Equity-based compensation arrangements
Treatment of grants
Outline the general tax, securities law and regulatory treatment relating to grants of:
(a) Stock options
French tax law provides for a favourable tax and social security regime in connection with stock option grants, provided that the requirements set out in the Commercial Code (Articles L225-177 to L336-186-1) are met, as follows:
- The company issuing the options holds, directly or indirectly, at least 10% of the shares of the French company which employs the persons subscribing to the options.
- The options are granted by the body which is competent to take such decisions within the issuing company.
- The option price is definitely fixed on the date of grant.
- The option holder is an employee of the employing company. Options may also be granted to corporate officers and directors of the employing company, provided that shares in the foreign parent company over which the options are granted are listed on a regulated market.
- The option holder does not hold more than 10% of the share capital of the issuing company.
- Where the shares to be purchased on exercise of the options are listed shares, the price at which the options are granted is no less than 80% of the mathematical average of the middle market quotation of the shares during the 20 business days preceding the date of grant. (The shares over which the options are granted may be newly issued or existing shares. However, specific rules apply for existing shares.)
- Where options are offered to officers of a direct subsidiary of the issuing company, the offer is made to at least 90% of the employees of the subsidiary.
- No option is granted to any employee less than 20 trading days after payment of a dividend or a bonus issue of shares.
Tax regime: Acquisition gains (ie, the difference between the fair market value of the shares on the date of exercise of the option and the exercise price of the option) are taxed as salary and are therefore subject to French income tax at the progressive rate (ie, the marginal rate of 45% for sums above €151,200) with respect to the year of disposal of the underlying shares.
Capital gains (ie, the difference between the sale price of the underlying shares and the fair market value on the date of the exercise of the option) realised on the disposal of the underlying shares are subject to French income tax at the progressive rate after an abatement depending on the period of ownership of the shares (ie, 50% where the ownership period is between two and eight years and 65% where the ownership period is at least eight years).
Capital losses are offset against acquisition gains.
Social security regime: At the time of granting stock options, employers are liable for payment of a special social security contribution at the rate of 30%, assessed on either the fair market value of the options according to International Accounting Standards or 25% of the value of the underlying shares at grant. This social security contribution falls due in the month following the grant date of the option under the plan, regardless of whether the option is effectively exercised.
Upon exercise of the option, provided that employers comply with disclosure obligations towards the French social security authority, any acquisition gain is not subject to employee or employer social security contributions (at the rates of approximately 45% to 50% and 22%, respectively). However, any acquisition gains are subject to social contributions at the rate of 8% and a special social security contribution at the rate of 10%, both of which are due to be paid by the employee at the time of his sale of the underlying shares.
Capital gains are subject to social security contributions at the standard rate of 15.5%.
Pros and cons
Compare and contrast the pros and cons of granting different types of equity award from a general tax, securities and regulatory standpoint.
Considering that acquisition gains are subject to French income tax in the same way as any other remuneration, the only favourable aspect is the fact that taxation is deferred until disposal of the shares.
With regard to the social security regime, the savings arising from the fact that the award is exempt from social security contributions are partially outweighed by the fact that special social security contributions are due at the granting of the options or free shares (although there are some savings given the different total rates).
Payment of exec comp generally
Tax and regulatory limitations
Do any tax or regulatory limitations apply to amounts that may be paid to executives, or deducted by employers, with respect to executive compensation generally?
Tax issues: Remuneration paid to executives is tax deductible from the company’s taxable results, provided that this is not excessive and is paid in consideration for effective work. When considering whether the level of remuneration may be viewed as excessive, the following criteria may be taken into account:
- the employee’s professional qualifications;
- the scope of the executive’s work; and
- a comparison with remuneration paid to similar executives.
In addition to the aforementioned rules, a specific limitation applies to fees received by directors of joint stock companies. Pursuant to Article 210sexies of the Tax Code, directors’ fees are tax deductible up to 5% of the amount equal to the number of directors multiplied by the average deductible remuneration paid during the year to the five to 10 highest-paid employees. If the company has fewer than five employees, the level of tax deductibility is capped at €457 per annum per member of the board of directors.
Regulatory restrictions: Pursuant to the EU Capital Requirements Directive IV (2013/36/EC), restrictions apply to the remuneration of employees of credit institutions and investment firms (both as defined under Directive 2006/49/EC) who are ‘identified staff’ – that is, whose activities may have a material impact on the institution’s risk profile. The following employees should be included as identified staff:
- executive members of the credit institution or investment firm’s corporate body;
- senior management who are responsible for day-to-day management;
- staff who are responsible for independent control functions; and
- other risk takers.
