France has recently introduced new rules obliging smaller companies to provide increased information to their employees regarding prospective takeovers and ownership changes and also regarding opportunities for the staff to make acquisition offers themselves. The laws are a part of the Lois sur l’économie sociale et solidaire,a scheme of reforms designed to strengthen economic social responsibility through increased employee share ownership.
The new law forces companies to inform employees of proposed shareholder takeovers and changes in ownership at least two months in advance of the deal, so that they may have an opportunity to make their own offers. The rule applies to French companies with less than 250 employees (and meeting certain turnover / balance criteria) and applies to deals from 1 November 2014.
The law applies when there is a sale of more than 50% of the shares of a limited liability company (SARL) or transfer of shares or securities in a stock company (société par actions) where the majority ownership would change.
The current legislation already provides that in companies that have a Works Council(Comité d’entreprise), the Council must be informed and consulted on transactions. The mandatory time period for that process ranges between 1 to 4 months. The new law creates a further obligation for companies to inform their employees direct at the same time as they inform their Works Council or other employee representatives.
A similar obligation is placed on companies with less than 50 employees or those with between 50 and 249 employees but without a Works Council or employee representatives. In such companies, the employees must be informed of the transaction but with a time limit of at least 2 months prior to the transaction. The transaction can happen before the expiration of the 2 months if each employee was correctly notified and each consequently decided not to make an offer. The result is a bizarre situation where small companies could have more onerous time obligations to inform employees of proposed changes in ownership than larger companies.
The proposed transaction to the third party must take place within two years of the notification to the employees. If it does not, a fresh round of information and consultation must take place.
If the rule is not complied with the deal can be declared null and void in its entirety, so the adverse impact on both buyer and seller could be huge. It is not yet clear how tolerant the law will be of minor or inadvertent omissions in the information and consultation process, but one must hope for some flexibility given the draconian sanctions for failure.
As a result of this new law, the confidentiality of proposed deals is also at stake. Though employees must keep the information confidential, there is no prescribed sanction for those who break the obligation, even if it were possible to identify them in the first place. An employee who leaks the information could still be sued for damages yet this is hardly ideal for either party. It seems unfair to burden all employees with highly confidential information (of no likely interest to them in the great majority of cases) and then sue them if they share it. It then puts the onus on companies to take legal action when most companies do not want to be seen to be the litigious ogre, especially when the financial compensation is impossible to quantify and in any case very unlikely to be large given that it is coming from an individual.
The risks are worrying for companies and buyers in terms of repercussions in the market place, amongst other things. However well-intentioned, the provision of this information is also bound to create alarm amongst employees regarding job security.
Though not as cumbersome but rather procedural and superfluous, the second prong of the new law forces companies with less than 250 employees to inform employees at least once every three years of the scope for takeovers by the workers themselves. This information, though also subject to confidentiality obligations, raises all the same concerns discussed above.
The justification for these new obligations is that it will allow employees to make an offer to acquire the shares of the business themselves. This is hoped to reduce the number of potentially healthy businesses failing for want of robust buyers, and this problem will become more apparent with retiring company directors in the future. This may be so, but frankly, the obligations are ill-fitting and a very blunt tool to achieve that objective.
The decrees to specify the precise terms and conditions of this new obligation have not been published yet.
Law 2014-856 of 31 July 2014 – Lois sur l’économie sociale et solidaire