Macqueron, P.

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Developments in French Law on Disclosure and Trading of Securities

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Journal of Comparative Business and Capital Market Law 5 (1983) 71-78 71North-Holland Publishing CompanyDEVELOPMENTS IN FRENCH LAW ON DISCLOSURE AND TRADINGOF SECURITIESP. MACQUERON *1. IntroductionThe Commission des Operations de Bourse (COB) is the regulatory agencyof the French securities market. Two important characteristics of the Commis-sion give it considerable flexibility in regulating the securities market. First, theCOB is not subject to statutory or administrative limitations on the amount oftime it may take to act upon applications. A delay of eighteen months inresponding to an issue permit application has been held to be reasonable [1].Second, the COB is not a legal person and thus, like the Commission deContr6le des Banques [2], it cannot be held directly liable for its decisions.Instead, liability falls, if at all, on the state. The state, however, accepts liabilityfor the acts of administrative agencies only in the event of serious offenses,that is, major offenses which a reasonable person would not have committed.The courts define such offenses very narrowly, and have upheld the COB evenwhen that agency has reversed itself [3].2. Disclosure required from companiesRecent EEC and French administrative decisions have encouraged corpora-tions to disclose more fully their financial condition and securities activities bycoordinating the publication of prospectuses, requiring disclosure of data on"the future of the company" and the regulation of all listed and unlistedsecurities, and encouraging the release of annual reports and informationbulletins. Despite this trend toward greater disclosure, the French criminalcode continues to prohibit dissemination of corporate "secrets" by corporatemanagers, agents, representatives, and employees.On March 17, 1980, the Council of the EEC adopted a directive tocoordinate prospectuses published for the purpose of registering securities on* Assistant Professor of the Faculty of Law and Economics, University of Haute-Normandie,France.0378-7214/83/0000-0000/$03.00 © 1983 North-HollandPublished by Penn Law: Legal Scholarship Repository, 2014P. Macqueron / Developments in French securities marker lawEuropean stock exchange lists. As a result of this directive, French securitiesissuers must now reveal certain information in addition to that alreadyrequired by the COB, for example, the aggregate amount of fees paid tofinancial agents and the interests (fees, benefits in kind, current loans, etc.)held by each category of managers in the company [4].Domestically, the COB requires disclosure of "data on the future of thecompany". Companies must distinguish between (1) the orientation of thecompany's activity and its investment programs, for which detailed informa-tion is required, and (2) a forecast of future activity and results, for which theCOB recommends a conservative, long-term approach. In its Annual Report,the COB commented:The Commission considers that it should be up to the companies themselves to decide inwhat form they will present their prospects, and how often this should be done; but itemphasizes the fact that once they have made their decision, they must adhere to the twoprinciples of consistency and coherence in the concepts used. It would, in fact. beregrettable, and doubtless 'against the company's own best interest in the end, if it were toconfine its information to the favorable elements of the financial data [5].When describing future prospects, managers must avoid any ambiguity in theterms used. For example, it is insufficient to refer to "improved results"; thedisclosure statement must specify whether its projections address "operatingresults" or "gross results". The COB also requires statistical forecasts to berealistic [6].The COB has recently emphasized the importance of having registeredcompanies provide regular and usable reports to their shareholders. Althoughonly the shareholders of a company have the legal right to demand an annualreport, the COB recommends that a report be sent to anyone who asks for it,since the condition of registered companies is also of interest to potentialshareholders [7]. In cases of repeated, negligent delays in publication of regularinformation bulletins, the COB does not hesitate to refer matters to the publicprosecutor's department [8].The COB is also concerned with the form and content of annual reports.For example, in 1977 the COB published a recommendation relating to thedisclosure of information on the distribution of capital. It is worth noting thatwithin two years, about one-half of the registered companies had integrated therecommendation into their annual reports [9]. The COB has emphasized theneed for rapid and synchronized dissemination of information in order topreserve equal access to information [10].The COB also hopes to institute a system that would permit companies toadjust accounts in times of price variation [11]. A similar system is used inEnglish-speaking countries where, in addition to traditional balance sheets,appendices are published showing inflation-adjusted accounts.Finally, as a result of the 1982 Finance Act, all listed and unlisted securitieshttps://scholarship.law.upenn.edu/jil/vol5/iss1/6P. Macqueron / Developments in French securities market law- shares, debentures (other than bonds issued before the implementation of theAct and redeemable by drawings), and founder's shares, if any (irrespective oftheir form, whether personal or bearer) - must be registered in the records ofthe issuing company or of an authorized broker. The latter option is availableonly to listed companies and to those on the special register of unquotedcompanies [12]. This measure will come into force eighteen months after thepublication of the decree implementing the Act.The COB's attitude toward domestic commercial disclosure is balanced,however, by the French penal code's prohibitions on the transfer of certaincommercial information by French citizens, residents, and businessses toforeign public authorities. If the information is deemed to endanger thesovereignty, security, public order, or essential economic interests of France,the informer could face two to six months in prison or a fine of 10,000-120,000French francs.3. AuditingIf an auditor conducts his inquiry with insufficient care, the client and itsassociates are deprived of a statutory guarantee. Such auditing errors give riseto a cause of action for negligence which may result in a judgment of monetarydamages [13]. In a recent case, the chairman of the board of directors of alimited company arranged to transfer to his personal account a sum of moneydeducted from a loan granted to the company. The company's auditor wasfound guilty of giving misleading information and failing to disclose criminalactivities to the public prosecutor. The court reasoned that the auditor hadcaused a loss to the company, which had paid interest on the diverted sum, byconfirming the false information [14]. The court ordered the auditor to pay thecompany a sum corresponding to the interest due on the money withdrawn bythe chairman.4. Marketing securitiesA recent COB study shows that the use of commissioned underwritersnearly doubles the cost/gross proceeds ratio of capital securities issues. Thecost borne by private companies tapping the public for funds has averaged2.6% of gross proceeds for capital increases without underwriting commissions,but escalates to 4.9% for those with underwriting commissions. The figuresshould be compared to the 3.6 and 4.3% average costs found in the study fortraditional and convertible loans, respectively [15].Two opinion polls, one involving the general public and the other involvingcompany directors, were conducted in October 1979 at the request of thePublished by Penn Law: Legal Scholarship Repository, 2014P. Macqueron / Developments in French securities market lawstockbrokers' association (Compagnie des Agents de Change). The polls indi-cated that, if the general public had better information about the stockexchange, four out of ten Frenchmen might be interested in trading insecurities. This would have doubled the number of Frenchmen then dealing onthe stock exchange. On the whole, French investors considered investment onthe stock exchange profitable, but they felt both ignorant of the exchangesystem and incapable of learning more about it. Eighty-five percent of thecompany managers supported opening capital investment in their companiesto a larger segment of the public, although half of them feared that this wouldresult in a loss of control. Nonetheless, the stock exchange remains a closedworld; seven persons out of ten stated they had never been advised by theirbanks to invest savings in securities and that they had never tried to find outabout the activities of the stock exchange [16].The gross value of issued securities reached 131,700 million French francs in1981 (106,900 for funds and 24,800 for shares) [17]. By the end of 1981, lawsregulating 529 general purpose investment pools had been approved by theCOB [18].5. Insider tradingIn 1979, the criminal court of Paris handed down two convictions forinsider dealing. The COB referred four people to the public prosecutor on thesame count [19].6. The purchase of controlling interestThe COB is taking a greater interest in the means by which controllinginterests are acquired. The COB had to apply stipulations regarding concurrentcompetitive takeover bids and counterbids four times during 1979. While