As a result of our efforts in recent years and following a somewhat ambivalent AMF Poupart Lafarge report , the French Government by its July 31, 2014 bill ruled to “simplify and secure corporate life”, has finally acted, we thought, wisely . But…
This law rules out of the control of the related party transactions between group companies 100% owned by the group. After a 15-year long request Proxinvest was finally heard and this simplification had been introduced within the AMF Poupart Lafarge report .
The second measure requires a disclosure in the annual report of any direct or indirect transaction between interested parties (Director, Manager or any shareholder exceeding 10% of the capital) and subsidiaries and sub-subsidiaries of the group : these related-party transactions (“RPT”)are already under Articles L 225-38 and 40 of the French commercial code supposed to be included in the auditors special RPT report but are actually often not included. The adopted process is heavy but useful, even investors would have preferred the enforcement of lax Directors and Auditors responsibility rather than these additional reporting requirements …
The final text of the bill has been enriched with the requirement for the Board to justify and document the transactions brought to the special report and to review annually and report all RPT whose execution were continued . Proxinvest had demonstrated that some longstanding RPT were not signed in the best interests of the shareholders and this legal change will strengthen Directors responsability over the oversight of significant transactions signed in favour of controlling shareholders, managers or some directors. Boards of Director are likely to be obliged to take into consideration the high opposition rate observed sometimes at french general meetings on this issue.
French legal RPT system which imply a shareholder vote on such transactions has been a good experience on one solution to ensure a better protection of minority shareholder rights. While this shareholder vote has forced investors to scrutinize carefully these RPTs, France should now move a step forward. Indeed, .as Proxinvest and the French specialist of minority rights Professor Dominique Schmidt agree, the real problem remains the lack of effect of a negative shareholder vote against the transactions that spoil them. Shareholder vote should be binding and any rejected RPT should not be executed without the approval of the general meeting.
This control of RPT by shareholders was also on the agenda of the EU Directive on shareholder rights which has much merit : in line with French Law, the direct or indirect beneficiary of the transaction should be excluded from the vote. More severely, the Directive provides that “The company should not be able to complete the transaction before shareholders have approved it.” It recommends a binding vote for transactions with related parties representing more than 5% of the assets. Besides, for other transactions exceeding 1% of assets, “a reference to the report of an independent third party assessing whether the transaction is carried out under market conditions and confirming that it is fair and reasonable from the point of view of shareholders. ” In contrast, our team of joint French auditors have a simple scribe task , simply repeating the transactions as described by the chairman of the company. Despite its merits, EU Shareholder Rights Directive project proposes a definition of RPT that is simply too large.
Finally a positive regulation? Unfortunately no.
September 2014
P.S. A final reading of the above bill brought later a very sad conclusion: the 2014 ordonnance has rathered destroyed the control of related party transaction in a very unseen manner. The issuers lobby is so strong here, it actually waived any serious duty to disclose related party in the requested disclosed listing.
Under the NRE bill of 2001 article L225 -39 requested that the free transactions (usual deals made normal market conditions) were to be disclosed into a listing presented by the chairman of the Board to the Directors and to the Auditors with full access to the individual contracts, the listing being made available to the shareholders upon simple request at the AGM. In an unseen almost hidden change of the law, the Parliament in 2011 deprived first sharehodlers of the lsting and the Auditors from the direct access. But this 2014 actually waived the need for any disclosure of these free contracts to the Directors or Auditors.
This bill changed the L 225-39 in line with another cancelled article R. 225-32 which requested the chairman to remit the listing of all related party transactions including free transactions to the Directors and Auditors. A serious set-back to the sharehodlers control over self-dealing.
