France Moves Forward on Implementation of EU FSAP Directives

French securities law practitioners will have a lot of extra reading to do after their summer vacations following the substantial progress the French Parliament and regulators have made on the implementation of the European Union’s Financial Services Action Plan (FSAP) Directives. Although the main objective of the legislative efforts prior to the close of the session on 13 July was a race against the clock to implement the EU Prospectus Directive,¹ the Parliament also took critical steps aimed at introducing into French law provisions of the Market Abuse Directive,² the Transparency Directive³ and the Markets in Financial Instruments Directive.⁴

Update on the Prospectus Directive

The legislative aspects of the Prospectus Directive were implemented into the French legal system by the Law for the Confidence in and Modernization of the Economy (Loi pour la confiance et la modernisation de l’économie)⁵ passed by the French Parliament on 13 July and published in the Official Journal on July 27, 2005, a few weeks after the deadline of July 1, 2005 set for the local implementation by all Member States of the Prospectus Directive. The French market regulator, the Autorité des marchés financiers (AMF), had launched on May 16, 2005, a call for comments on proposed amendments to its rulebook, the AMF General Regulation (Réglement général de l’Autorité des marchés financiers) to implement the regulatory aspects of the Prospectus Directive and implement the changes brought about by the Law for the Confidence in and Modernization of the Economy. These amendments are scheduled to be adopted this month.

The Law for the Confidence in and Modernization of the Economy and informal conversations with the AMF staff bring a number of responses to questions raised by non-EU issuers, and in particular non-EU issuers who offer their shares to employees in what is commonly known as employee stock purchase plans (ESPPs). These include determination of a non-EU issuer’s home Member State; the €2.5m exemption (Article 1(2)(h) of the Prospectus Directive); clarification concerning the EU-listed company exemption; “passporting out” and use of prospectuses already approved by the AMF; and the format of ESPP prospectuses.

Notable Changes to French Security Laws

The other notable changes brought about by the Law for the Confidence in and Modernization of the Economy and the Law for the Implementation of Various EU Law Measures in the Financial Markets Field (the “Implementation Law”/Loi portant diverses dispositions d’adaptation au droit communautaire dans le domaine des marchés financiers)⁶ are as follows:

A. Changes to the procédure de garantie de cours

The procédure de garantie de cours is a compulsory filing by any person who acquires or agrees to acquire a block of securities giving such person or group of persons acting in concert the majority of the target’s capital or voting rights. Article 34 of the Law for the Confidence in and Modernization of the Economy adds language to Article L. 433-3 of the Monetary and Financial Code extending the procédure de garantie de cours to companies listed on Alternext, a non-regulated market operated by Euronext Paris S.A.

B. New cases of compulsory take-over bids

French law provides that a bidder who takes over a company, either French or foreign, which holds more than a third of the share capital or voting rights of a subsidiary whose shares are listed in France, must launch a takeover bid of the subsidiary where the subsidiary represents a substantial portion of the assets of the parent company. Article 34 of the Law for the Confidence in and Modernization of the Economy extends this provision to subsidiaries listed on a foreign market. The AMF proposed amendments to its General Regulation on August 2, 2005, that would clarify the rules applicable to such take-over bids. The public consultation period for such amendments will expire on September 30, 2005, and the new rules are expected to be issued soon after.

C. Elimination of the prospectus requirement for share buy-back programs

The Law for the Confidence in and Modernization of the Economy eliminates the requirement for French issuers to have a prospectus subject to the full review and visa (effectiveness order) of the AMF for share buy-back programs, since the Prospectus Directive does not require a prospectus in such cases. Instead, the information will be ensured by a document that will need to be made public before any share buy-back program is put into effect. The AMF also began a public consultation for the proposed amendments to its General Regulation that set out the information that must be published.

