Geneviève Helleringer

ESSEC Business School, University of Oxford and ECGI

Related Party Transactions in France – A Critical Assessment

01/07/2020

In France, the regulation of related party transactions (RPTs) involves three steps following the notification to the board of an RPT. First, the board gives its prior authorisation to the transaction. Those who are self-interested do not take part in the vote. Secondly, auditors prepare a report on RPTs. Thirdly, a general meeting of shareholders approves or rejects it. If the shareholders do not endorse the transaction, any adverse consequences will be borne by the interested insiders. The RPT can only be avoided if it was not approved by the board and is harmful to the company. This longstanding procedure has been designed to prevent company officers and substantial shareholders from using their power to influence a contract with the company on terms less advantageous than those that the company would have obtained from a third party in a fair and balanced negotiation. This rather burdensome procedure often proved artificial and ineffective. Anti-tunnelling laws may have been unproductive because demand for them and shareholder protection more generally had traditionally been low in a culture where top management was a closed club. However, the addition of AMF recommendations in 2012 and legislative modifications in 2014 have increased the quality and quantity of information passed on to auditors and shareholders.

The implementation of the 2017 Directive on Shareholders’ Rights may be the occasion to introduce further useful adjustments, such as a legislative clarification of the scope of French RPT law.

I. INTRODUCTION

French law has long had a mechanism for scrutinising related party transactions (RPTs).

 

The mechanism, known as conventions réglementées (“regulated conventions”), has been in place since 1863, with periodical amendments of which the most recent were introduced in 2014. It is enshrined in articles L. 225-38 to L. 225-43 of the Commercial Code, which apply to both listed and non-listed companies,2 and is also supplemented by soft law provisions, including, for listed companies, recommendations of the French Market Authority, the Autorité des Marchés financiers (AMF).

 It should, however, be emphasised at the outset that in French law, transactions “within the ordinary course of business” are exempted from regulation, even where they would otherwise be considered as “related party” transactions. In this chapter, the expression “RPT” is confined to transactions that fall within the scope of the French regulatory framework.

 

At present, there is no consensus on the effectiveness of French RPT law. Advocates of shareholders’ rights argue that the law is ineffective to prevent abuse, and that criminal sanctions are not frequently imposed. Meanwhile, business associations argue in favour of less burdensome reporting requirements, requesting for instance a materiality threshold.

 

The fact that French ratings are not particularly high in the World Bank’s Doing Business report signals that RPT law has had limited efficacy. The 2017 report ranked France 32nd according to the investor protection index. France was ranked at the same level as Spain and Austria but far below the UK (6th), Northern European jurisdictions such as Sweden and Denmark (19th), Slovenia (9th), Ireland and Bulgaria (13th), and Cyprus and Croatia (27th).

 

Nevertheless, this has not deterred institutional investors, including investors from the UK and the US, from buying shares in French listed companies: approximately 40% of the shares of the 40 largest listed French companies are held by foreign institutional investors. Of course, these purchases may have been made at a discount, which limits the conclusions that could be drawn about the attractiveness of French companies for investors.

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