All of French Company Law: ordinary law of companies and specific regime for different types of companies

Company Law (en cours)

A group of companies can be formed in several ways: a parent company can either create a subsidiary in which it holds 100% of the capital, take a stake or control of an existing company, or establish an acquisition holding company when a company, acting alone or in concert, comes to hold more than 30% of the capital or voting rights of a listed company.

The group can first be created by the subsidiarization of certain activities that the parent company can no longer or does not wish to carry out itself, or by the creation of structures to cover new geographical territories, particularly to meet the regulatory constraints of the country of establishment. In these two scenarios, it is important to distinguish the subsidiary from related concepts such as the branch, agency, or establishment, the difference mainly residing in the fact that the former has legal personality and thus a certain autonomy, whereas this is not the case for the others . The contribution of a complete branch of assets to a new structure created ex nihilo is the natural means of forming a group. When choosing this option, the parent company must exercise caution and diligence, particularly by providing its subsidiary with sufficient financial resources  to achieve the objectives assigned to it and fulfill its social commitments to the employees assigned to the new structure .

The formation of the group can also be carried out through the acquisition of equity interests in the capital of one or more existing companies. For these to be classified as "subsidiaries" within the meaning of Article L. 233-1 of the Commercial Code, the participation must amount to at least 50% of the target's capital . Indeed, between 10% and 50% of the capital, Article L. 233-2 considers that the subscriber only holds "an interest" in the target. However, even a participation of less than 50% can grant its holder control power that allows for the consideration of the existence of a group, when, in accordance with Article L. 233-3, it grants the majority of voting rights in the target's general meetings or allows for the determination, in fact, of decisions in the target's general meetings or even the appointment or removal of the majority of the members of the administrative, management, or supervisory bodies of this company. The acquisition of equity interests can be carried out in several ways derived from traditional company law techniques such as subscribing to a cash capital increase, holding, partial asset contribution, or acquiring shares or stocks from the founders and/or shareholders, in which case the applicable regime is that of the transfer of shares.

When the acquisition of a stake aims to take control of a company, it is referred to as a takeover. Public offers are the most frequently used mechanism to take control of a listed company. A public purchase or exchange offer is the operation by which a person publicly notifies the shareholders of another company of their intention to acquire their securities. The purchase price, higher than the stock market price, must be announced in advance. If it is stipulated in cash, it is called a public purchase offer (OPA); if the payment is made by delivering shares or bonds, it is a public exchange offer (OPE). Quick and transparent, these operations  are made mandatory, unless an exemption is requested , when a company, acting alone or in concert, comes to hold more than 30% of the capital or voting rights of a listed company . Furthermore, to guard against undesirable takeover attempts, the legislator has established a number of information obligations for the acquirer. Indeed, in accordance with Article L. 233-6 of the Commercial Code, when a company has taken, during a fiscal year, a stake exceeding a certain threshold in a company with its registered office in France, it is mentioned in the report presented to the target's associates on the operations of the fiscal year and, if applicable, in the statutory auditors' report. Similarly, for listed companies with their registered offices in France, the regulations regarding threshold crossing situations apply. Under the applicable texts , any natural or legal person acting alone or in concert who comes to possess, directly or indirectly, a number of shares exceeding, or becoming less than a certain threshold of the capital or voting rights, is required to inform the company no later than before the close of trading on the fourth trading day following the day of the occurrence of this event, of the total number of shares or voting rights they hold. They must also inform it of the number of securities they hold giving access to shares to be issued and the voting rights that will be attached to them, as well as the already issued shares they can acquire, under an agreement or a financial instrument. The person required to comply with the threshold crossing rules must, in accordance with paragraph 7 of Article L. 233-7, declare the objectives they intend to pursue over the next six months. The text adds that the person in this situation must also inform the Financial Markets Authority (AMF), which will make the information public . Except for exemptions , failure to comply with these obligations results in the deprivation of voting rights for the shares exceeding the fraction that should have been declared, for a period of two years.

Furthermore, Article L. 233-29 of the Commercial Code establishes the principle that a joint stock company cannot hold shares in another joint stock company if the latter holds more than 10% of its capital. The company that exceeds the 10% threshold must inform the other, in accordance with the information obligation of Article L. 233-7, para. 1. In the absence of an agreement between the interested companies to regularize the situation, the one holding the smaller fraction of the other's capital must divest its investment. If the reciprocal investments are of the same magnitude, each company must reduce its investment so that it does not exceed 10% of the other's capital. When a company is required to dispose of the shares of another company, the disposal is carried out within the time frame set by decree in the Council of State. The company cannot exercise the voting rights attached to these shares .

