In business practice in France, the incentives for managers can take various forms. Share subscription warrants (bons de souscription d’actions, or 'BSAs') are often chosen by corporations to motivate their executives.
Following the recent case of the Social Chamber of the French Supreme Court (Cass. Civ. 3e, 4avri. 2019, n°17-24.470), the choice of BSAs is now more hazardous than ever.
What was the case about?
The case concerned an investment contract that was concluded on 17 December 2004 between a company, its managers and another group company. It gave the executives the option to subscribe for warrants over a total amount of €900,000. These BSAs were non-transferable and could only be sold upon the occurrence of one of two events, namely: the Company's stock exchange listing, or the exit of a named investor. In the latter case, the managers committed to sell the BSAs to the Company. The contract also provided for the calculation of the price.
The named investor sold his interest on 15 April 2009. The managers then sold their warrants to the company, according to the predefined conditions, and realised a capital gain of €2.7 million.
The French social security contributions collection agency (URSSAF) then reintegrated the amount of the capital gain in the base of the social contributions due by the company. The agency regarded the BSAs as an advantage granted in return for work that is subject to social security contributions. The company contested this reassessment before the substantive court and, following an appeal conviction, the company appealed to the French Supreme Court.
What did the Court decide?
According to the French Supreme Court, share subscription warrants constitute an advantage that falls within the scope of social security contributions (under article L. 242-1, paragraph 1, of the French Social Security Code), inasmuch as they are offered to employees in return for or in the context of work and acquired by them on preferential terms. This confirmed the Court of Appeal's decision on this point.
The Supreme Court reasoned that, since the granting and maintenance of warrants in the investment contract is linked to the existence and maintenance of an employment contract or corporate office in the company, the Court of Appeal rightly concluded that the possibility of acquiring and exercising the warrants constituted an advantage granted on the occasion of work. This benefit must therefore be included in the company's contribution base. The fact that BSAs represent a financial investment for managers, subject to risks and uncertainties, does not prevent it from being an advantage reserved for managers or employees.
Implications of the decision
BSAs may constitute an advantage that has to be included in the base of social security contributions insofar as they are offered to employees in return for or on the occasion of work and acquired by them on preferential terms. The advantage must be valued on the basis of the value of the warrants on the date on which the beneficiaries obtained their free disposal.