Inter-company credit: Decree n of 22 April 2016

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1 Inter-company credit: Decree n of 22 April 2016 p.1 The supervisory committee of a simplified joint-stock company (SAS) qualified as de jure director: impact on the personal liability of the supervisory committee s members p.1 Grant of loans by investment funds p.2 Simplification of company law formalities p.2 Tax Excluding the proceeds of securities which do not carry voting rights from the parentsubsidiary system is unconstitutional p.2 VAT exemption for the management of real estate investment undertakings p.3 Zoom Transposition of the UCITS V Directive p.4 Inter-company credit: Decree n of 22 April 2016 Publication of Decree no of 22 April 2016 means that companies limited by shares (sociétés par actions) and limited liability companies (sociétés à responsabilité limitée, SARL) (whose accounts are certified by a statutory auditor) can now grant loans with terms of less than two years to companies with less than employees and annual turnover of not more than 1.5 billion euros or a balance sheet total of not more than 2 billion euros, with whom they have economic links justifying that loan. The Decree clarifies the links there must be between the lender company and the borrower company and the requirements which the lender company must satisfy (equity of more than its share capital, a gross operating surplus and positive net cash flow, a ceiling on the loans granted). A company may grant such loans up to a twofold limit of an amount (i) comprised between 10 and 100 million euros in the course of an accounting period depending on the size of the company (ii) and, equal to half the lender s free consolidated net cash position. Moreover, the company shall not grant to the same borrower such loans that exceeds an amount equal to 5% of the above overall ceiling per year. Lastly, the statutory auditor of the lender company must each year certify the initial amount and the outstanding capital of those loans. The supervisory committee of a simplified jointstock company (SAS) qualified as de jure director: impact on the personal liability of the supervisory committee s members (Paris Court of Appeal, 23 February 2016, n ) In this judgment (issued on an order for referral of 4 September 2014 from the French supreme court (Cour de Cassation)), the Paris Court of Appeal held that the members of a supervisory committee of a French SAS were de jure directors, after reviewing, inter alia, the committee s powers defined in the articles of association and in the shareholders' agreement. In this particular case, the threshold of euros above which the committee had to authorize any transaction or commitment not provided for in the budget was considered by the court as modest and as revealing a genuine power of decision-making in the management. However, by analogy with the well-established case law on civil liability of de jure directors of French public limited companies (SA), the Court of Appeal concludes from the recognized quality of de jure director of the SAS supervisory committee that its members shall be held liable against third parties only if a fault that does not fall within the exercise of their duties can be demonstrated (i.e. a fault which is committed intentionally, particularly serious and incompatible with the normal exercise of their duties).

2 Conversely, by framing the concept of de jure director, this case law may reassure the SAS ad-hoc committee s members about their personal liability. The grant of loans by investment funds Entry into force of Regulation N 2015/760 (the ELTIF Regulation) On 1 April 2016, the AMF (French Financial Markets Authority) published the results of its public consultation on implementation of the European Regulation on European long-term investment funds, the ELTIF Regulation, which came into force on 9 December That Regulation gave birth to a new European fund which can lend directly to companies in need of long-term capital. Although the Regulation is directly applicable, certain regulatory adjustments will be necessary in French law, in particular to allow this new derogation from the monopoly of the banks. A decree is currently under consideration and the AMF will then amend its policy as regards the requirements for extending the program of operations (programme d activité) of management companies wishing to grant loans. Only specialised professional funds, securitisation entities and professional private equity funds will be authorised to make these loans for amounts of more than 10% of the fund's net assets, subject to complying with a number of constraints including the fact that they can only grant loans to nonfinancial companies and are prohibited from leveraging loans and that the loans must be intended to be retained until maturity. Simplification of company law formalities Decree n of 11 March 2016 The issuing of this decree brought into force provisions, enacted by the Law of 6 August 2015 known as the Macron Law, which simplify publication of the accounts of companies falling within the definition of small enterprises (companies not exceeding two of the following three thresholds: a balance sheet total of 4 million euros, net turnover of 8 million euros and an average of 50 employees during the accounting period). Small enterprises will therefore be able to request that the profit and loss account for any period ended as from 31 December 2015 which they file at the registry (greffe) from 7 August 2016 not be made public. In order to exercise that right, small enterprises must include with the documents they file at the registry a declaration that their profit and loss account is confidential, drawn up in accordance with a standard form to be established by a forthcoming order of the Minister of Justice. Excluding the distribution proceeds of securities which do not carry voting rights from the parentsubsidiary regime is unconstitutional (Constitutional Council, decision n QPC of 3 February 2016) The dispute brought before the Constitutional Council related to the scope of application of the special regime for parent companies and subsidiaries. The right to enjoy that regime is subject in particular to holding at least 5% - 2-

