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

Company Law (en cours)

Under Article L. 225-206 of the Commercial Code, a company is prohibited from subscribing to its own shares, either directly or through a person acting in their own name but on behalf of the company . However, in joint stock companies, Article L. 225-206, II, of the Commercial Code permits the repurchase by the company of its own shares, under the conditions and according to the procedures provide …

Principle

Under Article L. 225-206 of the Commercial Code, a company is prohibited from subscribing to its own shares, either directly or through a person acting in their own name but on behalf of the company . However, in joint stock companies, Article L. 225-206, II, of the Commercial Code permits the repurchase by the company of its own shares, under the conditions and according to the procedures provided in Articles L. 225-207 to L. 225-217  for unlisted companies, and in Articles L. 22-10-61 to L. 22-10-65 for companies whose securities are admitted to trading on a regulated market or on a multilateral trading system.

Companies whose shares are not admitted to trading on a regulated market or on a multilateral trading system may repurchase their own shares in certain cases strictly provided for by Article L. 225-206 , among which the share repurchase promise made by a company to one of its shareholders is not included .

First, the general meeting that decided on a capital reduction not motivated by losses may authorize the board of directors or the executive board, as the case may be, to purchase a specified number of shares for cancellation . In accordance with Article R. 225-153 of the Commercial Code, the company must make a purchase offer to all shareholders. To this end, a purchase notice is inserted in a medium authorized to receive legal announcements in the department of the registered office and, additionally, if all its shares are not in registered form, in the Bulletin des annonces légales obligatoires. However, if all the company's shares are registered, these insertions may be replaced by a notice sent, by registered letter and at the company's expense, to each shareholder. The notice must indicate the company's name and form, the address of the registered office, the amount of the share capital, the number of shares intended for purchase, the price offered per share, the method of payment, the period during which the offer will be maintained, and the place where it can be accepted . The period cannot be less than twenty days . If the shares presented for purchase exceed the number of shares to be purchased, a proportional reduction is made for each selling shareholder based on the number of shares they prove to own or hold . If the shares presented for purchase do not reach the number of shares to be purchased, the share capital is reduced in proportion to the shares purchased . However, the board of directors or the executive board, as the case may be, may decide to renew the operation, under the conditions provided for in Articles R. 225-153 and R. 225-154, until the complete purchase of the initially set number of shares, provided it is done within the period indicated by the resolution of the general meeting that authorized the capital reduction . Finally, the shares purchased by the company must be canceled no later than after the expiration of the twenty-day period corresponding to the period during which the offer must be maintained . The cancellation must be recorded by a transfer to a suspense account opened in the name of the company, either at the company itself or with an intermediary mentioned in Article L. 211-3 of the Monetary and Financial Code .

Secondly, the companies involved may repurchase their own shares in three types of situations. In the first case, provided for by Article L. 225-208, the repurchase may be carried out with the aim of allocating the shares to their employees to involve them in the company's results. The shares must be allocated within one year from the acquisition . In the second case, referred to in Article L. 225-209-2, the ordinary general meeting may authorize the board of directors or the executive board, as the case may be, to purchase the company's shares, to offer or allocate them, within the year of their repurchase, to the beneficiaries of an operation mentioned in Article L. 225-208 or occurring within the framework of Articles L. 3332-1 et seq. of the Labor Code or, within five years of their repurchase, to shareholders who express to the company their intention to acquire them during a sale procedure organized by the company itself within three months following each annual ordinary general meeting. In these two scenarios, the number of shares acquired may not exceed 10% of its capital. Finally, the offer or allocation of shares may also occur within two years of their repurchase, as payment or in exchange for assets acquired by the company within the framework of an external growth operation, merger, demerger, or contribution, provided that the number of shares acquired does not exceed 5% of its capital. The general meeting must specify the purposes of the operation and define the maximum number of shares it authorizes for acquisition, the price or the methods for setting the price, as well as the duration of the authorization, which may not exceed twelve months. It may authorize the board of directors or the executive board, as the case may be, in compliance with the applicable deadlines, to use the repurchased shares for another of the purposes provided for in Article L. 225-209-2 .