Shareholdings between a joint stock company and a company other than a joint stock company are also subject to limitations, as specified in Article L. 233-30, which require the holder to dispose of and refrain from exercising the voting rights attached to them. Violation of these rules results in criminal prosecution against the concerned directors, in accordance with Article L. 247-3 of the Commercial Code. Nevertheless, on the civil level, the transfer of shares carried out within the framework of prohibited reciprocal shareholdings is not sanctioned by invalidity .

Regarding situations leading to auto-control, Article L. 233-31 of the Commercial Code provides that the voting rights attached to these shares or voting rights cannot be exercised at the company's general meeting. Furthermore, they are not considered for the calculation of the quorum. Managers violating the legal provisions in this matter also face the criminal penalties of Article L. 247-3. The law does not address the potential annulment of a resolution adopted in violation of the regulations on auto-control. However, since Article L. 233-31 constitutes a mandatory provision, its violation should result in the invalidity of the irregular resolution if it does not amend the statutes. If, on the other hand, it amends them, it incurs invalidity only in the case of fraud .

A joint subsidiary can be established between two or more corporate groups to carry out an activity . However, according to case law, when its capital is shared between two companies or corporate groups that manage it on a basis of strict equality, the joint subsidiary is deemed to belong to no group .

Finally, the group can be formed by acquiring a company's shares through the establishment of a takeover holding company. This type of arrangement occurs when a person plans to buy a target company without having sufficient capital: to carry out the operation, they can, alone or with others, establish a company known as a takeover holding company, which will incur debt to acquire the target company and refinance itself through the dividends from the latter. This leverage buyout (LBO) operation, which facilitates the takeover of a company at a lower cost, may be followed by the merger of the target company and the takeover holding company, allowing for even faster repayment of the loan, thanks to the target's assets. Such an operation is not without risks: it could be analyzed as a buyback by a company of its own shares, expressly prohibited and criminally sanctioned by Article L. 225-216 of the Commercial Code; legal action against the instigators of the operation for abuse of voting rights or misuse of company assets is also possible, and a too-rapid merger may be subject to a conviction for abuse of rights in tax matters.

Cass. 1re civ., 20 February 1979, LawLex202200010250JBJ, Bull. I, No 65, regarding a branch.

Cass. com., 12 May 2015, LawLex202200007221JBJ, approving Paris, 17 September 2013, LawLex202200008127JBJ: a parent company cannot be blamed for insufficient funding of its subsidiary if it has provided additional equity beyond the initial capitalization and if the difficulties experienced by the latter are not related to its liabilities but to a penalizing context in its sector of activity as well as various costly operations.

Commercial Code, Art. L. 233-29, para. 2 and 3.

Cass. com., 3 January 1996, LawLex202200007230JBJ.

Commercial Code, Art. L. 235-1, paras. 1 and 2.

BRILL, The Joint Subsidiary, thesis, Strasbourg, 1975; JEANTIN, The Joint Subsidiary, Means of Collaboration Between Companies and Groups of Companies, Librairie Techniques, 1976.

Cass. soc., 9 February 1994, LawLex202200007702JBJ.

Cass. com., 12 May 2015, LawLex202200007221JBJ, concerning the retirement of transferred employees.

Cf. Art. 145 of the General Tax Code, relating to the application of the parent-subsidiary tax regime, in which a capital holding rate of 5% is sufficient.

VIANDIER, OPA, OPE, and other public offers, Francis Lefèbvre, 5th ed., 2014; COHEN, Towards the end of hostile public offers, in Mélanges DIDIER, Economica, 2008, 125; BARRIERE and de REALS, The Florange Law: an anti-OPA law?, Rev. sociétés 2014, 279.

Cass. com., 19 October 1999, LawLex202200007237JBJ; 28 May 2013, LawLex202200007238JBJ.

Monetary and Financial Code, Art. L. 433-3, I.

Commercial Code, Art. L. 233-7, I, para. 1 and 2 and Art. R. 233-1.

Commercial Code, Art. L. 233-7, IV and V.

270. Techniques and specificities