FRENCH UPDATE: Revised Key Topics for Boards of Directors and Senior Management in Relation to the COVID-19 Crisis
This is a revised summary version of our initial client memos regarding the crisis.
In his speech on March 16, President Macron stated, “we are at war,” six times. Since then, businesses continue to assimilate and react to the radical changes that have occurred over the last weeks. The government and various regulators, including the AMF, continue to advance with emergency reforms responding to the crisis.
At the same time, after more than a month of confinement, the process of adaptation and acclimatization to the new volatility and uncertainty is well underway, even while recognizing the necessarily transitional nature of this new normal. The tentative date of May 11 for the end of the lock-down in France has now been announced, although many businesses open to the public will continue to be subject to significant restrictions. Each week brings additional clarity regarding some of the most urgent legal subjects for businesses, while at the same time new questions continue to arise.
Acknowledging that the situation continues to evolve rapidly, our initial observations on certain subjects of interest to our clients are provided below.
1. Communication by listed companies. Consistent with applicable law and regulation (notably MAR’s requirement of immediate disclosure of precise, price-sensitive information, in the absence of a legitimate interest to keep such information confidential or if confidentiality can no longer be assured), the AMF and ESMA have proactively encouraged fulsome communication from listed companies regarding their exposure to the crisis, and the AMF has contacted a number of issuers in this respect since the beginning of the crisis.
We also highlight our understanding of the AMF’s preference for avoiding piecemeal disclosure in the current environment, while acknowledging that each topic will need to be assessed on a case-by-case basis (and that in some cases an immediate profit warning may be unavoidable in the event of a sudden significant deterioration of numerous financial measures). In any event, disclosure should be properly organized at the time of issuance of the annual or management reports (especially if prior guidance has become outdated, and including in the annual report’s perspective and risk factor sections), the shareholders’ meeting and in connection with periodic financial communications. A delicate question for issuers will be to determine if and when old guidance has become outdated and, if so, whether and how to construct new guidance despite uncertainties.
Consistent with ESMA’s guidance, the AMF has now also indicated that exceptional delays of two additional months for annual financial reports, and one month for half-year financial reports, will be tolerated.
2. Board meetings (including executive compensation policies). It may be appropriate to reconsider the frequency of board meetings, as well as assess on a case-by-case basis whether to involve board committees in specific advisory missions or supervision or, in exceptional cases, creating a devoted board COVID-19 committee.
Certain technical issues relating to the holding of board meetings by video or teleconference – including in connection with the approval of annual accounts – are the subject of emergency reforms that have been released recently, and which apply retroactively as from March 12.
Regarding executive compensation policies to be submitted to shareholders, boards have also begun to consider including additional flexibility permitting variable remuneration to be calculated based on criteria adapted to the crisis. Remuneration committees may also take into account Afep’s decision to request that executive directors (dirigeants mandataires sociaux) of its members reduce their total compensation for the period during which employees are on partial unemployment (chômage partiel).
3. Dividends (including stock dividends) and share repurchases. On an increasingly politicized subject, certain large businesses have undertaken that if they accept certain government aid, they will not pay dividends or engage in share buybacks. Similar requests and recommendations have been made concerning other businesses. Nonetheless, the Afep has reiterated its attachment to the “principle of free determination of the dividend by businesses,” and it appears that many businesses held by private equity funds may in certain circumstances be in a position to reconcile benefitting from available state aid, while nonetheless distributing upstream dividends (notably in order to service acquisition debt), although each situation should be studied on a case-by-case basis.
Decisions relating to dividends also raise various other considerations in the current environment, including as regards potential director and officer liability, as well as from a disclosure perspective (particularly as regards a decision to cancel, postpone or reduce the dividend) for listed companies. It is recommended that those issuers still contemplating initiating or accelerating a share buy-back program ensure that they have properly disclosed their own COVID-19 situation prior to such purchases. Depending on the size and repurchase structure, the plan itself may also have to be disclosed.
4. Shareholders’ meetings. As with board meetings, certain technical issues relating to the holding of shareholders’ meetings at a distance have been the subject of considerable reflection, and emergency reforms have been implemented.
5. Prohibition on short sales. Following an initial temporary stay on scores of specific securities, on March 17, the AMF put in place a blanket thirty-day prohibition on the creation or increase of short positions targeting securities listed on French exchanges and for which the AMF is the competent regulator. On April 15, the AMF extended this prohibition for another thirty days to the end of the day on May 18. Some other regulators in Europe and around the world have also implemented similar measures.