D. Introduction of four new regulatory thresholds

Article 33 of the Law for the Confidence in and Modernization of the Economy, implementing Article 9 of the Transparency Directive, introduces four new thresholds (the upward or downward crossing of which will require mandatory threshold notifications to the AMF). The purpose of introducing such new thresholds is to ensure that the market is better informed. These four new regulatory thresholds are 15 per cent, 25 per cent, 90 per cent and 95 per cent of the share capital and/or voting rights of the French listed issuer. These new thresholds come as an addition to the existing regulatory thresholds of 5, 10, 20, 33, 50 and 66 per cent.⁷ In addition, a company’s by-laws may require certain notifications, which can be triggered at a threshold as low as 0.5 per cent of its share capital or voting rights.

Article 33 of the Law for the Confidence in and Modernization of the Economy also implements Article 10 of the Transparency Directive. It expands the requirement to notify the crossing of thresholds to persons who may also exercise a significant influence over a company without the knowledge of the market.

E. Grant of authority to the government to implement the Markets in Financial Instruments Directiveinto French law

Article 5 of the Implementation Law grants authority to the French government to take the necessary measures by way of ordinance to implement the Markets in Financial Instruments Directive into French law. The ordinance implementing the Markets in Financial Instruments Directive will have to be adopted within 18 months of the publication of the Implementation Law, i.e. no later than January 21, 2007. The current deadline set by the EU Commission for implementation is October 31, 2006, so France may be a few months late in doing so.

The Parliament was quite concerned that the Markets in Financial Instruments Directive will eliminate France’s long-standing concentration obligation, pursuant to which all orders for securities traded on Eurolist by Euronext must be traded on-market, unless a specific exemption set out in the AMF General Regulation is available. Accordingly, the Implementation Law requires the Government in its implementation of the Markets in Financial Instruments Directive to pay particular attention in defining measures to guarantee best execution of orders and their free circulation among market infrastructures, the prevention of conflicts of interest among member firms, and equitable exemptions to order transparency requirements. Article 5 of the Implementation Law expressly repeals the concentration obligation, with effect from the publication of the ordinance implementing the Markets in Financial Instruments Directive.

F. Implementation of certain measures of the Market Abuse Directive

These include:

• Notification of suspicious transactions – Article 1 of the Implementation Law implements into French law the provisions of the Market Abuse Implementing Directive⁸ by introducing a new series of articles to the Monetary and Financial Code, Article L. 621-17 through Article L. 621-17-7, requiring that credit institutions and investment firms notify the AMF without delay when such entities have reasonable grounds for suspecting that a transaction involves insider dealing or market manipulation.
• Executive officers’ transactions – Article 3 of the Implementation Law amends Article L. 621-18-2 of the Monetary and Financial Code, the purpose of which is to implement into French law the relevant provisions of the Market Abuse Implementing Directive on disclosure of purchases and sales of securities offered to the public by the officers and directors of the issuers of such securities.⁹
• Lists of insiders – Article 4 of the Implementing Law introduces a new Article L.621-18-3 to the Monetary and Financial Code, the purpose of which is to implement into French law the relevant provisions of the Market Abuse Implementing Directive requiring issuers to have a list of insiders, that is, persons who have access to inside information relating, directly or indirectly, to the issuer, whether on a regular or occasional basis.
• Increased sanction powers – Article 30 of the Law for the Confidence in and Modernization of the Economy completes the French implementation of the Market Abuse Directive, which began at the end of last year with the AMF’s adoption of certain regulatory aspects of the Market Abuse Directive in its General Regulation.

G. Implementation of the Transparency Directive

Finally, Article 32 of the Law for the Confidence in and Modernization of the Economy gives France a good head start on the implementation of the period information requirements of Articles 4 to 8 of the Transparency Directive. Such obligations, which bring the EU closer to the periodic information requirements of the US Securities and Exchange Commission, must be implemented in national law no later than January 20, 2007. The Law for the Confidence in and Modernization of the Economy sets the framework for the annual, half-year and quarterly information that issuers must file, and grants the AMF the authority to implement the law by amendments to its General Regulation that will take effect on January 20, 2007.