The provisions of Articles L. 225-209-2, L. 225-206, and L. 22-10-62 do not apply to fully paid shares acquired following a universal transfer of assets or a court decision . However, these shares must be sold within two years from their acquisition date when the company holds more than 10% of its capital. Upon expiration of this period, they must be canceled .

Article L. 225-210 provides that the company cannot hold, directly or through an intermediary acting in their own name but on behalf of the company, more than 10% of the total of its own shares, nor more than 10% of a specific category. This rule is justified by the idea that a company cannot be both creditor and debtor of itself, and that self-holding of its capital risks rendering it fictitious. These shares must be in registered form, except for those repurchased to facilitate the liquidity of the company's securities, and must be fully paid up at the time of acquisition. Failing this, the members of the board of directors or the executive board, as the case may be, are required to pay up the shares. The acquisition of the company's shares cannot result in reducing the shareholders' equity to an amount less than that of the capital increased by the non-distributable reserves . The company must have reserves, other than the legal reserve, amounting to at least the value of all the shares it holds. The shares held by the company do not entitle dividends and are deprived of voting rights.

Finally, in the event of a capital increase through the subscription of shares in cash, the company itself cannot exercise the preferential subscription right. The general meeting may decide not to take these shares into account for determining the preferential subscription rights attached to other shares. Failing that, the rights attached to the shares held by the company must, before the subscription period closes, either be sold on the stock exchange or distributed among the shareholders in proportion to each one's rights. However, the shares must be transferred within two years from the date of acquisition when the company holds more than 10% of its capital. At the expiration of this period, they must be canceled.

All shares held in violation of these provisions must be transferred within one year from their subscription or acquisition. Upon expiration of this period, they must be canceled . However, the invalidity incurred is not automatic; it requires a vote by the general meeting . Additionally, the shares held by the company itself must be subject to a transfer .

However, no text provides that the violation of the principle prohibiting a company from repurchasing its own shares must be sanctioned by the annulment of the operation . Consequently, the fact that an association transfers the shares it holds in a joint stock company to a nominee of the latter, in violation of Article L. 225-206, II of the Commercial Code, cannot result in the nullity of the acquisition . Similarly, the repurchase of its shares by an SA, intended to fulfill a commitment made by the latter to one of its shareholders, is only sanctioned by the nullity of the acquisition if the operation is not followed by the procedure provided for in the event of a capital reduction, which involves informing all shareholders and a decision by the general meeting .

2) Companies whose shares are admitted to trading on a regulated market or on a multilateral trading system

In accordance with Article L. 22-10-62 of the Commercial Code, the general meeting of a company whose shares are admitted to trading on a regulated market or on a multilateral trading system may authorize the board of directors or the executive board, as the case may be, to purchase a number of shares representing up to 10% of its capital. It defines the purposes and terms of the operation, as well as its ceiling. The authorization cannot be granted for a period exceeding eighteen months. The Social and Economic Committee must be informed of the resolution adopted by the general meeting.

A listed company may also repurchase its own shares, up to 10% of the corporate capital, to enhance liquidity under the conditions defined by the general regulation of the Financial Markets Authority.

Companies must declare to the Financial Markets Authority the transactions they plan to carry out pursuant to the provisions of Article L. 22-10-62. The declaration is deemed to have been made when companies have done so pursuant to Article 5 of Regulation No 596/2014 of 16 April 2014  or the provisions of a market practice accepted by the Financial Markets Authority pursuant to Article 13 of the same regulation . They report monthly to the Financial Markets Authority on the acquisitions, disposals, cancellations, and transfers they have made . The Financial Markets Authority may request any explanations or justifications it deems necessary in this regard . If these requests are not satisfied or if it finds that the transactions violate the provisions of Article L. 22-10-62, the Financial Markets Authority may take all measures to prevent the execution of orders that these companies transmit directly or indirectly . However, the Financial Markets Authority is not competent to address breaches related to the respect of the prerogatives of the general meeting of shareholders and to ensure the prevention of the risk of fictitious share capital and self-designation of corporate officers, by limiting to 10% the percentage of a company's own shares it holds and neutralizing the effects of non-compliance with this limit, obligations that primarily concern the proper functioning of companies and not the protection of investors and the proper functioning of the market .

