French law on bond issues has finally been modernised, with a simplification of its legal framework (1.), the "cleaning up" of the provisions of the French Commercial Code relating to the masse (2.) and the enshrinement in the French Monetary and Financial Code of the possibility for the issuer and the holders of bonds to organise their relationship on a purely contractual basis (3.). This small revolution, brought about by ordinance n°2017-970 of 10 May 2017 aiming at improving the development of bond issues, is welcome, since the previous system, mainly inherited from a decree-law from 1935, was in need of a thorough overhaul.
1. Simplification of the legal framework
- Capacity for companies to issue bonds: article L.228-39 of the French Commercial Code now allows stock companies (sociétés par actions) which have not had two balance sheets duly approved by their shareholders yet to issue bonds when they benefit from a guarantee from a company which has itself had two balance sheets duly approved by its shareholders.
- Enhanced flexibility in the procedure for the verification of assets and liabilities: whilst the previous version of article L.228-39 of the French Commercial Code referred to articles L.225-8 and L.225-10 of the same code relating to the approval of contributions in kind and the grant of special benefits when a company is incorporated with an offer to the public, the new version of the article deletes this clumsy reference and tailors the procedure for verification of the assets and liabilities to the specifics of bond issues. The corporate body competent to decide or authorise the issue of bonds will now be empowered to appoint the auditor responsible for drafting the report on the value of assets and liabilities.
- Possibility of delegating the power to decide the issue of bonds to any person: article 3 of the ordinance of 10 May 2017 eases the conditions for delegating the power to issue bonds. Under the previous state of law, the corporate body which was competent to authorise the bond issue could only delegate the power to decide such bond issue to one or more of its members, to the managing director or, with the agreement of the latter, to one or more deputy managing directors, except for credit institutions for which such limitation did not exist. Article L.228-40 of the French Commercial Code now unifies the regime applicable to all stock companies (whether they are credit institutions or not) by allowing the board of directors or management board to delegate the power to decide the bond issue to any person of its choice. This enhanced flexibility is appropriate as the chief financial officer or the treasurer, present throughout the setting up of the issue, will be eligible to receive the power to decide the timing and conditions of the issue.
2. Cleaning up of the articles of the French Commercial Code relating to the masse
- Clarification of the conditions for the appointment of the representative of the masse: article L.228-51 of the French Commercial Code provided that in the absence of a nomination in the terms and conditions, the representative of the masse was to be appointed by the general meeting of the bondholders or, failing this, by a legal decision, within one year of the issue date. This time constraint has been repealed, it being specified however that when the bonds are offered to the public, the representative of the masse must be designated in the terms and conditions. If the bonds are not offered to the public, the representative of the masse may therefore be appointed in the terms and conditions or later by a general meeting of bondholders and, failing this, by a judicial decision at the request of any party concerned, but the failure to appoint such representative in the terms and conditions no longer imposes an appointment within one year.
- Bringing the conditions for designation of the representative of the masse into compliance with European law: the incompatibilities to which the representative of the masse is subject rightly remain unchanged (articles L.228-49, L.228-62 and L.228-63 of the French Commercial Code). Former article L.228-48 of the French Commercial Code provided that the representative of the masse should either be of French nationality or a national of a Member State of the European Community and domiciled in France. The condition of domicile in the French territory was, as the legal committee of ANSA (French National Association for Stock Companies) emphasised, contrary to EU case law. Article 5 of the ordinance therefore deleted the criterion for residence in France thus allowing any person or company which is a national of or is domiciled in a Member State of the European Union to be designated as a representative of the masse.
- Enshrinement of the possibility for the representative of the masse to delegate some of its powers: the representative of the masse has the power to carry out, in the name of the masse, all management acts in defence of the common interests of the bondholders. The possibility for the representative of the masse to delegate part of its powers to a third party was discussed among scholars. The reform brings this debate to a close by enshrining the ability for the representative of the masse to delegate some of its powers to a third party (article L.228-53 of the French Commercial Code), which could notably facilitate the distribution of the roles of the representative and the security agent (whose regime has just been modified by ordinance n°2017-748 of 4 May 2014 relating to the security agent) in the case of secured bonds.
- Enhanced flexibility in the conditions of form and notice for calling general meetings of bondholders: firstly, article L.228-58 of the French Commercial Code opens the power to call general meetings of bondholders to the legal representative of the company, which is an interesting development since in the event of a meeting being called by the issuer, this used to fell under the jurisdiction of the board of directors or management board which had therefore to be convened. The calling of a meeting remains subject to the same conditions of form and notice as those applicable to general meetings of shareholders unless, and herein lies the significant change, there is a contrary provision in the terms and conditions (article L.228-59 of the French Commercial Code). In practice, this will enable burdens such as publication of notices of meetings in a journal of legal announcements and in the BALO (French Legal Announcements Bulletin) to be contractually excluded in favour of more flexible and less costly methods such as the distribution via clearing agencies, publication on the issuer's website or dispatch by email. It should be noted that a decree will set the requirements for the proper information of the bondholders; the draft decree provides at this stage that the notice in question must be sent to the bondholders within a reasonable period before the general meeting so that each of them may familiarise themselves with the items on the agenda sufficiently in advance.