3 of the capital of the issuing company. Furthermore, according to the instrument arising from transposition of the European directive 1 into domestic law, the system does not apply, inter alia, to the distribution proceeds of securities which do not carry voting rights 2. That voting rights requirement is, however, contrary to the European Directive which does not provide such requirement. In the case at hand, the dispute related to distributions from a French subsidiary. If the applicant had received the proceeds from a subsidiary incorporated in a different EU Member State, it could have relied directly on the fact that French law conflicted with provisions of the Directive in order to preclude application of the instrument to its individual situation. Applying domestic law thereby led to the distributions from France being treated less well than those originating from a different EU Member State. For the first time, that situation of reverse discrimination was penalised by the Constitutional Council as contravening the principles of equality before the law and equality in relation to public burdens. This decision paved the way for questioning a number of tax systems capable of having equivalent discriminatory effects. One can think in particular of the 3% additional charge on income distributed by companies which are subject to French corporation tax 3. VAT exemption for the management of real estate investment schemes CJEU, judgment of 9 December 2015, Case C-595/13 Under the VAT Directive of 28 November 2006 the management of special investment funds as defined by Member States is exempt from VAT 4. In transposing the Directive, a number of countries have excluded that exemption in relation to the management of real estate special investment funds. However, according to the principle of neutrality as apparent from the established case law of the Court of Justice of the European Communities (CJEU), the Member States must also regard as special investment funds funds which, whilst not collective investment undertakings within the meaning of the UCITS Directive, are sufficiently similar to be in competition with them. The CJEU held that such competition exists between special investment funds subject to comparable specific State supervision, irrespective of whether they are composed of transferable securities or immovable property. The French legislation, as derived from the Order of 25 July 2013 amending the legal framework governing asset management, does therefore conflict with EU law because it does not establish a VAT exemption for the management of real estate collective investment schemes 5. The Court made it clear that the transactions covered by the exemption are not only those which are specific to the business of undertakings for collective investment such as portfolio management, but also administration and accounting tasks, asset valuation, the preparation of statements for the distribution of income and the provision of information and documentation for periodic accounts. By contrast, the actual management of properties which is not specific to the management of a special investment fund is not one of the exempt management transactions in so far as it goes beyond the various activities connected with the collective investment of capital raised. 1 Council Directive 90/435/EEC of 23 July CGI (General Tax Code), Article 145(6)(b ter) as worded by the Law of 30 December CGI, Article 235 ter ZCA. 4 Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, Article 135(1)(g). 5 CGI, Article 261 C. - 3-