aseries of precedents is being established in this area, the COB refuses toformulate a detailed code which, it argues, would lack flexibility [20].The tender offer has recently been introduced into French law and is beingused with greater frequency. The COB hopes that, following the example of theUnited States and Great Britaln, tender offers will allow a wider participationby individual shareholders, under procedures to be developed by the offerorand the stockbrokers' association [21].Recent developments require notice to the public of the acquisition ortransfer of controlling interests. Section 204 of the general rules of thestockbrokers' association requires that any transaction bearing on a controllinginterest appear as a notice in the Bulletin of Market Prices for the day thetransaction takes place. Notice must disclose the identity of the buyer andhttps://scholarship.law.upenn.edu/jil/vol5/iss1/6P. Macqueron / Developments in French securities market lawseller, the date of the transaction, the price at which it was effected, and thenumber of shares involved. In order to insure equal treatment of shareholdersby giving all shareholders the opportunity to sell shares at the same price as themajor shareholders, notification must also show the period during which thebuyer offers to purchase shares on the market, as well as the price at which thepurchases will be made. This information usually is reprinted in newspapersand sent by banks to their customers without delay.The rules of the stockbrokers' association were recently affirmed in adecision of the COB and an order by the Minister of the Economy. As a result,any legal entity, individual person, or corporation who comes to own, directlyor indirectly, one-tenth, one-third, or one-half of the capital of a companywhose securities are registered on the official list or on the unquoted companiesspecial section, must give notice of his shareholding to the brokers' ChambreSyndicale, which informs the public [22].The COB requests disclosure of two kinds of information from the purchaserof a controlling interest. First, concurrent with notification in the Bulletin, thepurchaser of a controlling interest should publish a communique on his goalsand his reasons for the transaction. Second, once the transaction is completed,the purchasee should make public the number of shares acquired during theperiod when he maintained his bidding price and the new distribution ofcapital after the operation [23].In the case of a transfer of controlling interest involving an option (the sellerbeing obliged within a period of one to three years to either return the cashpayment or to demand the payment of any balance outstanding), the purchasermust maintain his bidding price for fifteen sittings of the stock exchange. TheCOB states that the bidding price requirement is tolled by the date of thesigning of the contract, not by the date of completion of the transaction [24].The COB also oversees the pricing of securities. The seller of a controllinginterest grants the purchaser a guarantee as to liabilities. The COB hasconcluded that a thorough examination of the risks involved in implementingsuch a guarantee may justify a price difference [25]. However, the COB hasdecided that the commissions and fees paid to the intermediaries who bringtogether a seller and buyer for the purpose of creating a controlling interestmay not be used to justify the offering of a lower price to minority share-holders [26].7. Invitation to the publicIt has recently been held that the printing of articles by a "socit6 civile" ina paper promoting subscriptions published by an association of telecommuni-cations users is an invitation to the public for funds, even though thesesubscriptions were open only to members of the association [27]. The courtPublished by Penn Law: Legal Scholarship Repository, 2014P. Macqueron / Developments in French securities market lawnoted that resorting to advertising was, in itself, indicative of the absence ofpersonal contact between the company and the prospective subscribers. Inaddition, the court noted that the association had a large membership, with theonly requirements for membership being use of public utilities and payment ofa fee. The regulations on invitations to the public for funds apply to theissuance of securities and to the incorporation of a company, as well as to theresale of already issued and subscribed securities [28].8. Companies trading in their own securitiesThe conditions under which registered companies are allowed to purchasetheir own securities in order to regulate their price have been changed.These companies must now:1. register on the official list or on the unquoted companies section;2. own not more than ten percent of the total of their own securities or morethan ten percent of any specific class