Due to a recent legal change, small and mid-cap M&A transactions in France will be subject to a new obligation requiring the target company to inform its employees of a potential sale. The Act on Social and Solidarity Economy (ESS) n°2014-856 of July 31, 2014 (Loi relative à l’économie sociale et solidaire) adds an additional burden on companies in relation to the transfer of SMEs. In some situations, it may also apply to more significant transactions. The aim of this is to give one or multiple employees the opportunity to come up with an alternative purchase offer. Whilst the full impact is not yet known, and may be limited, at very least this will have an impact on the transaction process and add an additional administrative constraint on companies.
Which transactions are affected?
The Act on Social and Solidarity Economy (ESS) n°2014-856 of July 31, 2014 establishes a preliminary and direct obligation to provide information to all of the employees of a company in the event that the sale of that company or business is contemplated. The aim of this is to give one or multiple employees the opportunity to come up with an alternative purchase offer. This applies to transactions where the target company employs fewer than 250 employees and has an annual turnover lower than Euro 50 million or, a balance sheet total lower than Euro 43 million.
The Act covers the transfer of business assets as a going concern (fonds de commerce) and the transfer of shares/securities as a result of which the purchaser would acquire more than 50% of the share capital of an SARL, SA, SAS or SCA .
The new law raises a number of questions as to its scope. Although targeting the sale of SMEs (see above), this new law may also apply to more significant transactions particularly in the event of the purchase of an active holding company (with a few employees) holding one or more subsidiaries that would not, in themselves, meet the above thresholds. The same could apply in cross-border deals where a French target company/business is to be purchased directly. Conversely, the sale of a pure holding-company (without employees) holding all of the shares in a subsidiary company meeting the legal thresholds would not fall within the scope of the law (save where fraud can be established).
Contributions/merger/spin-off transactions are not within the scope of the law whereas intra-group transactions are.
The ultimate impact is likely to be limited as the seller remains free to sell the company to whichever purchaser and on whichever terms he chooses. However, companies must still be careful to ensure that they fully comply with the new information obligation as failure to do so could have significant consequences including the transaction being voided completely.
How can the obligation to inform be satisfied?
The information required can be provided to the employees by any of the following means (which must in each case enable the company to show the date on which the information was received by the employees):
- during a meeting with the employees where an attendance sheet is kept;
- by displaying a notice within the premises (in this case the date of receipt of the information would be ascertained by the employees’ signature on a register so as to acknowledge sight of the notice);
- by way of an email provided that the date of receipt may be ascertained;
- by personal delivery, against signature or a signed confirmation of receipt the required information;
- by registered mail, the date of receipt being the one assigned by the post office on the delivery date; and
- by an extra-judicial act.
The Act merely specifies that the information notification is to provide only:
- the intent to sell the business assets or the majority of the share capital of the company;
- that for each employee of the company may formulate an offer.
The information must be provided before the projected sale closes, pursuant to a timetable which varies according to the size of the company (i.e. the target or the company disposing of a business):
- In companies of less than 50 employees, the notification must be made two months before the closing date. It is possible to shorten this period by having each employee of the company acknowledge in writing that he has been informed of the sale and foregoes his right to submit an offer. This statement should be included in the sale documentation where relevant.
- In companies with 50 to 249 employees which have a works council (comité d’entreprise), the obligation to directly inform the employees will be additional to the existing information consultation procedure which the company is required to go through with the works council. The new information obligation must be complete at least within the timetable for the works council consultation. In a case where there is not a works council nor any employee representatives (délégués du personnel), the two month period stated above will apply.
The sale must be carried out within two years of the notification to the employees. If not, a new disclosure will be required.
What are the consequences of non-compliance?
Where this new notification is not provided to employees any applicable sale may be cancelled at the request of any of the employees. It should be noted however that a judge may opt not to void the sale despite the failure to comply.
The statutory limitation period for the relevant legal action is two months for a sale of business assets as a going concern, such period measured “from the publication date of the sale notice“. In the case of a sale of securities, it is measured “from the date of publication of the sale of securities or from the date at which all employees were informed“.
The date on which the statutory limitation period starts to run may however be unclear. Though the sales of shares of an SARL must be filed with the clerk of the commercial court, the sales of securities of an SA, SAS or SCA are not subject to any such formality nor do they need to be published in a journal of legal notices. This makes the starting point of the statutory limitation period for the sale of such securities uncertain.
We therefore recommend that all employees are notified of a transaction closing as soon as possible in such a way that the date of the notification is recorded and receipt by the employees can be ascertained.
Practical implications of the new law
This new obligation creates an additional step in sale processes, which is unfortunate. The requirement to notify the employees may make it harder for companies to preserve the confidentiality surrounding a transaction, although it should be noted that the employees and any persons they may appoint to help them formulate an offer are bound by a “duty of discretion” equal to that of the members of the company works council.
Otherwise, the impact of the Act is in reality very limited. The information provided to the employees is very basic (specifically there is no obligation to disclose the terms and price of the sale). The Act does not establish a priority right or a pre-emption right in the employees’ favour; the seller remains free to sell to whom and on the conditions he chooses. Even in the event that an employee does put together a realistic offer, the seller may refuse to negotiate such offer and reject it.
In practice, it will often be improbable that in applicable period for issuing an offer, all or some of the employees will have the resources to structure an offer and to gather the necessary funds. For the most part therefore, it seems that this new law is unlikely to have a significant impact beyond the administrative burden.