Droit financier & produits dérivés

 

Les produits dérivés correspondent à l'appellation de marché de ce que définit le Code monétaire et financier comme étant les contrats financiers. Il peut s'agir de swaps ou d'options par exemple. 

 

Ils se distinguent des titres financiers qui peuvent par exemple représenter un droit de créance contre la personne qui les émet. C'est le cas des obligations.

 

 

Corporate Authorisations and Capital Markets Law in France

 

The French Code de commercehas recently been amendedby ordinance N° 2017-970 dated 10 May 2017. In this perspective, Article L. 228-40 of the Code de commerceis amended in the view of widening the scope of delegation of powers. This is the main purport of the reform. The new Article L. 228-40 is now drafted as follows:

 

 “The Board of Directors, the Management Board, the manager or the managers are capable of deciding or authorising the issue of bonds, except if the Article of Association reserve this power to the general meeting or if the general meeting decides to exercise such power. 

 

The Board of Directors or the Management Board may delegate to any persons of its choice, the necessary powers to carry out, within a period of one year, the issue of bonds and to determine the terms and conditions. 

 

Designated persons report to the Board of Directors or the Management Board under conditions determined by these bodies.”.

 

The new regime of delegation applicable to limited companies is now synchronised with the regime applicable to credit institutions (banks) (établissements de crédit). This allows the possibility to delegate to any persons (and not only to a specific person provided for in former Article L. 228-40, such as a member of the Board of Directors), the power to carry out the contemplated bond issue. The term person(s) used in Article L. 228-40 is generally understood as individual(s). This construction is consistent with market practice, even if, from a French law perspective, a literal interpretation could lead to the possibility for a person within the meaning of French law (i.e. an individual or a legal entity) to carry out the contemplated bond issue.

 

Such a literal construction would imply the possibility for another company, for example for a company within the same group of the issuer, to carry out a bond issue. Such a construction, although not being currently in line with market practice of corporates or banks, cannot be excluded. In practice, this would lead to the possibility for an issuer to administratively externalise the carrying out of the bond issue and, why not, to the possibility for a specific dedicated entity to be created within a group of companies or banks to bear the administrative burden of the bond issue. This might be interesting for companies or banks which are contractually structured as a group of companies, with the funding being separately managed.   

 

In practice, this amendment allows members of the issuer, typically members of the funding department, to carry out bond issues. Such members do not longer have to be at the same time members of the Board of Directors as this is, to a certain extent, considered as useless for the single purpose of carrying out bond issues decided by the Board of Directors. In addition, asking a member of the Board of Directors to carry out bond issues may lengthen the issuance process due to his potential non-availability. 

 

It has also to be emphasised that Article L. 228-40 maintains the concept of delegation of powers only, this being in line with market practice. However, in theory, it can be considered that a delegation of signature is also possible, as new Article L. 228-40 does not prohibit it. 

 

Up to date 17 August 2018.

 

Characterization of obligation

 

On 23 November 2017, the French Cour de Cassation (second civil room of the French Supreme Court dedicated to private cases) ruled, by a literal and traditional construction of Article L. 213-5 of the French monetary and financial Code, that the characterization of bond (obligation) is not conditioned on the guarantee of repayment at par.

 

Bonds that are not capital guaranteed remain nevertheless bonds.

 

In the previous instance, on 21 June 2016, the French Court of appeal of Paris ruled, on the contrary, that repayment at par was included as an essential feature in the concept of bond (obligation). This position was held to protect consumers, in a context where they have subscribed for life insurance based on non-capital guaranteed products, and they have not get back, at least, what they have invested.

 

It has to be mentioned that insurance companies are sometimes sellers in the secondary market of bonds (obligations i.e. titres financiers), that the market calls structured products. This implies that the performance of the bond is linked to an underlying which can be volatile and sometimes the capital invested is not guaranteed. In a way, non-capital guaranteed structured obligations can economically be similar to derivatives (contrats financiers) and this may result in massive losses. In such circumstances, the insurance company has to ensure, when such bonds / structured products are sold to consumers repackaged as life insurance, that the advisory and the information obligations are fully complied with. 

 

When we are in presence of bonds that are not capital guaranteed, the characterization of bond is then not only crucial for insurance companies but also for issuers, subscribers, and holders for other regulatory purposes. The current position of the French Cour de cassation will reassure the bond market as a whole.

 

Up to date 23 November 2017. 

 

Contract law: ordinance N°2016-131 dated 10 February 2016, unforeseen theory and capital markets. 

 

Law N°2018-287 ratifying ordinance N°2016-131 dated 10 February 2016 related to contract law and evidence was adopted on 11 April 2018 (with an entry into force on 1 October 2018).

The law not only ratifies the ordinance but also amends certain of its provisions. In this perspective, the law contains a very important article which excludes derivatives (contrats financiers) and transactions over securities (opérations sur titres) from the unforeseen theory (théorie de l’imprévision). In a nutshell, the unforeseen theory allows a party to ask a judge to amend or to rescind the contract in the event of a material adverse change of his economic situation (i.e. when it becomes extremely expensive for a party to perform the contract).