In addition, on March 16, ESMA issued a decision requiring, subject to certain exemptions, that holders of net short positions in shares traded on a European Union regulated market notify the relevant national competent authority if the position reaches or exceeds 0.1% of the issued share capital of the company concerned (and each 0.1% above that threshold). This decision applies for three months.
6. Activism / takeover defenses. Based on first quarter figures, although European activism had been poised for a record quarter, the onset of the crisis witnessed a significant decrease in campaigns both in number and amount. More generally, the crisis has shifted perspectives in campaigns that are underway. For example, the activist fund Elliott, which had long disputed Capgemini’s price in the Altran takeover, finally threw in the towel in March and tendered its shares due to the severely degraded market conditions. A few activists took advantage of the market crash to reinforce their positions (for example, Teleios Capital Partners LLC continued to build its position in Maisons du Monde SA throughout February and March). Other investors have raised environmental, social and corporate governance issues, including the first climate change resolution at Total SA.
Monitoring of shareholder and creditor positions should be reinforced to anticipate the arrival of bargain hunters, including possible hostile bidders or activists. Since the abandonment of the passivity rule in France, the board of a French issuer has regained some flexibility in preparing and implementing defense measures, and in the current environment this should be monitored more closely than usual. A record number of U.S. companies have recently adopted poison pills. Similar concerns regarding the vulnerability of European businesses to foreign state-backed enterprises have been voiced by the EU competition chief and others.
In this respect, French issuers could also contemplate submitting defensive measures to their annual shareholders’ meetings. Both ISS and Glass Lewis have recently clarified more nuanced positions for the American market in light of the pandemic.
7. M&A (including MAE considerations). A number of transactions have been put on hold or abandoned over the last month, resulting in the lowest quarterly deal count since the third quarter of 2014. At the same time, deal-making continues: boards, management and advisors remain connected and active, and virtual signatures (even for real estate transactions) and other solutions facilitate diligence, signings and closings. For public deals, the AMF has shown that it is operational. As regards foreign investments requiring the approval of the Ministère de l’Économie et des Finances, although as a formal matter all time periods are suspended until June 24, our preliminary discussions with our contacts suggest that the administration will continue to give particular regard to the transaction timetable in an effort not to slow down deals. Our current experience is that although the European Commission and the French competition authority may experience some slow down for certain complicated matters, cases that do not require a detailed review could be handled satisfactorily (with some questions however on the practicability of market tests).
For signed deals, one or both of the parties’ views about the desirability of the transaction may have evolved in light of recent events. From a contractual perspective, the usual suspects – including MAC / MAE clauses, conditions precedent more generally, the management in the ordinary course covenant (including as a closing condition), reps and warranties (including any bring down at closing), termination clauses, long-stop dates and break fees, information rights, as well as various clauses that in ordinary times are considered mere boilerplate – will come to the fore, in addition to idiosyncratic issues specific to a given deal or contract. In relation to MAE clauses in particular, key questions concerns not only specific drafting and possible exclusions (as well as whether there is a disproportionate impact exception to those exclusions) but also that of the general organization of the contract and how local law can impact it (including force majeure and hardship (imprévision), among others, to the extent relevant).
For deals that have not yet signed but continue to advance, a focus of diligence now includes questions relating to the impact and management of the crisis (in the context of ongoing uncertainty about what the new normal may look like, and when it will begin) as well as a renewed focus in negotiation and drafting on the same topics referred to in the preceding paragraph.
8. Force majeure and hardship (imprévision) in commercial contracts. Interest in questions of force majeure spread from China to many other jurisdictions in parallel with the evolution of the crisis itself.
Under French law, the rules relating to force majeure can be waived or contracted around, and the parties are generally free to define what they mean by force majeure and the consequences. Accordingly, the terms of the contract are the key starting point.
Any analysis of these questions should also take into account the recent introduction into French law of the notion of hardship (imprévision), which among other things may permit, if not waived by parties, a court to revise a contract based on an unforeseen change of circumstances that renders the performance of the contract excessively onerous for a party that did not undertake that risk. Hardship can also be invoked in contracts governed by administrative law, which has long acknowledged hardship as a basis for rescission.
9. Employment and specific aid regimes. As has now been authorized by the law relating to urgent measures, the French government, has, on a temporary basis, vastly expanded the aid available for partial unemployment (chômage partiel), providing considerable support to French employers and employees impacted by the crisis. At the same time, companies should exercise caution, as the granting of relief has been conditioned on the employer justifying the effective necessity of recourse to the partial unemployment regime as well as other conditions. Although layoff plans may continue, the expansion of the partial unemployment regime has among other things so far contributed to the suspension of some restructuring plans.
