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

Company Law (en cours)

The mechanism of subscription or purchase options for shares, provided for in Articles L. 225-177 et seq. and R. 225-137 to R. 225-145 of the Commercial Code, allows certain employees to subscribe to or purchase shares of the company in which they are employed, under attractive financial conditions. Indeed, the share subscription warrants offered by the board of directors of a joint stock company  …

Employee incentive mechanisms

TANDEAU de MARSAC and LEVESQUE, Stock options and similar incentive mechanisms: legal pitfalls to avoid, BJS 1999, 729, 163; VALUET, The employee shareholder or beneficiary of stock options, BJS July 2005, 14, 2.

The mechanism of subscription or purchase options for shares, provided for in Articles L. 225-177 et seq. and R. 225-137 to R. 225-145 of the Commercial Code, allows certain employees to subscribe to or purchase shares of the company in which they are employed, under attractive financial conditions. Indeed, the share subscription warrants offered by the board of directors of a joint stock company to its employees, in consideration of or on the occasion of their work, and acquired by them under preferential conditions, are considered an advantage that is included in the social security contribution base and whose amount is assessed at the time of the actual exercise of the transfer or realization of the share subscription warrants .

Before the NRE Law of 15 May 2001, corporate officers had to justify their status as employees of the company to benefit from the profit-sharing mechanism. This condition was removed, and Article L. 225-185, para. 4, now expressly provides that the chairman of the board of directors, the chief executive officer, the deputy chief executive officers, the members of the management board, or the manager of a joint stock company may be granted by this company options giving the right to subscribe to or purchase shares.

The implementation of the operation is carried out in several stages. The extraordinary general meeting may authorize the board of directors  or the executive board to grant, for the benefit of the company's salaried staff or certain of them, options entitling them to subscribe for shares. It sets the period during which this authorization may be used by the board of directors or the executive board, which cannot exceed thirty-eight months. The subscription price is set on the day the option is granted by the board of directors or the executive board, according to the terms determined by the extraordinary general meeting, and cannot be modified during the term of the option . The options are then integrated into a plan, which constitutes a form of agreement between the company and the concerned employees. Declarations of intent from the beneficiary of share subscription options, by which they declare acceptance of the option offer without identifying the number of shares they reserve the right to acquire, do not confer upon them the status of holder of these shares . The exercise period for options entitling the subscription of shares cannot begin to run if the allocation decision made by the board of directors has not been communicated to its beneficiary, who did not attend the meeting adopting the resolution in their favor .

Can the dismissed employee still exercise the option? Jurisprudence answers in the negative: the employee, who cannot, due to their dismissal without real and serious cause, exercise the stock options granted to them, is only entitled to compensation for the resulting damage, but not to the retention of the options . The damage, which consists of the loss of opportunity to realize a capital gain by exercising stock options, cannot result in compensation equal to the benefit that this opportunity would have provided if it had materialized . However, the dismissal of an employee for a real and serious cause prevents the claim for compensation for the loss of opportunity to realize a capital gain on their stock options . Finally, a derogation from the conditions of application of a stock option plan that requires the beneficiary to still be an employee or hold a corporate office at the time of exercising the option, to account for a settlement with a dismissed executive, requires a new meeting of the board of directors .

Article L. 225-183, para. 3, provides that in the event of the beneficiary's death, their heirs may exercise the option within six months from the date of death, failing which they will be barred. Companies issuing stock subscription options are not obligated to inform the beneficiary's successors to enable them to exercise the options within the required timeframe .

Finally, it should be noted that if the granting by the employer to an employee of an option entitling the subscription of shares constitutes an ancillary to the employment contract, which falls under the jurisdiction of the labor tribunal , any disputes that may subsequently arise in the relations between the company and the employee who has become a shareholder, independently of the conditions of acquisition of their shares, fall under the jurisdiction of the commercial court .

Cass. 2e civ., 28 September 2023, LawLex202300012033JBJ.

Cass. com., 23 March 2010, LawLex202200005541JBJ, considering that it is the board of directors, and not its chairman, that is vested with the decision-making power regarding stock options.

Cass. soc., 21 June 2005, LawLex202200005546JBJ.

Cass. soc., 16 September 2008, LawLex202200005547JBJ.

Cass. 2e civ., 27 November 2014, LawLex202200005548JBJ, specifying that in the case of a merger completed before the expiration of the period provided for the exercise of options, the subscription of shares pertains to the securities of the absorbing company and that the application of the exchange ratio determined during the merger by absorption to the subscription price of shares initially set at the time of the allocation of share subscription options cannot be analyzed as a price modification prohibited by Article L. 225-181 of the Commercial Code.

Cass. com., 19 March 2013, LawLex202300012154JBJ.

Cass. com., 9 June 2009, LawLex202300006465JBJ, emphasizing that the period for exercising options granting the right to subscribe for shares cannot begin to run if the decision to grant made by the board of directors has not been communicated to the beneficiary, who did not attend the meeting adopting the resolution in their favor.

Cass. soc., 2 February 2006, LawLex202200005545JBJ.

Cass. soc., 11 June 2014, LawLex202200005550JBJ; 18 May 2011, LawLex202300012152JBJ; 1 December 2005, LawLex202200005544JBJ; 16 March 2005, LawLex202200005542JBJ; 29 September 2004, LawLex202200005543JBJ.

Cass. soc., 30 September 2013, LawLex202300012153JBJ. - Cf. however Cass. soc., 15 January 2002, LawLex202200005539JBJ, considering that the clauses of the regulation approved by the general meeting of shareholders, under which the loss of employee status or corporate officer status results in the permanent deprivation of unexercised stock subscription options, cannot be applied in the event of dismissal without real and serious cause.

Paris, 23 September 1999, LawLex202300006469JBJ.

Cass. com., 10 December 2013, LawLex202200005549JBJ, considering that companies issuing stock subscription options are not bound by an obligation to inform the beneficiaries' successors to enable them to exercise these options within six months from the date of death.

Company Law (en cours)

494. Employee incentive mechanisms(1)

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494. Employee incentive mechanisms(1)

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