Rhidian David February 24 2014 Initiative to cut red tape gathers pace Hughes Hubbard & Reed LLP | Corporate & Commercial - France Rhidian David Corporate & Commercial IntroductionAbolition of declaration to prefectureSimplified accounting requirementsRegulated agreementsExtension of time limit for holding ordinary general meetingTransfer of sharesCommentIntroductionLaw 2014-1, published on January 2 2014, aims to simplify the rules and regulations applicable to businesses. It announces a number of forthcoming reforms and authorises the government to issue legislation through ministerial orders in the coming months. However, some of the provisions have immediate effect.The government's aim is to help businesses by reducing bureaucracy and relaxing the multitude of regulations that affect them. The new law follows similar initiatives elsewhere in Europe.The new law also seeks to modernise administrative procedures, enabling companies to focus on their core activities (ie, investment, creation and innovation) in order to boost competitiveness.The measures affect a variety of areas, from public law and environmental law to employment law and company law. A number of the measures in the company and commercial field are noteworthy.Abolition of declaration to prefecture Before the new law took effect, a foreign national(1) who sought to carry on a commercial, industrial or trade activity, or hold a corporate office(2) in a French company, while continuing to live abroad, had to submit to the prefect of the relevant department:a lengthy application containing information on the applicant's civil status;criminal record details or other similar documentation from the applicant's country of origin; anda copy of the company's bylaws.Gathering the necessary documents and preparing the application was often a time-consuming process.The prefecture would issue a receipt when a completed application was lodged. Without this receipt, a foreign national could not legally proceed with registration of a French law company with the Registry of Commerce and Companies or hold a corporate office.Prefectures received no more than 500 declarations per year for commercial, industrial or trade activities from non-resident foreign nationals.In order to speed up the process of investing in France, the new law has removed, with immediate effect, the obligation for non-resident foreign nationals to make this declaration. However, if a foreign national resides in France, he or she must obtain a temporary residence permit.Simplified accounting requirements The new law has relaxed the rules on the preparation and publication of annual accounts for micro and small businesses.To this end, under Ministerial Order 2014-86, issued on January 30 2014, micro businesses(3) are no longer required to prepare appendices to their annual accounts(4). In addition, these businesses can now opt for their filed annual accounts not to be published, although certain public bodies – such as the Bank of France, the national statistics agency and officials of the commercial courts – will still have access to the accounts. In addition, small businesses(5) can now draw up simplified statements for their balance sheet and profit and loss statement.The new rules do not apply to banks, insurance companies, mutual companies and listed companies.These measures will encourage businesses to file their accounts, which in turn will improve financial transparency. At present, many companies do not file their account on the grounds of confidentiality, although it is a legal requirement to do so.This ministerial order should apply to over 1 million companies and is intended to produce savings of around €110 million per year.The measures will apply to annual accounts for financial years ending from December 31 2013 and for accounts filed from April 1 2014.Regulated agreementsThe rules that currently apply to regulated agreements are burdensome. For example, in limited companies (sociétés anonymes),(6) certain related-party agreements must be submitted to the board of directors for prior approval. These agreements (except for ordinary agreements on arm's-length terms) are entered into, directly or through an intermediary, between:the company and its general manager, or a delegated general manager, director(7) or shareholder holding more than 10% of the voting rights; orif the shareholder is a company, the company controlling such shareholder within the meaning of Article L233-3 of the Commercial Code.Agreements in which one of the above persons has an indirect interest are also regulated in the same way, as are agreements between one company and another company where the general manager, or a delegated general manager or director of the first company(8) is the owner, an indefinitely liable shareholder, manager, director, supervisory board member or corporate officer of the second company.The board of directors or supervisory board must be informed of information about the agreement and then give its prior approval. The statutory auditors must be informed within one month of the agreement being entered into and present a special report on all such agreements to the next annual general meeting of shareholders, which then votes on the agreements.In practice, most regulated agreements are entered into between a parent company and its subsidiaries. For that reason, the new law removes agreements between a parent company and directly or indirectly wholly owned subsidiaries from the scope of regulated agreements for a limited company.Some of the measures announced by the new law, far from cutting red tape, actually increase the regulatory burden on businesses and overlap with the statutory auditor's report to the general meeting of shareholders. For example, the report which the board of directors or the management board must present at the general meeting of shareholders must set out information on agreements entered into between a parent company's executive officer, director or shareholder holding more than 10% of the shares of such parent company