It should be recalled that employers in France have a strict obligation to ensure a safe and secure workplace; particular care should be taken in assessing work conditions for operations that are maintained, most notably as regards social distancing. The April 14 Nanterre civil court ruling, ordering Amazon France to carry out a more thorough assessment of the risk of COVID-19 contagion at its warehouse and limiting Amazon’s warehousing activities in France to food, hygiene and medical products, underscores the importance for employers to continue to closely coordinate with employee representatives and labor inspection regarding the design and implementation of protective measures. A criminal complaint has also been brought against Carrefour following the death of an employee. These and related questions will become increasingly pressing as more businesses reopen on or after May 11, in the face of a virus that remains present in France and throughout the world.
10. Liquidity and financing issues. Many businesses are closely monitoring internal treasury forecasts.
Some of the same issues and tensions referred to above regarding M&A transactions will arise with respect to financing agreements, both for investment grade and more leveraged businesses. A full review of all financing agreements (including bonds and loan facilities) must be undertaken in order to assess the impact of COVID-19 on existing financings and on the ability to raise more liquidity. Among other things, covenants (including additional financial debt baskets, financial covenants, etc.), reporting obligations, conditions precedent, drawstop and clean-down provisions, notice periods for drawings, events of default (cross default, suspension of payments and business, etc.) transfer restrictions, and waiver requirements (including the applicable majority) should be reviewed, along with the impact of credit ratings downgrades and of the decrease in value of secured assets. In the event of any uncertainty regarding a borrower’s present or future ability to satisfy applicable conditions, an early drawing should be considered.
The French Banking Federation (Fédération Bancaire Française) has announced various measures to support the French economy, including the implementation of accelerated credit review procedures, the voluntary deferral of companies’ repayment obligations for up to six months and the forgiveness of penalties and additional fees. More recently, the French Banking Federation announced several undertakings with respect to the implementation of the State loan guarantee program, including (i) to grant the State-guaranteed loan within five days of receipt of an application, for all companies whose turnover is less than €10 million (or a higher threshold specific to each bank) and which are not in financial difficulty (ratings from 3++ to 5+), i.e., 85% of the companies in France and (ii) for all other companies, to examine their applications carefully on a case-by-case basis.
Setting aside these good intentions, in practice the implementation of banking measures may nonetheless confront practical difficulties, as the standard procedures are not always relevant to the current environment (noting, for example, the difficulty of constructing credible business plans and the necessity of appropriate disclaimers in this respect) and banks also have their own organizational, legal and practical constraints.
11. Government aid and European Commission positions. Government aid should also be considered on a jurisdiction-by-jurisdiction basis. In France, the various relief plans continue to evolve rapidly, but as of this writing, they include, among other things:
- Tax relief. Companies may defer the payment of all or part of their employee and employer contributions (cotisations salariales et patronales) up to three months without penalty and may request a deferral of their next direct tax payment from the tax authorities (advance payment of corporate tax, payroll tax), without penalty. Possible conditions that may be applied should be assessed.
- Bank guarantees. French State guarantees apply to many treasury loans made by banks to many French business borrowers until December 31, 2020 (up to 70-90% for loans, depending on the size of the company). The State-guaranteed loans have a maturity of 12 months without any repayment during that period. After the initial 12-month period the borrower has the option to repay the loan over a period of up to five years. The bank loan may be for an amount of up to 25% of the borrower’s 2019 turnover. The loan is unsecured (except for loans granted to firms employing more than 5,000 employees in the last financial year or with a turnover of more than €1.5 billion). The State guarantee has been expressly conditioned upon certain businesses not paying dividends or engaging in share buybacks in 2020, and other conditions should be assessed.
- Credit lines from Bpifrance. In addition to credit guarantees, Bpifrance offers SMEs and unsecured credit lines of up to €15 million for ETIs.We continue to monitor the evolution of available relief plans. In light of the accelerated pace of the formulation, promulgation and implementation of many of these measures, key terms and conditions, including their scope, may in some cases be vague or otherwise unclear at this stage (and in practice may not always match the initial broad initial assurances that have been given). Additional practical challenges have been encountered in negotiating some guaranteed loans with banks (particularly for more significant amounts) and a decree is expected to provide additional clarification. In this respect, a ministerial order has reinforced the binding nature of the guarantee, as well as providing for a provisional payment to be made within 90 days of a request, representing a reliable estimate of the amount of losses likely to be borne by the lending institution. The first major French State-guaranteed loan (in the amount of €500 million) was announced on April 19, and others are expected to follow promptly; even more significant State-sponsored loans have been announced in other jurisdictions.