The exclusion is applicable to the transactions mentioned in I to III of Article L211-1 of the French monetary and financial Code. This therefore includes securities (e.g. shares, bonds, units of UCITS) and derivatives (e.g. forward, future, swaps, credit default swaps, options).

The importance of this exclusion has to be stressed as it strengthens the capital markets legal safety, as a whole. Correlatively, it also avoids a potential disruption of the international recognized existing legal scheme based on the material adverse change (MAC) provisions. 

Up to date 8 August 2018.

 

Increase in share capital (employee share schemes)

The French Supreme Court related to private matters (Cour de cassation) ruled as a ratio decidendi on 28 November 2018 that the single vote on the resolution related to an increase in share capital reserved to employees is considered satisfactory to regularize an increase in share capital not subject to a vote on a preceding general meeting. This allows the possibility for a general meeting to ratify an increase in share capital reserved to employees (due to the relativity of the nullity – nullité relative).

The legal concept that may be considered as underpinning the ratio decidendi is the French appearance theory: the ratification is being made possible by the subscribers (employees) having legitimately believed that the increase in share capital was regularly made. This is in line with the spirit of company law to allow ratification as much as possible to ensure legal safety. 

Up to date 28 November 2018.

 

Jerôme Kerviel trader’s case – Court of Appeal of Paris dated 19 December 2018 – labor decision 

 

On 19 December 2018, the French Court of Appeal of Paris (RG 16/09186) stated that the dismissal of Jerôme Kerviel, French trader from SGCIB (Société Générale Corporate and Investment Banking), the investment bank of Société Généraleis fair (on the basis of a gross negligence – faute grave). 

 

This overrules the decision (jugement) of the Conseil de Prud’hommes(French jurisdiction dedicated to labour law) dated 7 June 2016, whereby the dismissal was considered unfair (i.e. without a material and true reason) (cause réelle et sérieuse). In this first instance, Jerôme Kerviel obtained not only €100,000 because of the unfair dismissal but also (i) €20,000 due to the vexatious nature of the dismissal, (ii) €18,083.32 as regards to compensation in lieu of notice(indemnité compensatrice de préavis), (iii) €1,808.33 in relation to unpaid vacation pay (congés payés), (iv) €13,609.23 in connection with conventional severance pay (indemnité conventionnelle de licenciement) and (v) €300,000 as to the unpaid bonus for 2007 (plus €2,000 in relation to article 700 of the French Code de procédure civile). 

 

The ratio decidendiof the Court of Appeal of Paris is based on the characterization of the conduct of Jérôme Kerviel during his contract. The blames in the letter of dismissal are considered grounded by the Court of Appeal of Paris (even if previously been ruled purged due to the knowledge of them by the employer). In particular, the blame considered crucial by the Court is the taking of directional positions (i.e. at a highest analyzed value), while at the same time going over authorization (€50 billion for an authorization of €125 million for the whole desk only).

 

The Court of Appeal of Paris states however that the wilful misconduct (faute intentionnelle) is not characterized: Jérôme Kerviel did not mean to cause the loss of the estimated circa€5 billion. The position of the Court is in line with the statements of Jérôme Kerviel who considered himself as being part of a spur gear (as mentioned in his book “L’engrenage, mémoire d’un trader”). This decision gives a warning to the traders: taking inconsiderate risks could lead to a dismissal (with maybe prison), and at the same time a balance: a bank which loosens internal regulations (or admits implicitly / explicitly / or maybe intentionally some inappropriate derogations) cannot fully blame a trader. 

 

The ratio decidendiof the Court of Appeal of Paris is also grounded on the force of res judicata(for res judicata pro veritate habeturautorité de la chose jugée). This means that, once the decision is final, such a decision is considered as representing the judicial truth. Jérôme Kerviel was indeed convicted with offences (délits pénaux) by a distinct decision of the French Cour de cassationdated 19 March 2014 (Ch. Crim.pourvoi12-87416). In this respect, the Court of Appeal of Paris qualifies the force res judicataprinciple, as absolute. As a consequence, other civil French pending decisions are to be linked (and bound) by the decision of the French Cour de cassation. In this perspective, the conviction of the trader by the French Cour de cassationinflues on, and binds the decision of the Court of Appeal of Paris, ruling the labor decision.

 

It should however be considered that the absolute feature of the force res judicata, as stated in the ruling of the Court of Appeal of Paris, should be subject to challenge. As such, since any legal concept, even considered as absolute, are, in a democratic country, subject to other legal concepts tempering (within the meaning of qualifying) such absolute rights. 

 

It should also be considered that this characterization by the Court of Appeal of Paris is more in line with what would be acceptable in a context where the bank is considered as being itself in default, since being itself convicted by the French banking regulator – Commission Bancairefor the lack of control and monitoring of the trading systems. 

 

In light of this, the Court of Appeal of Versailles ruled on 23 September 2016 (room 9 – RG: 14/01570) (ruling by a review of the case decided by the French Cour de  Cassationdated 19 March 2014 (Ch. Crim.pourvoi12-87416)) that Jérôme Kerviel is only partially responsible for the prejudice caused to the Société Généraleand convicts him to pay €1 million only (instead of circa €5 billion). 

 

Up to date 19 December 2018.

 

 

 

 

 

 

 

 

 

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