A new French law relating to sales of small and medium-sized companies (SMEs) and business cooperation between employees and employers was passed on July 31, 2014, and published on August 1, 2014. As of November 1, 2014, owners of companies with fewer than 250 employees will be required to inform their employees of an intent to sell the business or a majority stake in the company, in order to encourage the employees to consider purchasing the company.
Failure to inform the French employees of an intent to sell could result in a very substantial fine and the subsequent sale being nullified by a court order. Unfortunately, the practical aspects of the law’s implementation have yet to be defined. An implementing regulation (décret d’application) is expected to be adopted soon.
To What Companies Does the Law Apply?
The law does not apply to companies with more than 250 employees. It applies without restriction to companies with fewer than 50 employees. For companies with 50 to 249 employees, the law applies if one of two conditions is satisfied:
The company’s turnover/business revenue is less than EUR 50 million.
The company’s assets are less than EUR 43 million.
Until the implementing regulation is issued, it is not known whether the owners of every company objectively satisfying the criteria above will be subject to the new obligation, or whether companies that objectively satisfy the criteria, but are not considered to be SMEs because they are too closely integrated with a group of related companies, are exempt. If the implementing regulation does not answer this question, owners will have to decide whether or not to risk the sale being nullified by expediting the transaction and according exclusivity to a specific buyer.
What New Information Rights Are Granted to Employees?
Two additional rights are provided to employees in France. The first is a right to general information. At least once every three years, employers must provide their French employees with general information regarding the legal provisions related to purchasing the company, including the advantages and disadvantages of a purchase and the available mechanisms to finance a purchase. This right does not imply that an owner is required to sell the company.
The second is an immediate and specific right. When a company owner intends to sell the business or a majority share in the business, the employees in France must be informed of the intent to sell. This right is not a right of pre-emption or even of first negotiation, it is merely a right to be informed.
What, precisely, the employer must communicate to the employees, apart from the intent to sell, is still unclear. The implementing regulation should address whether or not the employees are entitled to information on the potential buyers, the proposed or required sale price, the structure of the transfer, the means of financing or the potential buyers’ business plan. In any event, it is unlikely that the implementing regulation will grant employees in France broader rights than those accorded to staff representative bodies, such as works councils.
Once employees receive the information, they are bound by a discretion obligation. The enforcement of this obligation may prove challenging, as no criminal sanctions are imposed in case of breach. A claim for compensatory damages would therefore need to meet a high burden of proof.
What Triggers the Immediate Right to Information?
The right to information is triggered when two conditions are satisfied:
The owner has an intent to sell.
What is intended to be sold must be a business, shares or securities giving access to the majority of a company’s capital.
The nebulous notion of “intent to sell” refers to a mental state that is difficult to determine from a legal perspective. Without good faith cooperation by the owner, employees in France will find it difficult, if not impossible, to establish or to date such an intent.
The obligation to inform employees of an intent to sell applies only to the sale of a business (fonds de commerce), shares or securities giving access to the majority of capital of a company. There is no information requirement in respect to the transfer out of an estate; the liquidation of marital property; intra-family transfers; or changes pursuant to insolvency procedures (conciliation procedures, safeguard procedures, reorganization or judicial liquidation). Nor do operations that are not, strictly speaking, sales, such as exchanges, mergers, de-mergers or sales of isolated shares not amounting to a business, trigger the obligation.
What Is the Timeline?
For companies with fewer than 50 employees, the owner must notify the employees of the intent to sell at least two months before the closing of the sale. For companies that have between 50 and 249 employees, the owner must notify the employees of the intent to sell at the same time the works council is informed and consulted, at the latest.
Nothing prevents employees from indicating their lack of intent to make an offer to purchase before the end of the two-month period.
If the sale does not take place within a two-year period after the employees are notified, it will be considered a new sale and must be accompanied by a new notification.
Must the Owner Justify a Refusal of an Offer by the Employees?
While the law does not require an owner to justify its refusal of an offer made by the French employees to purchase the company, a justification would be useful in practice. Not only would it reduce the possibility of liability, it also would help establish that the legal obligation to identify another buyer before closing was not ignored, and would facilitate the consultation with the works council when the seller negotiates with an alternative purchaser.
When Does the Law Enter into Force?
The law applies to sales closing on or after November 1, 2014. The implementing regulation is expected to be issued shortly. The transition period before November 1 may be complicated, especially for owners planning a closing after November 1, including those who signed purchase agreements before that date. Such owners will have to evaluate the risk of the sale being nullified and possibly re-examine the closing date to take into account the obligation of notifying employees two months in advance of the sale or, at the latest, at the time the works council is notified. Owners considering a closing after November 1, 2014, may be prompted to modify the closing date in order to comply with the timeline.
Several employers’ organizations have pointed out the legal uncertainty of this law and have asked the government to repeal it.