The restrictions include a requirement to adopt a sound remuneration policy, including the following:
- The ratio of fixed to variable remuneration should be limited to 1:1 (or 1:2 in certain circumstances – that is, with the approval of a simple majority of the shareholders, unless fewer than half of the shares are voted, in which case 75% shareholder approval is required). If variable remuneration is over the ratio of 1:2, at least 25% of any bonus above the 100% cap must be deferred for at least five years in the form of long-term deferred instruments such as shares and contingent convertible debt instruments.
- At least 50% of the total variable remuneration should comprise equity-linked interests and at least 40% of the variable component should be deferred over a period of three to five years.
- Restrictions apply to retention bonuses.
- Increased transparency and disclosure requirements apply for employees earning over €1 million gross per annum.
Do any special limitations apply to severance benefits?
Tax deductibility for company: Pursuant to the general rules on the tax deductibility of expenses, severance benefits and sums paid on the removal of executives from office and/or the termination of their employment contracts are tax deductible from the company’s taxable results, provided that they relate to a normal act of management (ie, they are deemed to be incurred in the interests of the company and are not excessive).
Social security treatment for company: The first €75,096 (as of January 1; this rate changes each year) of the total of termination sums paid pursuant to French law or the applicable collective redundancy agreement plus any other termination payment made to the employee can be paid without social contributions due from the employer.
In the case of payments made under agreed terminations, the first €75,096 of any such payment is subject to employer social contributions at the rate of 20%.
Tax treatment for executive: Severance payments and benefits received on removal are subject to French income tax at the progressive rate for the fraction exceeding the highest of the two following amounts:
- half of the amount received; or
- twice the amount of the gross annual remuneration received by the executive during the calendar year preceding his removal.
However, the fraction that is exempt from French income tax cannot exceed an amount corresponding to six times the annual ceiling of social security (ie, for 2014, €225,288).
Social security treatment for executive: The first €75,096 (as of January 1; this rate changes each year) of the total of termination sums paid pursuant to French law or the applicable collective redundancy agreement plus any other termination payment made to the employee can be paid without social contributions due from the employee (but will be subject to social charges (CSG/CRDS) at the rate of approximately 8%).
Do any special limitations apply to amounts payable under a change in control agreement?
Special issues applicable to public companies
Does executive compensation raise any special regulatory disclosure issues?
Corporate officers may receive remuneration by way of directors’ fees, although this is not mandatory. If they are also employees, they will also be paid remuneration under the terms of their employment contracts.
The tax and social security treatment of remuneration both as an officer and as an employee is identical.
In addition to the directors’ fees, the president of a listed company receives additional remuneration determined by the board. The president’s remuneration is not considered to be a regulated agreement and thus does not require shareholder approval.
The remuneration of other officers of a listed company is also determined by the board (often with the assistance of a remuneration committee), and must be strictly linked to the satisfaction of performance conditions set by the board and evaluated over at least two years (this should not be payable in the event of simple resignation).
Special provisions apply to termination payments made to officers of listed companies or payments relating to changes in their office. The Mouvement des entreprises de France (MEDEF) – the largest employers’ union in France – recommends that termination payments also be linked to performance during the period of office.
Termination payments are capped at 24 months’ fixed and variable remuneration, inclusive of any non-compete payment. Agreements in relation to termination payments are considered regulated agreements and thus require shareholder approval, with the following additional checks:
- The authorisation of such undertakings by the board must be published on the company’s website no later than five days after the relevant board meeting and must be available for consultation on the website during the officer’s mandate.
- Shareholder approval must be obtained by way of a separate resolution for each beneficiary.
- Shareholder approval is required at the time of each renewal of the mandate of the officer in question.
Any complementary retirement provisions are also are considered regulated agreements and thus require shareholder approval. MEDEF further recommends that:
- such benefits be taken into account when setting the global remuneration;
- the group of beneficiaries be larger than simply officers of the company; and
- such benefits be calculated over several years.
In addition, information on such rights must be publicly available.
The Commercial Code also obliges listed companies to specify, in the annual management report presented to the shareholders, the total remuneration and benefits of any nature paid to each corporate officer (ie, the president, managing director, deputy managing director, and other officers), including any sums received from other companies controlled by the company.
Do any special rules apply to employee transactions involving employer securities?