Appointment by Foreign Issuers of a Permanent French Correspondent

The AMF announced in a press release published on 26 April 2005 that a new Article 210-2 would be added to the General Regulation of the AMF.¹⁰ Pursuant to this new article, all foreign issuers whose shares are listed on Eurolist by Euronext will be required to appoint a local representative to receive correspondence from the AMF and to transmit to it all information required by the relevant texts.

AMF Staff have confirmed that they are requiring all foreign companies whose shares are traded on Eurolist by Euronext (including companies based elsewhere in the EU) to designate a local correspondent prior to September 1, 2005, regardless of whether France is the issuer’s home Member State pursuant to the Prospectus Directive. The AMF consider this to be the equivalent of an agent for service, which the SEC requires for foreign private issuers. A simple letter to the AMF from an authorized person at the issuer is sufficient to make the designation.

Conclusion

The latest fundamental changes to French securities law continue the trend that began with the Financial Security Law of August 1, 2003, which created the AMF and established powers beyond those of its predecessor bodies. The Law for the Confidence in and Modernization of the Economy and the Implementing Law give the AMF an even greater arsenal to supervise the French securities markets and sanction violations, in line with the EU Financial Service Action Plan Directives.

The AMF has wasted no time in using its new powers. It has already began an investigation concerning widespread market rumors of a possible hostile bid by Pepsico for the French food company Danone, which were repeated at the highest levels of the French government. However, the rumors had died down by the time the Law for the Confidence in and Modernization of the Economy was published, which means the AMF will not be able to invoke it in its investigations and will have to rely on the pre-existing texts on market and price manipulation. Now that the new laws are in effect, it can only be hoped that French politicians will have time to read them, and then think twice before they spread unsubstantiated market rumors.

¹Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (the “Prospectus Directive”).

²Directive 2003/6/EC of the European Parliament and of the Council of January 28, 2003 on insider dealing and market manipulation (market abuse) (the “Market Abuse Directive”).

³Directive 2004/109/EC of the European Parliament and of the Council on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, Official Journal of the European Union, L 390/38, 31.12.2004 (the “Transparency Directive”).

⁴Directive 2004/39/EC of the European Parliament and of the Council of April 21, 2004 on markets in financials instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and Repealing Council Directive 93/22/EEC (the “Markets in Financial Instruments Directive”).

⁵Law n° 2005-842 of July 26, 2005.

⁶Law n° 2005-811 of July 20, 2005

⁷The regulatory timeframe to notify the AMF of a downward or upward crossing of a regulatory threshold will be modified by a decree to be promulgated pursuant to the Law for the Confidence in and Modernization of the Economy. The declarations are expected to be required within four trading days after the threshold crossing.

⁸Commission Directive 2004/72/EC of 29 April 2004 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards accepted market practices, the definition of inside information in relation to derivatives on commodities, the drawing up of lists of insiders, the notification of managers’ transactions and notification of suspicious transactions (the “Market Abuse Implementing Directive.”

⁹Article L. 621-18-2 of the Monetary and Financial Code covers all companies publicly offering their shares in France, which includes non-French companies whose shares are traded on Eurolist by EuronextTM as well as ESPP issuers. It will be possible for U.S.-based issuers subject to these requirements to satisfy their French disclosure requirements by making public in France an indication of where the statements of changes in beneficial ownership filed with the U.S Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934 may be obtained.

¹⁰Persons or entities whose executive office is not located in France, whose securities are traded on a regulated market in France must appoint a correspondent established in France, with whom they elect domicile, that they authorize to:

1. Receive any correspondence from the Autorité des marchésfinanciers; and
2. Forward to the Autorité des marchésfinanciers any documents and information required by statutory or regulatory provisions or in response to any requests to receive information made by the Autorité des marches financiers pursuant to its statutory or regulatory powers.

When the securities of the issuer were admitted to trading on a regulated market prior to the effectiveness of this Article, the concerned persons or entities must comply with the requirements set forth in paragraph 1 above by September 1, 2005.