Under the conditions and according to the procedures set by the general regulation of the Financial Markets Authority, any company whose shares are admitted to trading on a regulated market that wishes to repurchase its own equity securities must inform the market in advance .

Before the start of operations under a share buyback program, any issuer shall publish, in accordance with the procedures set out in Article 221-3 of the AMF General Regulation , the program description in compliance with the provisions of Delegated Regulation No 2016/1052 of 8 March 2016 . During the execution of the buyback program, any modification of one of the pieces of information listed in the description must be made known to the public as soon as possible, according to the procedures set out in Article 221-3.

Finally, companies that involve employees in the fruits of the company's expansion by granting their own shares, those that grant their shares under the conditions provided for in Articles L. 225-197-1 to L. 225-197-3 and L. 22-10-59 of the Commercial Code, as well as those that intend to grant stock options to employees, may use for this purpose all or part of the shares acquired under the conditions provided above. They may also offer employees the opportunity to acquire their own shares under the conditions provided by Articles L. 3332-1 and following of the Labor Code.

For an illustration, see CA Paris, 31 January 2003, LawLex202300006096JBJ, holding that the purchase by a first company of 2% of the capital of a second company, which holds 3% of the capital of a third company, cannot be analyzed as a repurchase, even indirectly, by the latter of its own shares through an intermediary, solely because the first company is nearly 100% its subsidiary, as long as it is not established that it does not act independently and on its own behalf.

CA Paris, 18 May 2017, LawLex202300006091JBJ.

Commercial Code, Art. R. 225-154, by reference to Art. R. 225-158, para. 3.

Commercial Code, Art. R. 225-158, para. 2.

See CA Montpellier, 25 June 2013, LawLex202300006198JBJ, considering that a company does not violate the prohibition against reducing its shareholders' equity below the amount of the corporate capital by repurchasing its own shares, when it is provided that this repurchase will be followed by the cancellation of the acquired shares and a reduction of the corporate capital.

Cass. com., 12 May 2021, LawLex202200005596JBJ, upholding CA Versailles, 2 April 2019, LawLex202300006088JBJ.

CA Versailles, 23 June 2015, LawLex202300006090JBJ, considering that the commitment made by a SA to repurchase the shares of one of its employees in the event of dismissal within the year is unlawful as it does not correspond to any of the scenarios provided for by Article L. 225-206 of the Commercial Code.

CA Montpellier, 13 December 2007, LawLex202300006092JBJ.

Cass. 1re civ., 17 December 2009, LawLex202200005593JBJ.

CA Rennes, 15 January 2019, LawLex202300006191JBJ.

Regulation No 596/2014 of 16 April 2014 on market abuse.

Commercial Code, Art. L. 22-10-64, para. 1; CMF, Art. L. 451-3; General Regulation (RGAMF) of the Autorité des marchés financiers (AMF), Art. 241-1 et seq.

Commercial Code, Art. L. 22-10-64, para. 2.

Commercial Code, Art. L. 22-10-64, para. 3.

Cass. com., 3 March 2021, LawLex202200005595JBJ; Cass. 1re civ., 15 November 2010, LawLex202200005594JBJ.

Under which “The issuer ensures the effective and complete dissemination of the regulated information defined in Article 221-1, except for the information referred to in m of 1° of Article 221-1, whose effective and complete dissemination is ensured by the AMF on its website. The issuer posts the regulated information on its website as soon as it is disseminated, except for the information referred to in m of 1° of Article 221-1, which is disseminated by the AMF on its website.”

RGAMF, Art. 241-2, para. 1; Delegated Regulation No 2016/1052 of 8 March 2016 supplementing Regulation No 596/2014 with regard to regulatory technical standards for the conditions applicable to buy-back programs and stabilization measures.

Commercial Code, Art. R. 225-154, para. 1.

Commercial Code, Art. R. 225-154, para. 2.

Commercial Code, Art. R. 225-155, para. 1.

Commercial Code, Art. R. 225-155, para. 2.

Company Law (en cours)

99. Principle

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99. Principle

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