The French legal system provides a variety of ways to secure the involvement of employees in the growth and profits of their company, including compulsory deferred profit-sharing plans (accords de participation), optional voluntary cash-based profit-sharing plans (intéressement), and other similar mechanisms.

The Amended Social Security Financing Law of 2011 provided for a new legal framework entitled “profit-sharing” premium (prime de partage des profits), which set forth rules to allocate premiums to the benefit of employees in the event their company decides to increase dividend distributions to its equityholder(s) (the “Premium Allocation Rules”). These Premium Allocation Rules are in force but have not yet been codified.  According to recent government declarations, however, the Premium Allocation Rules could be abrogated by the end of 2013.

Overview

Generally, the Premium Allocation Rules apply to privately held companies with at least 50 employees as well as to public corporations under certain specific conditions.  If a company subject to the Premium Allocation Rules decides to distribute dividends in excess of the average amount of dividends distributed during the two previous fiscal years (an “Increased Dividend Distribution”), then the company must grant a premium (typically a cash payment) to its employees (the “Employee Premium”).   Importantly, the determination of whether an Increased Dividend Distribution has occurred does not include any amounts, whether in cash or in kind, distributed to the equity-holders of the company as a result of other non-dividend corporate actions, such as share buy-backs.

If the parent company of a “group” (as defined by the French Code of Commerce) engages in an Increased Dividend Distribution, then each company within the consolidated group that employs at least 50 people must grant the Employee Premium to its employees.

The Employee Premium must be determined by an agreement executed between the company and a representative of the employees within three months of the date on which the company decided to engage in an Increased Dividend Distribution.  Similar to collective bargaining agreements, the Employee Premium agreements may also be negotiated and executed at the industry level, as opposed to the company level.  If such an agreement is not reached, then the company must issue a statement setting out the premium amount that the company unilaterally agrees to pay, which the employee representative cannot block.  In order to avoid repeating the agreement negotiation process each time a company makes an Increased Dividend Distribution, it is possible for a company or a consolidated group to negotiate a long term agreement with the relevant employee representatives that provides the framework for, among other things, calculating and paying the Employee Premium.

An employer (whether the board of directors and its chairman, the manager(s) or the president, depending on the corporate form) that defaults on the obligation to implement the profit-sharing premium process, will risk the following penalties: up to one year of imprisonment and/or a fine of €3,750.

Practical examples

1.  Foreign companies

A foreign company incorporated outside of France and its direct French subsidiary would not be deemed to constitute a “group” for the purpose of the rule.  This would have the following consequences: (1) the French subsidiary would not be required to provide an Employee Premium to its employees as a result of the foreign [parent] company’s Increased Dividend Distribution decision, but (2) the French subsidiary would be subject to the Premium Allocation Rules if it meets the legal criteria and proceeds itself with an Increased Dividend Distribution.

2.  Cross-border M&A deals

MotherCo (a U.S. company with at least 50 employees) sets up and holds SubCo (a French company with less than 50 employees), an acquisition entity formed for the purpose of the acquiring Target (a French company with at least 50 employees).

MotherCo will finance the acquisition through HoldCo and will expect to be repaid its equity contribution with upstream dividends distributions from Target and HoldCo to MotherCo. An Increased Dividend Distribution at each level would have the following consequences:

• MotherCo’s Increased Dividend Distribution:  No company has to provide an Employee Premium to its employees because MotherCo is not a French parent company and, thus, no “group” exists under French Code of Commerce.

• HoldCo’s Increased Dividend Distribution:  Both HoldCo (the parent company) and Target, as a group, would have to provide an Employee Premium to their respective employees.

• Target’s Increased Dividend Distribution:  Target would not have to provide an Employee Premium absent any such distribution by its parent company (HoldCo).

In order to avoid the Premium Allocation Rules in the context of a corporation acquisition similar to the acquisition described above, MotherCo could finance the acquisition costs through shareholder loans and/or bonds in HoldCo.  The repayment of the shareholder loans and/or redemption of the bonds from HoldCo to MotherCo would not trigger the obligation, for any company involved, to implement the Employee Premium.