4 Transposition of the UCITS V Directive Order n of 17 March 2016 transposing Directive 2014/91/EU of 23 July 2014, UCITS V (the Directive ), and the Delegated Regulation of 17 December 2015 (published on 24 March 2016) (the Regulation ) have brought in new rules relating to (i) the duties and liability of UCITS depositaries and (ii) the remuneration policy of UCITS management companies. The intention is to harmonise those rules with those under the AIFM Directive applicable to managers of alternative investment funds ( AIF ). Principal measures applicable to UCITS depositaries The Directive seeks to harmonise the rules applicable to the duties of UCITS depositaries with those laid down by the AIFM Directive for AIF depositaries. However, differences remain between the two directives with the UCITS V Directive laying down a number of more stringent rules in so far as UCITS are intended to be targeted at the general public. Those additional protections relate in particular to the creation of a restricted list of the entities eligible to act as depositaries, a prohibition on their reusing the assets of the UCITS for their own account and the rules governing their liability. Entities eligible to act as UCITS depositaries: only the entities defined in Article L of the French Monetary and Financial Code (Code monétaire et financier, CMF ) can act as depositaries (this list will now include the French branches of credit institutions which have their registered office in a different EU Member State). On 19 April 2016 the AMF published an instruction describing the new process for authorising UCITS depositaries (DOC ). In practice, management companies which have, before 18 March 2016, appointed a depositary institution which is no longer one of the eligible entities will have until 18 March 2018 in which to appoint a new depositary in order to comply with the new requirements of the Directive. In respect of UCITS set up after 18 March 2016, the AMF has stated that, until the date on which the Delegated Regulation comes into force (that is to say, 13 October 2016), new UCITS will be authorised on the basis of an undertaking by the depositary, in the letter of acceptance contained in AMF Instruction no , to discharge its duties in accordance with the Directive. Changes to the activity of UCITS depositaries: UCITS depositaries will now have to monitor the cash flows of UCITS. This measure brings the provisions into line with the regime under the AIFM Directive. In contrast, unlike AIF depositaries, UCITS depositaries are prohibited from reusing the assets of the UCITS to perform transactions on their own account. According to Article L CMF, however, assets can be reused for the account of the UCITS under certain circumstances. Furthermore, where the asset safekeeping function is delegated, the depositary must ensure that the third party to which it has delegated that function upholds the segregation of assets principle. Increasing the liability of UCITS depositaries: depositaries now have a statutory obligation, where financial instruments are lost or in the event of improper performance of their oversight duties, to return a financial instrument of an identical type or the corresponding amount. In the case of a loss of assets, UCITS depositaries can only be exonerated from liability in the event of force majeure (Article L CMF). Unlike the AIFM Directive which gives AIF depositaries the right to discharge that liability contractually in the event of losses on securities, UCITS depositaries will be liable to the UCITS or to the unit holders even where they have delegated their asset safekeeping functions to a third party. - 4-

5 Requirements concerning independence between management companies and depositaries: in order to avoid potential conflicts of interest between the UCITS, its unit holders, the management company and the UCITS depositary, the Directive now provides that no company may act as both a management company and a UCITS depositary. The Regulation accordingly lays down rules relating to management independence between the management company and the depositary: for example, no one may be both a member of the management body of the management company and a member of the management body of the depositary. The Regulation also establishes rules relating to independence, where a group link exists between them, between the boards of directors and the supervisory functions of depositaries and management companies. New organisation of management companies Duty to establish remuneration policies and practices: these remuneration policies and practices apply to those categories of staff whose professional activities have a material impact on the risk profile of the management company or the UCITS they manage. They must include the fixed and variable components of salaries (Article L CMF). The RGAMF (Règlement Général de l AMF, AMF General Regulation) will determine the provisions for implementing those remuneration policies and practices, which will be similar to those for AIF management companies although with a number of differences, in particular relating to the frequency of review which is annual for UCITS management companies, the arrangements for spreading the payment of variable remuneration over at least three years and the composition of the remuneration committee. The Directive provides that those rules must be applied proportionately and in a manner and to an extent appropriate to the size, internal organisation and activities of each management company. The ESMA recommendations, published on 31 March 2016, envisage application of those policies in the 2017 financial year which will relate to the remuneration paid in In practice, the AMF has indicated that UCITS management companies will have to update their programmes of operations by the end of October 2016 at the latest (see the AMF s Guide for Asset Management Companies on the UCITS V Directive). Duty of transparency to investors regarding remuneration policies and practices: investors must now be given information on the remuneration policies and practices in the prospectus, KIID and annual report of a UCITS in accordance with instruction DOC as amended to that effect. Management companies must therefore amend their prospectuses and KIIDs to take these new provisions into account by 18 March By way of conclusion, it is pointed out that the Directive also increases and harmonises the administrative penalties applicable to infringements of the rules governing UCITS and establishes mechanisms to encourage the reporting of those guilty/allegedly guilty of infringements (whistleblowing) and to protect whistleblowers. Those requirements will be transposed into French law by the draft law on transparency and modernisation of the economy (the Sapin II Law ). 18, rue de Vienne Paris Tél: + 33 (0) [email protected]