Employees must comply with the general securities regulations in connection with employee transactions involving shares in the company, in particular in relation to insider trading. For example, employees are prohibited from buying or selling securities of their employer if they have access to inside information.
In addition, stock options granted (or free shares allocated) may not be exercised or sold during certain windows (eg, the 10 trading days prior to release of the company’s consolidated/non-consolidated annual accounts; or where the holder has knowledge of significant information regarding the management of the company, up to 10 trading days after publication of this information).
Outline any general issues relating to the impact of proxy advisory firms such as ISS.
Proxy advisory firms have become increasingly important in France. They now play a key role in the annual meeting, due to various recent regulatory changes (eg, authorising a proxy firm to vote on behalf of shareholders in accordance with their voting policy). As a consequence, certain issues (eg, management remuneration packages) are scrutinised carefully by proxy advisory firms and shareholders (including institutional investors).
Pension plans treatment
Outline the treatment of pension plans in an M&A transaction. Do such transactions raise any special funding or regulatory issues (eg, required consents from governmental agencies or independent trustees)?
Given that private pension plans are relatively rare in France, these seldom feature as an issue in M&A transactions in practice. Such supplementary pension arrangements either may be provisioned on the target’s accounts or may not be provisioned, in which case future potential liabilities should be taken into account during the negotiation of the sale price, indemnities and warranties.
No consent from government agencies or trustees is required in relation to such arrangements in the context of M&A transactions.
Equity compensation arrangements
Outline the treatment of equity compensation arrangements in an M&A transaction
Any capital gains derived by an executive upon the disposal of his shares in an M&A transaction will be subject to income tax according to the ordinary rules (ie, according to a progressive scale, subject to the benefit of certain abatements depending on the period of ownership of the shares).
In some cases, however, the disposal of the shares may be restricted as a result of such shares having been awarded under a qualified stock option or free share plan (see section 3). In this case the market practice is for the executives to enter into a liquidity arrangement with the purchaser so as to enable them to comply with their lock-up obligations while allowing the purchaser to obtain certainty on the future transfer of the shares owned by the executives.
Tax and regulatory issues
Does the treatment of executive compensation in an M&A context raise any special tax or other regulatory issues?
Provision of insurance
Outline the extent to which health insurance coverage is provided by the government, through private insurers or through self-funded arrangements provided by employers.
The usual approach in France is that employees are provided with the minimum state health insurance and such insurance as is mandatory under the terms of the applicable collective bargaining agreement (if any). Employee and employer contributions in this regard are paid via the payroll to the relevant French authority (URSSAF).
It is relatively rare for employees to have additional private health insurance arrangements. However, where these exist, they are provided by independent companies, and the employee and employer may negotiate the split of the contributions between them to cover the cost of the premiums.
Do any special laws mandate minimum coverage levels that must be provided by an employer?
The employer must comply with the minimum state contribution levels and those set out in the applicable collective bargaining agreement (if any).
Can employers opt to provide different levels of health benefit coverage to different employees within the organisation?
The Supreme Court has recently held that, subject to the provisions of the applicable collective bargaining agreement (if any), it is lawful in principle to provide different levels of healthcare benefits to different categories of employee, provided that the differences in treatment are intended to take into account the specific situation of each category (eg, the circumstances in which they undertake their role, the evolution of their career, remuneration). The principle of equal treatment thus applies only within the same category of employee in this regard.
However, the employer must not discriminate between employees in the same category.
Are there any requirements that oblige employers to continue providing health insurance coverage after an employee’s termination of employment?
Yes. Pursuant to an inter-professional agreement between employee and employer representatives dated January 11 2008, dismissed employees with at least 12 months’ service have the right to continued complementary health insurance and life assurance, provided that they qualify for unemployment benefits, for a maximum period of nine months from the date of termination of their employment contract of employment, except in case of gross misconduct. The employee shares the cost of this continued cover with the employer on the same basis as applied prior to the termination date. Accordingly, the employee may elect to renounce this right within 10 days of his termination, in which case cover ceases to apply and no further contributions are due from either the employee or the employer.
New legal provisions will apply at the latest with effect from June 1 2014, which will apply to all employers and will extend the continuation of complementary cover to a maximum period of 12 months from the date of termination of the employment contract. From this date the contributions will also be mutualised based on the social contributions paid on the remuneration of current employees (rather than shared between employer and employee). The new provisions also remove the employee’s right to renounce such protection.