of securities [29].3. possess reserves, in addition to the statutory reserves, amounting to at leastthe total value of the securities they own [30].Additionally, the purchase of securities may not produce a reduction of the netassets to a level below that of the sum of the capital and the non-distributablereserves [31].Prior authorization by the shareholders at their annual meeting is requiredto establish the details of the transaction (price, quantity. timing). In additionto the price ceiling determined by the shareholders, the maximum purchaseprice can in no case be more than "the average initial price quoted for thethirty previous stock exchange sessions on the futures market or the spotmarket, wherever the stock was traded. This price may be adjusted to take intoaccount the coupons and rights which may have been detached during thesethirty sessions or after the thirtieth" [32]. The resale price cannot be less thanthat determined by the shareholders, nor less than the average intitial price ofthe thirty preceding stock sessions, this average being determined in the sameway as the purchase price [33].Securities acquired by the company in violation of the above stipulationsmust be sold within a year of their purchase; otherwise, they must be cancelled[34]. Furthermore, the chairman, directors, or managers (or the members of themanagement committee) who purchase or sell securities in the company's namewithout abiding by the statutory stipulations, are subject to a fine of2,000-60,000 French francs [35]. For the purpose of regulating security prices.companies must notify the COB of the transactions they plan to make andmust provide an account of the purchases they have completed [36]. TheCommission may require any explanation of evidence it deems necessary [371.https://scholarship.law.upenn.edu/jil/vol5/iss1/6P. Macqueron / Developments in French securities market law 77If these requirements are not complied with, or if the Commission noticesirregularities in the company's transactions, it may request the brokers'Chambre Syndicale to take all necessary measures to prevent stock exchangeorders received directly or indirectly from the company from being carried out[381.9. Reissuing debenturesA company which issues a debenture may alter the conditions of the issueby substituting another person for the original debtor. Procedurally, a rulingmust be submitted to a special meeting of the bondholders and endorsed bythe court (Tribunal de grande instance). In a recent case where the new debtorwas a foreign company, the COB requested and was granted assurances thatthe original debtor would continue to guarantee the bond issue [39].Published by Penn Law: Legal Scholarship Repository, 2014P. Macqueron / Developments in French securities market lawNotes[] Judgment of April 5, 1979, Trib. admin., Paris, 1980 Dalloz I.R. 389.[2] Id. See also Judgment of February 12, 1960, Conseil d'etat. 1960 Lebon 107.[3] Judgment of April 5, 1979, Trib. admin., Paris, 1980 I.R. 389.[41 COB, Bulletin, April 1980, at 5.[5] COB, 1979 Annual Report.[6] COB, Bulletin, July 1980, at 4.[7] COB, 1979 Annual Report.(8] Id.[9] Id.[10] Id.[11] Symposium of December 2, 1980, published in COB, Bulletin No. 133. January 1981, at 3.[12] Section 94 of the 1982 Finance Act, December 30, 1981.[13] Judgment of November 15, 1979, Trib. gr. inst., Le Havre, 1980 Bulletin des Commissairesaux comptes at 44.[14] Judgment of January 14, 1980, Cour de Cassation, 1980 B.R.D.A. No. 12 at 17.[15] COB, Bulletin No. 143, December 1981, at 4.[16] Banque, January 1980, at 106.[17] COB, Bulletin, February 1982, at 12.[18] Id. at 15.[19] COB, 1979 Annual Report.[20] Id.[21] COB, Bulletin, October 1980. at 3.(22] Decision of the COB, March 17, 1981; Order of the Minister of Economy. April 1. 1981:COB, Bulletin No. 136, April 1981, at 33.[23] COB, Bulletin No. 127, June 1980, at 4.[24] COB, Bulletin, February 1980, at 5.[25] This rule does not apply in the case of a deferred payment to the seller of a controllinginterest, for which specific provision are made by law.[26] COB, Bulletin, December 1980, at 6.[27] Judgment of July 3, 1980, Trib. corr., Paris, 1981 B.R.D.A. at 1 I.[28] Judgment of January 20, 1981, Trib. gr. inst., ST. Nazaire, COB., Bulletin No. 134.February 1981, at 3.[29] Law of July 24, 1966, art. 217-3 al.l.[30] Id. at art. 217-3 al.3.[31] Id. at art. 217-3 al.2.[32] Id. at art. 217-2 al.3.[33] Id. at art. 217-7.[34] Id. at art. 217-7.[35] Id. at art. 454-1 al.l.[36] Id. at art. 217-5 al.l.[37] Id. at art. 217-5 al.2.[38] Id. at art. 217-5 al.3.[39] COB, Bulletin, April 1980, at 9.https://scholarship.law.upenn.edu/jil/vol5/iss1/6

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Developments in French Law on Disclosure and Trading of Securities

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