and a direct or indirect subsidiary of the parent company, as these agreements can create conflicts of interest and damage the company's interests. The new law also obligates the board of directors or supervisory board to set out the reasons behind its decision to approve or not approve a regulated agreement.The new law does not address the question of cautions, endorsements and guarantees granted by a limited company, which are currently subject to the prior approval of the company's board of directors or supervisory board. A relaxation of the rules in this area would have been welcome.The government has eight months to adopt a ministerial order on regulated agreements.Extension of time limit for holding ordinary general meetingAt present, if a limited liability company (société à responsabilité limitée) does not convene a general shareholders' meeting in order to approve its annual accounts within six months of the end of the financial year, the Commercial Code does not allow the company to apply to the commercial court for an extension of the six-month time limit. However, such a situation is not always attributable to the company's management, as they may have valid reasons for being unable to issue the convening notices or to prepare the accounts in time.Therefore, the new law provides for the possibility of extending the deadline for the annual general meeting of a limited liability company. This change will bring the rules for limited liability companies into line with those that apply to limited companies.The government has eight months to adopt a ministerial order on this matter.Transfer of sharesCurrently, for a transfer of shares in a partnership (société en nom collectif) or a limited liability company against the company, it must be notified to the company in one of three ways:lodgement of an original of the transfer agreement at the registered office of the company against confirmation of receipt;service of the transfer agreement by bailiff; oracceptance by the company of the transfer in a notarised deed.(9)A transfer is not enforceable against third parties unless, in addition to the above conditions, two sets of the transfer deed (if it is notarised) or two originals (if it is a private deed) are filed at the Registry of Commerce and Companies.(10)However, the Supreme Court case law holds that even if the rules outlined above are not complied with, the transfer is still enforceable against third parties if the updated bylaws recording the transfer are filed with the Registry of Commerce and Companies.The government is therefore seeking to clarify and simplify the rules by:authorising the filing of a single set of the deed of transfer with the Registry of Commerce and Companies;authorising the transfer deed to be lodged electronically; andpermitting the transfer to be enforceable against third parties as soon as the bylaws are filed with the Registry of Commerce and Companies.The government has eight months to adopt a ministerial order on this issue.CommentThe new law is part of an ongoing drive to reduce red tape, which the Inter-ministerial Committee on Modernisation of Public Action approved on July 17 2013.The reforms that have been announced so far should make it easier for companies to do business and, as such, are a step in the right direction. However, although many of the reforms are welcomed, more radical changes are needed if the government's simplification programme, which is already well under way, is to achieve its stated aim of boosting economic growth.For further information on this topic please contact Rhidian David or Cyrille Gaucher at Cabinet Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00), fax (+33 1 44 05 80 54) or email ([email protected] or g[email protected]).Endnotes(1) Except for citizens from the European Union, the European economic area and Switzerland.(2) Such as the manager of a limited liability company (société à responsabilité limitée), a partnership (société en nom collectif) or an equity partnership (en commandite simple ou par actions); chairman of the board of directors, general manager or delegated general manager of a limited company (société anonyme); chairman of the management board of a limited company; or chairman, general manager or delegated general manager of a simplified joint stock company (société par actions simplifée).(3) A micro business is one that does not exceed at least two of the following thresholds for two consecutive years:net assets -€350,000;net turnover - €700,000; andaverage number of employees - 10.(4) The appendices complete and comment on the information provided in the balance sheet and income statement. They must contain "all the significant information on the company's financial and asset situation, and the income statement", such as:the methods and processes of evaluation applied to the various items on the balance sheet and income statement;the methods used to calculate the amortisations, depreciations and provisions; andthe amount per category, distinguishing those used for the application of tax legislation.(5) A small business is one that does not exceed at least two of the following thresholds for two consecutive years:net assets - €4 million;net turnover - €8 million; andaverage number of employees - 50.(6) Article L225-38 of the Commercial Code for a limited company with a board of directors and Article L225-86 for a limited company with a management board and supervisory board.(7) Or, in the case of a limited company with a management board and supervisory board, an agreement entered into with a member of the supervisory or management board.(8) Or, in the case of a limited company with a management board and supervisory board, any member of the management or supervisory board.(9) Article L221-14 of the Commercial Code for partnerships and Article L223-17 of the Commercial Code for limited liability companies.(10) Articles L221-14 and R221-9 of the Commercial Code for partnerships and Articles L223-17 and R223-13 of the Commercial Code for limited liability companies.