M&A small & mid cap transactions impacted by a new information obligation towards the employees

The Act on Social and Solidarity Economy (ESS) n°2014-856 of July 31, 2014 (Loi relative à l’économie sociale et solidaire) burdens the transfer process of SMEs. It may also apply to more significant transactions.

Covered Transactions

The Act on Social and Solidarity Economy (ESS) n°2014-856 of July 31, 2014 sets up a preliminary and direct information obligation towards the totality of the employees in the event of a contemplated sale of a company/business, so as to enable one or multiple employees to come up with a purchase offer. This applies to transactions where the target company has less than 250 employees and a yearly turnover lower than to Euro50 million or, a balance sheet total lower than Euro43 million.

The scope of the Act covers the transfer of business assets as a going concern (fonds de commerce) and the transfer of shares/securities granting access to more than 50% of the share capital of an SARL, SA, SAS and SCA (1).

The new law raises a certain 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. Likewise in cross-border deals providing for the direct purchase of a French target company/business. Conversely, the sale of a pure holding-company (without employees) holding a company meeting the legal thresholds would not fall under the purview of the law (save for an established fraud).

Contributions/merger/spin-off transactions are excluded from the purview of the law whereas intra-group transactions are included therein.
Ultimate impact is limited as seller remains free to sell to whom and on the conditions he chooses. However, this new information obligation shall be carefully complied with as non-compliance herewith could result in the cancellation of the transaction.

An information obligation burdensome to the management of the process but limited in its content

The information of the employees may be achieved by the following means enabling the assertion of the date of its receipt by the employees, including:

• during a meeting with the employees where an attendance sheet is to be kept;

• by way of displaying a billboard, the date of receipt of the information would be ascertained by their signature on a register so as to acknowledge that they took notice of the billboard;

• by way of an email provided that the date of receipt may be ascertained;  by personal delivery, against signature or of a signed receipt mentioning 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 sale the business assets or the majority of the share capital of the company;

• the possibility for each employee of the company to formulate an offer.

The information must be made before the completion of the projected sale (closing), 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 fifty employees, the delay is of two months before closing date. It is nonetheless possible to shorten this delay by setting up a document by which each of the employee acknowledges that he has been informed of the sale project and foregoes his right to submit an offer. In any cases, practitioners will now have to include a new condition precedent in the sale protocols.

• In companies of 50 to 249 employees subjected to the obligation to have a works council (comité d’entreprise), the direct information obligation of the employees is added to the existing procedure of information-consultation owed to the company works council and must be completed at the latest simultaneously to this procedure. In the specific case where, due to an acknowledged deficiency, there would not be any company works council nor any employee representatives (délégués du personnel), the two month delay above shall apply.

The sale must be carried-out within two years of the notification of the information to the employees. Otherwise, any new sale shall be subject to a new disclosure to the employees.

A harsh sanction: the cancellation of the transaction

The sale completed in default of the new information obligation may be cancelled at the request of any of the employees. It should be noted however that the judge may opt not to void the sale despite the failure to comply with the information obligation. The statutory limitation period for the relevant legal action is of two months, regarding the sale of business assets as a going concern “from the publication date of the sale notice” and, regarding the sale of securities “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 also calls for some commentaries. Specifically, though the sales of shares of SARL must be filed with the clerk of the commercial court, the sales of securities of SA, SAS and SCA are not subject to such a 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 the notification, on or as soon as possible post-closing date, of all employees of the completion of the transaction by any means provided that the date of receipt by the employees can be ascertained.

This new obligation will burden sale processes, which is unfortunate, and will make the upholding of the confidentiality surrounding the transaction harder, although the employees and the persons they may appoint to help them elaborating 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 fact 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 to the benefit of the employees and the seller remains free to sell to whom and on the conditions he chooses. Even in the event that an employee would formulate an offer, the seller may refuse to negotiate such offer and reject it.
Moreover, it would be wishful thinking to believe that in the given time-period for issuing an offer, all or part of the employees may have the resources to structure it and to gather the necessary funds notwithstanding the pedagogical support organized by the new law . One can therefore legitimately stand dubious about the merits of this Act.

Impact of the new law

This new obligation will burden sale processes, which is unfortunate, and will make the upholding of the confidentiality surrounding the transaction harder, although the employees and the persons they may appoint to help them elaborating an offer are bound by a “duty of discretion” equal to that of the members of the company works council (2).

Otherwise, the impact of the Act is in fact 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 to the benefit of the employees and the seller remains free to sell to whom and on the conditions he chooses. Even in the event that an employee would formulate an offer, the seller may refuse to negotiate such offer and reject it.

Moreover, it would be wishful thinking to believe that in the given time-period for issuing an offer, all or part of the employees may have the resources to structure it and to gather the necessary funds notwithstanding the pedagogical support organized by the new law (3). One can therefore legitimately stand dubious about the merits of this Act. 

(1) Save for transfers in the events of testaments, liquidation of matrimonial property, collective insolvency proceedings – article L141-27 (for the sale of business assets) and L23-10-6 (for the sale of securities) of the French commercial Code. 

(2) The penalties are in practice very limited: no criminal penalties. The civil penalties known to date are merely disciplinary penalties (suspension). 

(3)The Act provides the possibility for employees to be assisted before certain regional chambers (CCI, etc.) and by any person elected by the employees subject to the condition laid down in the decree. The Act also implements a periodical information process of the employees (at least once every three years) with respects to the legal and financial conditions to the buying of a company in general.