Businesses in France are in a state of confusion in relation to the status and impact of obligations imposed by a law dated July 31 2014,(1) in force for transactions closing on or after November 1 2014, imposing a new obligation on small and medium-sized enterprises (SMEs) to inform employees directly two months in advance of an intention to sell 50% or more of the shares (or 50% of more of the assets) of a business in France. The aim is to enable the employees to make an offer for those shares/assets. The new obligations are in addition to existing obligations with regard to the French works council.
The obligation to inform employees in advance of share and asset transfers also applies to intra-group transfers. For example, if a subsidiary within a group proposes to transfer 50% or more of its assets or shares to another group company as part of a group restructuring, then technically the subsidiary transferring such assets/shares must inform its employees of the proposed sale at least two months in advance of closing and give them a chance to make an offer for the assets/shares.
There is no obligation to favour - or even seriously consider - any offer received from an employee; the seller retains the freedom to choose to whom to transfer the shares/assets.
The law has come in for significant criticism from the business community and in the press, such that the Senate has now proposed an amendment to remove the information requirement.(2) However, the National Assembly will have to approve the amendment before the new information obligation is removed from the statute; pending such decision, the information requirement therefore remains in force.
French companies with a works council are already obliged under French law to inform and consult with the works council prior to a shareholder entering into an agreement to sell shares in the company or prior to any business transfer. These obligations are not affected by the new law.
As a result of the new law, certain smaller companies will also need to provide information on the proposed sale directly to employees two months prior to closing of the proposed transaction.
The background to this measure was a concern relating to succession planning in small family businesses where the owner was approaching retirement age. The measure aimed to secure the future of a number of smaller and medium-sized businesses in France and avoid redundancies and closures simply because of the owner's retirement. However, the law clearly has a significant wider impact and may create an added level of complexity in certain transactions involving French SMEs, including intra-group reorganisations.
The new law covers:
- companies which are not currently required to put in place a works council (ie, which have fewer than 50 employees); and
- companies which have a works council, but which are categorised as 'PME' companies – that is, small and medium-sized companies with fewer than 250 employees and an annual turnover of less than €50 million or a balance sheet of less than €43 million.
In each case the word 'company' includes the following structures, which are the most common structures used for commercial companies in France:
- Société à responsabilité limitée;
- Société anonyme;
- Société en commandite par actions;
- Société par actions simplifiée; and
- Societas Europaea.
Societies civiles and societies en participation are excluded (these structures are less common).
Companies in liquidation and other collective proceedings are also excluded.
Under the terms of the new law, employees must be provided with "information to enable them to make an offer" (the type of information which must be supplied is not further detailed in the law).
However, an official guide published on October 30 2014 states that this information must simply include:
- a simple statement of the fact of the seller's desire to sell; and
- a statement that the employees may make an offer.
This guide, while an official explanation of the law, is not binding on the courts.
The employees are obliged to keep the information confidential, but can be assisted by a representative of the regional chamber of commerce and industry, the regional artisan chambers of commerce and certain other individuals.
The information can be provided to the employees by any means (eg, email, registered letter, formal notice on a company notice board), provided that it is possible to prove receipt of such information by the employees (eg, read receipts for emails, signed delivery for letters, a signature confirming that they have read the notice displayed).
If a works council is in place (for companies with 50 or more employees), the employees must be informed at the same time as the information and consultation of the works council (which is in advance of signing and final decisions being taken).
The information must be provided to the employees at least two months prior to closing of the proposed transaction. In the case of companies with fewer than 50 employees, if all employees respond earlier than the two-month period to confirm that they are not interested in making an offer, the company is not obliged to wait until the end of the two-month period before completing the transaction. In the case of companies with 50 or more employees, the information period coincides with the period of information and consultation of the works council. It is not yet clear whether the two-month period can therefore be shortened if the works council's opinion is obtained in less than two months.
The sale to any third party must take place within no later than two years of notification of employees – otherwise, in the event of any continuing wish to sell thereafter, the notification must be repeated.
A failure to comply with the obligation could render the sale to a third party null and void. Any employee whose assets or shares are sold may bring such an action for nullity within two months of the date of publication/notification of the sale.
The response of the National Assembly to the amendment proposed by the Senate is awaited, to see whether the new information obligation will be annulled. In the meantime it remains in force and binding.
For further information on this topic please contact Emma Röhsler at Herbert Smith Freehills LLP by telephone (+33 1 53 57 70 70), fax (+33 1 53 57 70 80) or email (firstname.lastname@example.org). The Herbert Smith Freehills LLP website can be accessed at www.herbertsmithfreehills.com.