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    On October 9, 2018, the French National Assembly adopted, at first reading, the PACTE bill (Action Plan for Business Growth and Transformation).

    Among the many measures in the bill, whose objective is to lower the obligations that weigh on companies, Article 55 is aimed at reinforcing the framework of foreign investments in France.

    The current regime

    Foreign investments in France are free as a matter of principle (Article L.151-1 of the Monetary and Financial Code). Nevertheless, investments in certain sectors, considered strategic, are subject to prior authorisation from the Minister of Economy (Article L.151-3 of the Monetary and Financial Code).

    The authorisation procedure, established in 2005 and strengthened in 2014, currently concerns investments that foreigners wish to make in France and which might infringe upon public order, public security or the interests of national defence.

    Initially, the list of sectors was narrow: gambling, private security, counterterrorism, equipment designed for wiretapping, IT security, companies entrusted with national defence secrets, weapons trade, companies dealing with the Defence Ministry.

    However, in 2014, the list of sectors concerned was extended to also target energy and water supply, transportation and electronic communications networks, vital infrastructures and facilities as defined by the Defence Code, as well as the public health sector.

    In the abovementioned sectors, a foreign investor must make a request to the Minister of Economy for an authorisation to invest. Once the audit has been made, the Minister can: (i) authorise the investment, (ii) deny the investment, if the investor is likely to commit a series of offences or if the investment risks infringing on national interests, or (iii) authorise the investment subject to certain conditions aimed at ensuring that the planned investment does not infringe on national interests.

    In the event that the investor does not comply with the Minister’s decision, the latter may request the investor “not to follow through with the operation, to modify it or to re-establish the former situation at the investor’s expense“.

    If that demand is not complied with, financial sanctions may be imposed, the amount of which may go up to “twice the amount of the irregular investment“.

    The PACTE bill

    The two main changes foreseen by the PACTE bill are as follows:

    • 1. Extension of the business sectors concerned so as to better protect promising sectors. The list of activities would thus be extended to semi-conductors, the space industry, drones, and if related to national security, artificial intelligence, cybersecurity, robotics and mass data storage.
    • 2. Stronger sanctions. The Minister will have a wider, more calibrated range of sanctions since he will be able, in the event of non-compliance with his decision and the conditions imposed on the investment, to define additional conditions not provided in the initial agreement or even order the investor to honour his commitments, subject to penalties. The Minister will also be able to take protective measures such as the suspension of voting rights or the investor’s right to receive dividends, or he can appoint an agent commissioned to ensure the protection of national interests within the company.

      The regime of financial sanctions will also be modified. The fine determined by the Minister will not be able to exceed the highest of the following amounts: twice the amount of the irregular investment, 10% of the target company’s yearly turnover, €1 million for individuals and €5 million for legal entities.

    The PACTE bill will be examined by a Senate committee as from January 2019. We will keep you informed of the conditions for the effective implementation of the new measures having a direct impact on foreign take-over operations of a French company.

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    For the past several months, French legislators (deputies) have sought to implement a tax break on transfers by gift or inheritance.

    To this end, last May, legislators introduced a bill mainly aimed at increasing the tax allowance beyond which an inheritance or a gift is taxed, raising it from €100,000 to €159,325.

    Those legislators also proposed to apply tax allowances every 10 years instead of every 15 years as is currently the case in effect.

    Although the bill has not been voted on, it now seems to have little chance of being passed.

    In answering two ministerial questions raised, the French Government expressed its intention of not changing those tax rules.

    As per the increase of the current €100,000-allowance, the Ministry of Economy and Finance considers that the amount is “very close to the median net assets of all households, which, according to the INSEE, reached €113,900 per household in early 2015” and “that, on its own, it results in a very large majority of transfers being tax exempt“.

    As for the time period related to past gifts, the Ministry considers that the current time period is adequate, and as a reminder points out that “contrary to the sentiment expressed by (public) opinion, over three-fourths of inheritances are exempt from the payment of gift or inheritance tax.

    It is therefore in the best interest of taxpayers with a substantial estate to plan the transfer of their assets to their descendants in advance.

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    On June 21, 2018, the French Senate finally adopted the Bill aimed at transposing European Directive 2016/943 on trade secrets adopted by the European Parliament in June 2016 and introducing a new Title V in the French Commercial Code entitled “Protection of Trade Secrets”.

    The text in the reform is aimed at protecting company know-how and information against industrial espionage and unfair competition, regardless of their size or field of business.

    Companies should adopt good practices in compliance with these new regulations as of now:

    1. Information covered by the protection

    Trade secrets deal with information of various types such as technical, commercial, accounting and financial, or strategic data.

    In order to be considered a trade secret and be covered by the new protection regime, information must meet the following three requirements. It must:

    – be secret, i.e. not readily accessible by the public,
    – have commercial value,
    – be the subject of reasonable protective measures, such as pre-contractual or contractual measures or personnel awareness measures.

