Reform of related party agreements

August 10th, 2014

The Commercial Code establishes a procedure for the control of agreements between a company and any member or affiliate of a member or any officer or employee of the same company.

The agreements included in article L225-38 of the Commercial Code are notably: “any convention concluded, directly or through a third-party, between the company and its Chief Executive Officer, one of its deputy CEOs, one of its directors, one of its greater-than-10%-shareholders, or its controlling company […]”.

Any agreements pertaining to day-to-day operations and concluded under regular conditions are excluded from the scope of this regulation. (art. L225-39).

Any related party agreement shall be:
• (i) Subject to a prior authorization by the board of directors;
• (ii) Notified to the statutory auditor who shall draft a report and submit it to the general assembly; and
• (iii) Approved by the general assembly a posteriori.

The Ordonnance of July 31, 2014 has amended the regime applicable to related party agreements within “sociétés anonymes” (public limited companies or corporations), partnerships limited by shares, European companies, and in general companies which fall under the scope of regulation applicable to “sociétés anonymes” in terms of related party agreements. They do not, however, apply to simplified joint-stock companies (SAS) and limited liability companies (SARL).

It entered into force on August, 3, 2014.

The purpose of the reform is to simplify and improve transparency.

The reform is focused on four main axes:

  • The extension of the exception to 100% owned subsidiaries: As of the entry into force of the reform, the procedure for related party agreements does not apply to 100% owned subsidiaries, directly or indirectly. Indeed, article L225-39 has been modified and now commands that this procedure is not applicable to « […] agreements held between two companies of which one holds, directly or indirectly, the whole share capital of the other [excluding qualifying shares]. ». Given the risks of conflicts of interest arising out of holding-subsidiary relationships, it seemed appropriate to loosen the legal framework applicable to related party agreements.
  • Reasons for the authorizing decision: The board (of directors or supervisory) must present a statement of reasons for authorizing the agreement and justify its interest for the company, which notably implies specifying the financial conditions thereof. (art. L225-86).
  • Review of previously concluded related party agreements: all agreements authorized during prior fiscal years that are still being executed must be reassessed every year by the board (of directors or supervisory). Certain agreements shall be mentioned in the management report.

The management report shall now mention the agreements concluded, directly or through a third-party, between one of the members of the board (of directors or supervisory), the managing director (or CEO), one of the deputy managing directors, one of the directors, one of the greater-than-10%-shareholders of a company on one hand, and another company held, directly or indirectly, in at least half of the share capital by the first one on the other hand. Otherwise, the agreements covered are those concluded between certain proxies or significant shareholders of a company and the subsidiaries of said company.

These agreements do not fall under the scope of regulated related party agreements of the company, because said company is not a party to the agreement. This new article aims to reinforce transparency on these operations and to instore better information to the shareholders.

August 10, 2014 | Corporate Law