Depending on the type of aid or governmental intervention contemplated, state aid constraints should be studied, noting that, in the context of the COVID-19 crisis, the European Commission adopted a temporary framework providing several types of exceptional State aids considered as compatible with the internal market, that the European Commission intends to approve rapidly upon notification by the Member States. In this context, the European Commission has already approved certain French initiatives on an accelerated basis, and it is prepared to regularly update its temporary framework.
On April 9, 2020, the Eurogroup, an informal body which brings together all the finance ministers of the euro area, agreed on a four-part plan of more than €500 billion to support the economy, including (i) a first line of credit to the euro area Member States, financed from the European Stability Mechanism (ESM) to support domestic financing of direct and indirect healthcare, cure and prevention related costs, (ii) a second credit line of up to €100 billion from the European Union to support Member States to protect employment in the COVID-19 crisis (such as partial activity (“activité partielle”) measures in France), (iii) the creation by the European Investment Bank (EIB) of a pan-European guarantee fund of €25 billion (which could support €200 billion of financing) for companies with a focus on SMEs, throughout the EU, and (iv) a Recovery Fund to prepare and support the recovery, providing funding through the EU budget to programs designed to kick-start the economy, ensuring EU solidarity with the most affected Member States. No decision has been taken to pool debt between Member States (“coronabonds”). The legal and practical aspects of such a fund, including its relation to the EU budget, its sources of financing and on innovative financial instruments, will continue to be discussed in the coming weeks.
12. Capital markets. There have been no significant transactions on the French equity capital markets since the beginning of the confinement measures, although European equity markets have begun to open (particularly in the UK). On the debt capital markets, investment grade issuers have enjoyed a highly receptive market for bond issuances; lower rated issuers have elicited markedly less interest, although the European high yield market is slowly opening.
Although the immediate measures that have been adopted provide many businesses with liquidity in the short to medium term, longer-term solutions may be necessary. In light of the challenges for many businesses to access additional sources of capital, a wide range of less conventional and more tailor-made financial instruments may be considered. If the new financing involves new investors or an increase in an existing shareholder’s stake, the protection of other shareholders’ rights may be a sensitive issue.
We note that both the NYSE in the U.S. and the FCA in the UK have sought to temporarily liberalize certain requirements relating to capital increases (for example, to avoid the delay associated with a shareholders’ meeting), in order to facilitate access to additional capital.
13. Possible recapitalization / nationalization. Senior officials have publicly referred to the possible recapitalization or even nationalization of certain businesses, and the latest draft amended budget sets aside twenty billion Euros for investments by the State in “strategic” businesses. Such an approach would not be inconsistent with other jurisdictions. For example, the Italian State is nationalizing Alitalia, reportedly without opposition from the European Commission. Similarly, the Economic Stabilization Fund Act passed by the German Bundestag on March 25 authorizes the Federal Ministry of Finance to borrow up to €100 billion in connection with its participation in direct recapitalization measures for businesses; in addition, €600 billion is available to the German Federal state-owned Economic Stability Fund for equity participations (as well as guarantees) in certain systemically important companies.
During the 2008 financial crisis, a sophisticated program based on subordinated instruments and non-voting preferred shares was put in place to temporarily shore up banks’ capital structures, while incentivizing them to seek replacement capital. Any structures in the current crisis would naturally need to be adapted to the current context and the nature of the afflicted businesses. As regards nationalizations, we believe that such an extreme measure would likely be used by the current administration only as a last resort to save businesses that have strategic significance for the French economy. Any such nationalization would necessarily be for fair and prior compensation of expropriated shareholders, acknowledging that by hypothesis the residual equity value in such a case may be relatively limited.
It should be emphasized that State recapitalization funds may come with significant strings attached, possibly including limitations on the granting of stock options or certain variable remuneration to senior management, limiting dividends and share repurchases, requiring timely payments to suppliers, or conditions relating to maintaining employment or meeting environmental goals.
14. Financial sector. The European Central Bank (ECB) has announced a monetary policy of massive support to the European economy amounting to €750 billion as of this writing, as well as signaling a readiness to do more if necessary.
Credit institutions activated their business continuity plans last week without any interbank liquidity crisis at this stage. For its part, the Banque de France has encouraged borrowers to avoid systematically drawing on their credit lines and has announced that it will exceptionally postpone its 2020 rating process of companies’ financial situation until the beginning of September 2020. As regards asset managers, there is some concern that there may be significant outflows from investment funds and about how exit rules should apply.
With regard to approval procedures, it appears that the ACPR and ECB continue to operate under near normal conditions.
