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14 October 2013
A recent law has brought about greater employee involvement in corporate governance. Law 2013-504(1) introduced a new system of employee representation on boards of directors(2) and supervisory boards.(3)
The new law follows on from the ambitious recommendations of the Gallois Report,(4) which were subsequently scaled back in the government's action plan on competitiveness and the national pact on competitiveness and job security (for further details please see "Competitiveness initiative points to greater employee involvement in governance").
The new regime sits alongside the existing voluntary system, which allows companies to stipulate in their bylaws that the board of directors or supervisory board must include directors or members that are elected by the workforce of both the company and its direct or indirect French subsidiaries. There are also existing rules on the representation of employee shareholders in listed companies, which apply if the workforce holds more than 3% of the company's share capital. In addition, staff representatives elected to the works council may attend meetings of the company's board of directors or supervisory board, but they do not have voting rights.
The new law requires employees to be represented on a company's board of directors or supervisory board by at least one director or member carrying voting rights. The rule applies to sociétés anonymes (limited liability companies), sociétés en commandite par actions (a partnership limited by shares) and sociétés européennes (European companies),(5) provided that such companies have a works council and employ at the end of two consecutive financial years:
A qualifying company must have at least one employee representative if it has 12 or fewer directors or supervisory board members in total, or at least two employee representatives if it has at least 13 directors or supervisory board members in total.
A qualifying company is required to make the necessary changes to its constitutional documents in order to implement the new system. The company's bylaws must stipulate one of three or, in some cases, four possible methods of appointing employee representatives:
The necessary amendments to the company's bylaws must be approved by the general meeting within six months of the end of the second of the two consecutive financial years at the end of which the company met either of the permanent workforce thresholds. The employee representatives must be appointed within six months of that general meeting. However, if a company met the conditions for the law to apply, including in particular the workforce threshold, as at June 17 2013, its bylaws must be amended by December 31 2014.
If an extraordinary general meeting to amend the bylaws has not been held within six months after the end of the second consecutive financial year during which the workforce threshold was exceeded, any employee may ask a presiding judge ruling in summary proceedings to order the board of directors or management board (in the case of a société anonyme) or the manager (in the case of a société en commandite par actions) to convene an extraordinary general meeting to amend the bylaws, subject to penalties accruing on a daily basis. Failing amendment of the bylaws within six months after the end of such second consecutive financial year, the employee representatives are elected by the employees of the company and its direct and indirect French subsidiaries. Any employee may ask a presiding judge ruling in summary proceedings to order the company to organise such elections, subject to penalties accruing on a daily basis. If the employee representatives are appointed in this way, it is not clear, in the absence of relevant provisions in the bylaws, what their term of office would be, although the law provides that it cannot exceed six years.
The company's bylaws must set the employee representatives' term of office, which cannot exceed six years. They will have voting rights and enjoy the same status as the other directors or supervisory board members. Their employment contract, if they have one, stays in place and their remuneration as employees cannot be reduced on the ground of their status as corporate officers.
The office of employee representative is incompatible with being:
Holders of any such office must resign from that office within eight days of becoming an employee representative. If not, they will be deemed to have resigned as employee representative.
If an employee representative dies, resigns or is dismissed from his or her employment, his or her office as employee representative will cease automatically. An employee representative can be removed from office only if he or she has committed a wrongful act in office. The removal must be pronounced by a court decision (tribunal de grande instance), at the request of the majority of the members of the board of directors or supervisory board.
An employee representative cannot be dismissed from employment in the absence of the labour inspectorate's approval and consultation with the board of directors or the supervisory board.
If a company is subject to the new regime, its direct and indirect subsidiaries are exempt from having to comply with the law. Consequently, the obligation to appoint employee representatives applies only to the parent company, not its direct or indirect subsidiaries. On the other hand, a subsidiary does not benefit from the exemption if its parent company is not subject to the new regime. For example, if a company is in the form of a société par actions simplifiée (limited liability company by shares) and hence falls outside the scope of the new regime, its subsidiary, assuming that it meets the qualifying conditions, must implement the new rules.
Similarly, the new rules do not apply to companies and their direct or indirect French subsidiaries whose boards of directors already include a number of employee representatives, appointed under an existing system, which is at least equal to the number of such representatives that would have to be appointed under the new regime.
The new law takes a cautious, step-by-step approach. It applies only to groups that employ a relatively large number of employees. It does not affect sociétés par actions simplifiée, which is a common type of company, nor does it address the issue of whether employee-appointed directors should be entitled to sit on key board committees, such as the remuneration or audit committee, even though this was one of the recommendations of the Gallois Report.
The government is due to submit a report to Parliament on the implementation of the new system by
June 30 2015. This will be an opportunity to gather feedback from interested parties, take stock and address any shortcomings in the new regime's reach.
For further information on this topic please contact Rhidian David or Cyrille Gaucher at Cabinet Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00), fax (+33 1 44 05 80 54) or email (firstname.lastname@example.org or email@example.com).
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