(French Supreme Court, Civ. 2, 7-5-2014, no. 13-15.790, URSSAF du Rhône v./ Sté STMicroelectronics Grenoble 2)
In a decision handed down on May 7, 2014, for the first time, the 2nd civil chamber of the French Supreme Court specified what constitutes the operative event for the employer’s specific contribution with respect to grant of RSUs subject to a performance condition.
Companies which grant RSUs pursuant to Articles L. 225-197-1 et seq. of the French Commercial Code (RSU referred to as “qualified RSU") must pay a specific employer’s contribution equal to 30% of the shares’ value, determined on the date of grant. Such specific contribution is due the month after the date of the decision to grant the Qualified RSUs. There was some uncertainty regarding the tax base for this contribution for grant of Qualified RSUs subject to a performance condition, and in particular when the shares were not issued in the end because the performance condition had not been satisfied.
The facts of the case were as follows: the company, STMicroelectronics Grenoble 2, had granted RSUP (RSU under condition of Performance)to its employees, who would acquire them only if the performance condition had been satisfied. As they were not, it did not distribute the shares as planned. Therefore, it asked the URSSAF to refund the contribution it had paid for granting qualifying RSUs since the shares were not acquired in the end. The URSSAF rejected its request.
In its decision on January 30, 2013, the Social Security Affairs Court of Lyons ruled that the due date (exigibility date) for the employer’s specific contribution, which was the decision to grant the RSU, could not be confused with the operative event, which was the grant and not merely the decision to grant them. Consequently, because the condition precedent was not performed, the employer had the right to obtain a refund of the employer’s specific contribution.
The French Supreme Court reversed this decision, stating that the operative event for the employer’s contribution was the decision to grant the shares, even if the event was accompanied by a condition precedent. Consequently, in the event the shares are not acquired in the end, i.e., when the condition is not satisfied, the employer’s specific contribution must not be refunded to the employer. Hence, the Court ruled that this contribution had to be based on the maximum possible amount of shares that could be granted if the conditions were satisfied and not on the effective number of shares effectively issued when employees acquire them in the end.
Therefore, this decision provides us some clarification on when the employer’s specific contribution is due, which is indeed when the operative event for such contribution occurs, i.e., the grant of theRSUP. Therefore, the employer is liable for the unforeseeability of whether or not the desired performance will be reached, and this takes place by paying all the employer’s specific contributions at the time of grant of the RSU subject to a performance condition, notwithstanding the number of shares effectively acquired.
These clarifications also apply to gant of stock options (also mentioned in Article 137-13-II of the French Social Security Code) when the beneficiary decides not to exercise the option. Indeed, this decision is not surprising based on legislation’s wording.
Nevertheless, the fact of paying a social contribution on a “virtual” employee benefit when the contribution is due does seem unfair.