- Decisions may be taken by the bondholders in the general meeting or in writing: holding general meetings will no longer be the only method for taking decisions. New article L.226-46-1 of the French Commercial Code provides that "decisions may also be taken after a written consultation, including by electronic means, if the issue agreement provides for this and in accordance with the conditions for form and notice provided therein".
- Simplification of the framework for the grant and release of security interests to bondholders: bonds may be secured by security interests (sûretés réelles) and this trend has notably developed in recent years in the Euro PP market. The framework for the grant and release of security interests by the company to the bondholders, which features in the French Commercial Code, has been legitimately modernised by the ordinance of 10 May 2017:- references to a "preferential right" ("droit de préférence") (former article L.228-65 I 4° of the French Commercial Code) and to "special security interests" ("sûretés particulières") (former article L.228-77 of the French Commercial Code), are replaced by the expression "security interests" ("sûretés réelles");- the French Commercial Code now expressly allows the issuer to constitute security interests concomitantly with the issue of the bonds (article L.228-77 of the French Commercial Code) while only constitution of security interests before or after the issue were envisaged by the French Commercial Code, with furthermore different regimes which led to difficulties. In the case of security interests constituted before the issue, article L.228-79 of the French Commercial Code as amended, helpfully stipulates that the representative of the masse may be a party to the security agreement "on behalf of the masse of bondholders being formed";- the ordinance repeals the provisions of article L.228-78 of the French Commercial Code which provided that security interests securing a bond issue were conferred "by the chairman of the board of directors, the representative of the management board or the managing director, on authorisation by the corporate body authorised for this purpose by the articles of association". The repeal is logical because the common law for authorisation should not be displaced in favour of specific rules when the security interests were granted to bondholders. The same applies to the registration procedures for the relevant security interests and their renewal for which common law rules for such security interests shall apply;- the provisions of article L.228-79 paragraph 2 of the French Commercial Code which provided that the legal representative of the issuer should record the result of the subscription of a bond issue in a notarised deed within six months of its opening are repealed; and- article L.228-80 of the French Commercial Code as amended specifies that the conditions for the release of security interests granted to the bondholders can be determined in the terms and conditions. This enables notably a more efficient management of the cases and conditions for release when the security interests are shared between several creditors.
- Repeal of obsolete legislation: another remarkable amendment by the ordinance, the obsolete law of 11 July 1934 relating to the rules of jurisdiction applicable to the redemption of securities and payment of coupons by French or foreign companies or authorities and decree-law of 1935 relating to the protection of bondholders, are repealed.
3. Enshrinement of freedom of contract for issues intended for institutional investors
- Contract freedom enshrined for wholesale issues: with the new article L.213-6-3 of the French Monetary and Financial Code, the ordinance enshrines for bonds with a nominal value at least equal to an amount set by decree, the possibility to organise the relationship between the issuer and the bondholders on a purely contractual basis, in the terms and conditions. The decree should set this amount at €100,000 in order to limit the application of this article to bonds placed with institutional investors, issues intended to be offered to the public remaining subject to the framework set out in the French Commercial Code. In practice, for bonds with a nominal value at least equal to €100,000, the terms and conditions may continue to refer to the system of the masse of the French Commercial Code, with the possibility to make all adjustments that may be required and can be freely negotiated between the issuer and the bondholders. But the terms and conditions may also, and this is the major innovation, set out a purely contractual regime to govern the relationship between the issuer and the bondholders, without a masse, as is the case in other governing laws.
- Intercreditor agreements: the issue agreement can define special majority rules and even provide for the conditions in which the bondholders may vote with other creditors, thereby facilitating the application of intercreditor agreements for project bonds or Euro PPs with shared security interests.
- Possible unilateral amendment of the terms and conditions in the event of a material error: the new article L.213-6-3 paragraph V of the French Monetary and Financial Code gives the issuer the ability to unilaterally amend the terms and conditions in order to correct a material error. Borrowed from Anglo-Saxon law, this provision brings the French system into alignment with international bond practice.
The ordinance was taken pursuant to law n°2016-1691 of 9 December 2016 on transparency, combatting corruption and the modernisation of the economy (known as law Sapin II). It is based, in large part, on the important work carried out for several months within the Bond Commission of Paris Europlace, bringing together representatives of the French Treasury, the Ministry of Justice, the French Autorité des marchés financiers, AMAFI (French Financial Markets Association), ANSA (French National Association for Stock Companies), AFTE (French Company Treasurers Association), issuers, arrangers and law firms, including CMS Bureau Francis Lefebvre.
The reform will not be completed until publication of the decree amending the regulatory part of the French Commercial Code and providing additional details on some points of the ordinance, still under consideration by the Conseil d'Etat. The articles which do not require such decree are in force since 12 May 2017. A law ratifying the ordinance must be filed before Parliament within three months of its publication.
We can only welcome the completion of this work with the very last ordinance of the quinquennium that just ended. This reform gives us a law governing bond issues which is modern and flexible for the financing of companies and local authorities.