shareholders to vote and approve the proposed capital increase up to the amount provided for in the reorganisation plan. The capital increase must be carried out within a period of 30 days following the holding of the general meeting.
Forced sale of the shareholders’ interests in the share capital. Where a shareholder who holds a majority of the voting rights or a blocking stake refuses to vote in favour of the changes to the capital structure the court may order such shareholder to sell all or part of its shares to those who are committed to implementing the reorganisation plan.
If no agreement is reached between the selling shareholder(s) and the purchaser(s) on the value of the shares and other capital interests to be sold, such value is then determined by an expert appointed by the court.
Further welcome reforms
The loi Macron also introduces some other welcome amendments to French insolvency laws. In particular, it provides for:
- a number of “specialised” commercial courts to have exclusive jurisdiction over certain insolvency and pre-insolvency proceedings (in particular large proceedings); and
- the regrouping before the same court of insolvency proceedings opened in relation to several companies of the same group.
These provisions will only come into force on 1 March 2016 and will be described in a further Briefing.
This new regime, combined with the reforms in March 2014, should encourage creditors to propose restructuring plans involving debt-for-equity swaps. It is also likely to create a renewed interest from turnaround investment funds for loan-to-own strategies in France as it shifts the existing balance between creditors and shareholders in favour of the former.
From a turnaround perspective, it is unfortunate that the new mechanisms are only available in the context of judicial reorganisation proceedings (i.e., at a time when the distressed company is already insolvent).
How the new law and the underlying mechanisms will work in practice remains to be seen as a number of questions will no doubt need to be answered in due course in particular in relation to the assessment by the court of the 4 conditions described above and the share valuation process. Although the new law provides for a certain number of procedural protections designed to ensure that the expropriation mechanisms are implemented after a fair process (such as the hearing of all parties by the court and the presence of the public prosecutor during the debates taking place before the court), these are unlikely to be sufficient to avoid protracted litigation following the implementation of the expropriation mechanisms in certain restructurings.
The Révolution is probably not finished…