    2. Acts considered as an infringement of trade secrets

    If the abovementioned prerequisites are all met, the law makes it possible to object to access, use and disclosure of the protected information as well as punish the perpetrator whose conduct was unfair or who must have been aware, under the circumstances, of the illicit character of his/her act(s).

    The perpetrator having committed acts constituting direct infringement of the trade secret shall be civilly liable according to the terms of Article L. 152-1 of the Bill and may be sentenced to pay damages if the infringement of the information occurred without the legitimate holder’s consent.

    With regard to any person who imported, exported, produced or marketed products reproducing secret know-how, the reform provides stronger protection compared to the current regime since it makes it possible, in particular, to punish that person even if s/he did not personally participate in the misappropriation of the know-how, provided it can be proven that s/he knew, or ought to have known, of the fraudulent origin of the information. To that end, it will be possible to send a letter of warning to the perpetrator beforehand “informing of potential infringement”.

    3. Additional exceptions to the protection

    In view of the criticism targeting the European Directive, regarding the violation of the right to freedom of expression, the national legislator decided to extend the situations in which trade secrecy cannot be raised.

    While, in accordance with the European Directive, Article L. 151-7 of the Bill provides that trade secrecy cannot be raised when “acquisition, use or disclosure of the secret is required or allowed by European Union or national law”, Article L. 151-8 of the Bill adds an additional exception for situations in which acquisition of the information took place “within the framework of the exercise by employees or their representatives of their right to information and consultation”.

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    In a ruling dated 13th June 2018 (CE plén. 13-6-2018 n° 395495), the Council of State has finally clarified the notion of an “active holding company,” which it defines as a company: “whose principal activity, in addition to managing a portfolio of investments, is to play an active role in the management of the group’s policy and the running of its subsidiaries and, where relevant and on a strictly internal basis, the provision of specific administrative, legal, accounting, financial and property services.

    Before the 13th June ruling, only the Cour of Cassation have issued a definition of active holding companies. The Council of State’s definition builds on the definition issued by the Cour of Cassation, adding that management must be the company’s “principal” activity.

    As such, companies with non-controlling minority shares in businesses may qualify for “active holding company” status.

    Furthermore, the Council of State mentions a certain number of factual elements to be used to prove “active holding” status, notably including:

    – Minutes from meetings of the company’s board of directors attesting their involvement in the management of their subsidiaries’ policies; or else

    – The existence of a contract for administrative and strategy and development support, specifying that the holding company will play an active role in the strategy and development of its subsidiaries, without compromising their respective autonomy as legal entities.

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    Order n°2016-1635 dated 1 December 2016 required companies, other than those whose securities are admitted to trading on a regulated market, to declare their beneficial owners with the registry of the Commercial Court where their head office is located.

    Decree n° 2018-284 dated 18 April 2018 was created to clarify the system for declaring beneficial owners. These clarifications came into effect on 21 April 2018.

    The two following provisions of the decree should be highlighted:

    1. The definition of the “supervisory power” exercised by the beneficial owner

    Before 21 April 2018, article R. 561-1 of the French Monetary and Financial Code indicated that the beneficial owner of a company was the natural person:

    – Either directly or indirectly holding more than 25% capital or voting rights in the company;

    – Or exercising, via any other means, a supervisory power over managing, administrative or executive bodies of the company or over the general meeting of shareholders.

    The new decree specifies the notion of “supervisory power” and amends article R. 561-1 of the French Monetary and Financial code to this end.

    As of 21 April 2018, the supervisory power is now defined “within parts 3 and 4 of section I of article L. 233-3 of the French Commercial Code”.

    The notion of “supervisory power” is thus clarified and a natural person shall be considered as fulfilling the review criterion in the two following cases:

    – Either, he/she determines, via the voting rights in his/her possession, the decisions in the company’s general meeting (article L. 233-3, I, part 3);

    – Or, he/she is a member or shareholder of the company and holds the power to appoint or to remove a majority of members of the administrative, executive or supervisory bodies of this company (article L. 233-3, I, part 4).

    2. The default beneficiary owner

    Before 21 April 2018, the texts did not indicate how to process a case where it is impossible to identify a natural person as a beneficial owner on the basis of criteria established in the first paragraph of article R. 561-1 of the French Monetary and Financial Code.

    From 21 April 2018, the registry practice has been enshrined in the new decree. Article R. 561-1 now specifies that, when no natural person can be identified, the beneficial owner is the natural person or persons or, if the company is not registered in France their equivalent under foreign law, who legally represents the company, namely;

    a) The manager or managers of partnerships, limited partnerships, limited liability companies, limited stock partnerships and civil societies;
    b) The managing director of limited companies with a board of directors;
    c) The sole managing director or the chairman of the board of limited companies with a board of directors and a supervisory board;
    d) The President and, if needed, the managing director of simplified joint stock companies.

