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08 September 2014
Presidential Order 2014-863, relating to company law, was published on July 31 2014. It implements a number of measures previously announced in Law 2014-1, which aimed to simplify the rules and regulations applicable to businesses and pave the way for measures in a wide variety of areas affecting company law (for further details please see "Initiative to cut red tape gathers pace"). This update examines how the order affects regulated agreements, the time limit for holding annual general meetings and the enforceability of share transfers in certain companies.
As part of the government's ongoing initiative to boost competitiveness by simplifying business rules and regulations, a draft law on the simplification of business rules is being debated in the Senate, following its adoption by the National Assembly on July 22 2014. Among many other measures, it provides for the implementation of rules by the end of 2014 to reduce the required number of shareholders in public limited companies and facilitate the transfer of a registered office.
In public limited companies (sociétés anonymes), certain related-party agreements which are not agreements for ordinary transactions entered into on arm's-length terms must be submitted to the board of directors or the supervisory board for prior approval.
The order removes agreements between a parent company and directly or indirectly wholly owned subsidiaries from the scope of regulated agreements.
Further, in order to improve transparency, the board of directors or the supervisory board must now set out the reasons behind a decision to approve or reject a regulated agreement. This measure is designed to give shareholders more information regarding agreements on which they vote. Regulated agreements that were authorised and entered into in the course of previous financial years and continue to apply must now also be re-examined annually by the board of directors or the supervisory board and communicated to the company's statutory auditor, so that it can include these agreements in its report to the shareholders.
Finally, the order creates an obligation to inform shareholders of agreements between:
Such agreements can have a material impact on the parent company, its subsidiary and their shareholders; yet until now, shareholders had no right to be informed of these agreements and therefore had no control over them.
Far from simplifying them, these measures add to the complexity of the rules on regulated agreements. The principal objective of the new rules is to improve shareholder information in order to avoid conflicts of interest.
Extension of time limit for holding an annual general meeting
A limited liability company (société à responsabilité limitée) must hold its annual general meeting (AGM) within six months of the end of the financial year. Law 2012 – 387 of March 22 2012 had erroneously removed the ability of the manager to apply to court for an extension of the deadline for holding the AGM. The presidential order rectifies this error by reinstating the manager's right to ask the court to extend the deadline. This change brings the rules for limited liability companies back into line with those applicable to public limited companies.
Enforceability of share transfers
The order has simplified the rules on the enforceability against third parties of share transfers in a limited liability company or partnership (société en nom collectif). A share transfer is now enforceable against a third party if the company's amended bylaws are filed with the Registry of Commerce and Companies. It is no longer required also to file the share transfer deed with the registry. The amended bylaws can now be filed electronically. However, the transfer is not enforceable against third parties unless it has been made enforceable against the company. Accordingly, it is still necessary to lodge the original of the transfer agreement at the registered office of the company against confirmation of receipt, or for the company to be bound by the transfer pursuant to Article 1690 of the Civil Code.
Reducing required number of shareholders
Pursuant to Article L225-1 of the Commercial Code, a public limited company must have at least seven shareholders. Difficulties can arise if the number of shareholders in the company falls below seven, as the company has only one year to remedy the situation by, for example, selling shares to a third party or changing the corporate form of the company. If the company does not become compliant in time, interested parties may apply to court for it to be wound up. Therefore, the draft law on the simplification of business rules enables the government to take measures to reduce the required number of shareholders in unlisted public limited companies. The draft legislation does not state the proposed new minimum number, although it could be set at two or three.
Facilitating transfer of registered offices
Under Article L223-18 8 of the Commercial Code, in limited liability companies the manager can transfer the registered office within the same or to an adjacent administrative area (département) and modify the bylaws accordingly. The modification of the bylaws must then be ratified by the shareholders by a majority of at least two-thirds or three-quarters, depending on when the company was incorporated.
The draft law authorises the government to pass legislation to simplify the process for transferring the registered office of a limited liability company. It is envisaged that new rules will be introduced to enable the manager to transfer the company's registered office anywhere in France and make the necessary changes to the bylaws, subject to subsequent ratification by holders of at least two-thirds of the company's shares.
These developments illustrate the government's continuing drive to simplify rules and regulations applicable to companies. The Council for Business Simplification has been tasked with finding ways to reduce red tape for businesses and simplify business procedures, and is making proposals to the government on an ongoing basis. Therefore, the simplification process is set to continue as further measures are proposed and implemented.
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 (email@example.com or firstname.lastname@example.org). The Cabinet Hughes Hubbard & Reed website can be accessed at www.hugheshubbard.com).
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