15. Distressed companies (including as counterparties). The crisis has put many previously healthy businesses into difficult financial straits, while for businesses that were already distressed the situation may have degraded considerably. In the face of the structural menace posed by e-commerce and a series of challenges in recent years, French retailers (outside of the grocery sector) have been among the businesses hardest hit by the current crisis. One of the most notable measures adopted by the government with respect to distressed companies is to provide that cash insolvency (état de cessation des paiements) will be assessed for many (but not all) purposes in light of the company’s financial situation on March 12. Concretely, this means that a degradation of a company’s financial situation after March 12 need not be taken into account in assessing whether a business is eligible for mandat ad hoc, conciliation or safeguard proceedings, or in connection with officers and directors’ obligation to open judicial reorganization (redressement) or liquidation proceedings. However, this does not prevent a debtor from itself electing to open reorganization or liquidation proceedings based on its actual financial situation.
As a result of the foregoing, and the financial aid measures that have been put in place, we understand that there has not been a material increase in the number of bankruptcy filings, although there has been a significant increase in the number of preventative procedures initiated (mandat ad hoc and conciliation) before the Paris commercial court. The true test will come once the measures are lifted, as some businesses are able to pay down their debt or recapitalize, while others are unable to resolve their increased debt load.
From a counterparty perspective, it should be emphasized that the ordinances may not affect the assessment of cash insolvency for purposes of the “clawback period” (période suspecte). This is the period, beginning on the date of cash insolvency (up to eighteen months prior to the opening of the relevant procedure) during which certain acts or agreements of the debtor may be retroactively considered as null and void or voidable. Accordingly, particular vigilance should be exercised when engaging in transactions that fall within categories that may be void or voidable with a distressed or potentially distressed counterparty (including related parties). For parties that wish to proceed with a transaction with such a counterparty, various protections can be considered, including recourse to conciliation. For international activities, an assessment of these and related risks should be made on a jurisdiction-by-jurisdiction basis in light of local law.
16. Insurance. Losses and potential losses that may be covered by insurance (including business interruption, event and contingency cover, D&O, and general commercial liability, as applicable, among others) should be evaluated promptly, based on a careful review of applicable policy language, in order to timely file full and complete claims for coverage. Given the insurance industry’s significant exposure, coverage disputes may be anticipated; in this respect we are aware of some insurers that have already taken aggressive positions in response to claims.
17. Contractual obligations. For agreements governed by French law, between March 12, 2020 and the date falling one month after the end of the state of health emergency (the “Suspension Period”): (i) contractual clauses sanctioning non-performance (e.g., liquidated damages provisions, contractual termination for breach, etc.) will not become effective until the end of the Suspension Period, and (ii) deadlines for termination or opposition to renewal of contracts occurring during the Suspension Period are automatically extended for an additional two months from the end of the Suspension Period.
18. Litigation. The crisis has crystallized and in some cases provoked tensions, resulting in an additional source of stress on commercial and contractual relationships. At the same time, the courts are closed and all pending cases have been suspended, with the exception of matters relating to companies in financial distress or requests for injunctive relief that are “extremely urgent.” For these latter categories of cases, a derogation procedure has been implemented allowing the court to hold a virtual hearing or even to avoid a hearing in specific cases. In addition, the French Council of Ministers has adopted numerous ordinances temporally modifying courts’ procedures. We have recently initiated several court proceedings on behalf of clients, and in our experience the French courts remain responsive for time-sensitive matters.
If a dispute does not rise to the necessary level of urgency, seeking agreement with the other party to submit the matter to mediation or arbitration may be alternatives to consider. Statutes of limitations and procedural deadlines have been suspended or postponed temporarily from March 12, 2020.
19. Conseil d’Etat (French Administrative Supreme Court). The Conseil d’Etat has been reviewing the measures taken by the administration and local authorities in matters of health emergencies on an expedited basis. Since mid-March, it has issued over 130 orders on an expedited basis relating to the health crisis. Overall, the Conseil d’Etat has validated the confinement regime put in place by the administration, concluding that it responds to the health situation in light of the resources available to France to combat the pandemic.
It appears likely that compensation claims will be brought before the administrative courts in connection with public authorities’ various decisions (or lack thereof) in response to the pandemic. The administrative courts will apply their traditional jurisprudence which requires that the plaintiff demonstrate negligence or misconduct by the public authority and a direct causal link between the negligence / misconduct and the prejudice suffered. Negligence / misconduct will likely be assessed by the judge, on a case-by-case basis, taking into consideration the available information at the time of the decision, particularly scientific information, the means available at that time and the appropriateness of the decisions taken by the State or other public bodies.
We are closely following these and other matters in this rapidly evolving business and regulatory landscape.
*This article was originally distributed on April 22, 2020