    If the legal representatives mentioned in letter a) or letter d) are legal persons, the beneficial owner is the natural person or persons who legally represent these legal persons.

    Even if the companies concerned by this obligation are presumed to have submitted their declaration by 1 April 2018 at the latest, the new aforementioned rules shall apply for the filing of any corrective statement required in the event of amendment to the initially declared beneficial owners resulting in a change to the shareholding or control of the company.

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    In the terms of article 219, I-a quinquies of the French Tax Code (CGI), the quasi-exemption regime for long-term capital gains is applicable to shares held for at least two years, which:

    – Have, in accounting terms, the nature of equity securities, whether they are entitled, or not, to the parent companies’ tax regime; and
    – Are entitled to the regime of the parent companies and subsidiaries (CGI, article 145) without having, on the accounting level, the nature of equity securities subject to the shares being recorded in a special subdivision of a balance sheet and subject to representing at least 5% of the distributing company’s capital.

    In accounting terms, equity securities are those whose lasting ownership is considered useful to the activities of the company, notably because they enable the company to exercise control or influence over the company issuing the shares.

    In principle, the usefulness of lasting ownership of transferred shares can be characterized by the existence of a shareholders’ agreement.

    In the case judged by the Council of State, it was considered, quite to the contrary, that such was plainly not the case as the agreement established that the shareholders were solely pursuing the objective of financial returns. In this instance, neither the intent to exercise influence over the issuing company nor the intent to ensure its control was therefore characterized by this agreement.

    Moreover, regarding the condition of holding at least 5%, the Council of State specified that the percentage had to be assessed based on the date of the event having generated the tax, i.e. regarding capital gain on transfer, on the date of that transfer, and not in a continuous manner over a 2-year period.

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    New measures to facilitate decision-making and the participation of shareholders in public limited companies (SA), companies limited by shares (SCA) and limited liability companies (SARL) introduced by French Decree n° 2018-146 dated February 28, 2018 as per ruling n° 2017-747 dated May 4, 2017.

    1. Shareholders’ Meetings held exclusively via remote, virtual means.

    The Articles of Association of public limited companies (SA) and companies limited by shares (SCA) may provide for general meetings held exclusively via videoconference or means of telecommunication enabling the identification of its shareholders.

    Nevertheless one or several shareholders, holding at least 5% of the capital, have the right to request that a physical meeting be convened. The Articles of Association must specify if this right to oppose is to be exercised before or after the formalities of convening the meeting.

    – Right to oppose exercisable prior to the convening of the general meeting:

    – The company must notify its shareholders of the meeting date at least 35 days prior to the former by sending the text of the draft resolutions and a reminder of the conditions for exercising the right to oppose.

    – The opposition must be addressed to the company at least 25 days prior to the meeting date.

    – Right to oppose exercisable after the convening of the general meeting:

    – The company sends to its shareholders the notice of meeting reminding them of the right to oppose and the conditions for exercising that right as well as the location where the meeting is to be held if opposition is made to holding it exclusively via remote, virtual means.

    – The opposition must be addressed to the company within 7 days following the publication or sending of the notice of meeting.

    – In the event of opposition, the company notifies its shareholders, at the latest 48 hours before the meeting, that it will not be held exclusively via remote, virtual means.

    2. Inclusion of items or draft resolutions on the agenda for the company’s (SARL) general meeting made by shareholder(s) holding at least 5% of the capital.

    Any and all companies (SARL) are required to send a notice to one or several shareholders holding at least 5% of the capital if so requested, informing them of the date scheduled for the assembly meeting.

    When shareholders seek to include an item or draft resolution on the agenda, they must justify their request, accompanied by the draft text if need be, and address it to the company at least 25 days prior to the meeting date. If the request is in compliance with the legal terms, management must include it on the agenda.

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    According to Article 155, IV of the French Tax Code, LMP status is granted to taxpayers:

    – Whose annual income, derived from said activity by the members of their tax household, is over € 23,000 and exceeds their tax household’s professional revenues; and
    – Whose tax household has one member registered in the Trade Register as a professional landlord.

    As a relieving measure, the French tax authorities granted LMP status to individuals who were not registered in the Trade Register simply due to the Register’s refusal based on the non-commercial nature of the activity, so long as those individuals could provide proof of the reason for said refusal.

    In ruling n°2017-689 QPC dated February 8, 2018, the Constitutional Council overturned the obligation for registration in the Trade Register, considering that the aforementioned obligation ignored the principle of equality of public burdens.

    As such, only the conditions pertaining to income derived from the activity as a furnished rental property landlord remain necessary for qualifying the activity as professional in nature, or not.

© Schmidt Brunet Litzler