On the aftermath of the statements made by Mr Bruno Le Maire on 27 March 2020, a document was published on the portal of the Ministry of the Economy and Finance on 2 April 2020 (available here) making the granting of State financial support in the context of the current health crisis conditional on the waiver of dividend payments and share buybacks by companies wishing to benefit from it. The document outlines the new system at stake.

It should be noted that this measure does not take the form of a bill or a regulation, but rather corresponds to a discretionary decision by the government thereby adjusting some of its support measures previously announced (and available here).

In order to clarify the situation, it is necessary to present the framework (I) and the details (II) of the mechanism, before providing some elements of assessment (III).

I. FRAMEWORK OF THE SCHEME

The scheme is of exclusive interest to large companies (A), which will be able to benefit from certain financial support measures from the State (B) only if they commit not to distribute dividends and not to buy back their own shares (C).

A. An arrangement concerning only large companies

While Mr. Le Maire's initial statements appeared to be relatively general in scope, the document published by the Ministry of the Economy and Finance clearly targets only large companies, i.e. those entities which, during the last financial year ended, (i) employed at least 5,000 employees or (ii) had consolidated sales in excess of 1.5 billion euros in France.

It should be noted that the entities concerned may, according to the document, be independent entities or groups of several related entities within the meaning of the definition used for tax consolidation or the Cotisation sur la Valeur Ajoutée des Entreprises (CVAE), which means that the thresholds mentioned above are to be measured at the group level.

B. A mechanism concerning certain financial support measures of the State

Among the many business support measures announced by the State, only (i) deferrals of social security contributions or tax payments and (ii) State-guaranteed loans are concerned here.

With regard to the first type of measure in question, it should be recalled that firms may apply without penalty for (i) deferment for up to three months of all or part of the payment of employee and employer contributions and (ii) deferment of the payment of their next direct tax instalments (advance payment of corporation tax, business property tax (CFE), payroll tax), which does not concern the payment of tax credits and/or VAT credits for firms meeting the legal conditions for obtaining them.

As for the second type of measures, these are bank loans granted until December 31 to support their cash flow and which may represent up to 3 months of turnover in 2019, for which the State grants its guarantee by individual order of the Minister of the Economy and Finance, after instruction by the General Directorate of the Treasury supported by Bpifrance Financement SA.

C.    A system aimed at avoiding the distribution of dividends and share buybacks

According to the published document, the large companies seeking State support under these measures undertake (i) not to distribute dividends to their shareholders in 2020 and (ii) not to buy back shares during 2020, a commitment that applies to all French entities and subsidiaries of the group in question, even if only some of these entities or subsidiaries would benefit from cash support.

With regard to the first part of the mechanism, the notion of dividends is understood in the broadest sense by the document, in that it covers all at these operations same time:

• sums whose distribution is decided by the annual general meeting, including when dividends are distributed in shares;
• interim dividends;
• and exceptional distributions of reserves.

On the other hand, the following are not concerned, and can therefore always be made independently of any state support measures:

• intra-group dividend distributions, provided that they have the effect of financially supporting a French company, in particular for the purpose of meeting its contractual commitments;
• dividend distributions made by entities that are legally obliged to distribute a fraction of their profits during the year 2020^[1];
• distributions made by the Group's foreign entities to French entities.

On the second part, the share buybacks concerned are exclusively those carried out with a view to a capital reduction not motivated by losses for financial management purposes, to which are added the capital reductions carried out by simple reduction of the nominal value.

The following ones are not concerned, however, and can therefore always be carried out independently of any support measure:

• share buybacks for the purpose of allocating shares to employees;
• the repurchase of shares intended for the execution of a legal commitment prior to March 27, 2020, which covers in particular the execution of liquidity contracts or external growth operations based on such a commitment.

II. TERMS AND CONDITIONS OF THE MECHANISM

Above all, it is important to be aware that the mechanism does not directly prohibit the companies concerned from distributing dividends or buying back shares, a prohibition whose constitutionality would have been questionable, to say the least.

It is therefore simply a matter of making the granting of the support measures referred to above conditional on the failure to carry out these operations, the continuation of which can always be decided by the corporate bodies.

More specifically, companies wishing to benefit from these measures must, when requesting them, expressly undertake not to carry out the operations concerned, subject to formalities which vary according to the measure requested^[2].

The date from which distribution or repurchase transactions can no longer be decided to qualify for the support measures has been set at 27 March 2020, with reference to the date of the decision of the body competent to legally bind the undertaking, and not the date of its convocation or the date of execution of the commitment.

In concrete terms, if the company has decided to carry out this operation before 27 March 2020, it will therefore still be able to benefit from state support measures.

On the other hand, if it took this decision after 27 March 2020, it is no longer eligible for these measures. Consequently, in the event of non-payment of social security contributions and taxes by the due dates, the unpaid amounts will have to be paid immediately and the company will be subject to the late payment surcharges provided for by law. Similarly, it will no longer be able to benefit from the State guarantee on a bank loan. Consequently, (i) if the company benefits from a State-guaranteed loan, no drawdown will be possible and the bank will be able to require the company to reimburse the entire loan and (ii) if the company has initiated steps to obtain a State-guaranteed loan, the Minister will not sign an individual order allowing the guarantee to be granted.

III. ASSESSMENT

The attention of large companies should therefore be drawn to the choice open to them in this context, since it is basically a question of arbitrating between State support and distribution operations for the benefit of their shareholders, bearing in mind that the tolerance in principle expressed for intra-group dividends is meant to avoid such a choice.

Leaving this last hypothesis aside, the arbitration to be rendered raises at least two difficulties.

The first relates to the decision-making bodies, which are generally not the same for the various measures and transactions concerned.

In fact, where the choice to resort to State support is a management measure taken by the governing bodies, the choice to decide on a distribution to the shareholders most often falls within the sovereign competence of the latter, who would therefore be in a position to question the option initially chosen by the directors. It will therefore be necessary to ensure that there is no inconsistency between these different players.

The second relates to the choice finally made, which will necessarily have to be taken in the light of the impact of the health crisis on the financial situation and activities of the entity concerned.

If this remains limited, it goes without saying that it would be perfectly entitled to refuse State support for the purpose of carrying out these distribution measures.

On the other hand, to do without state support in order to maintain such operations for the benefit of its shareholders could give rise to criticism, particularly with regard to the company's brand image. Nevertheless, when the distribution is within the sovereign jurisdiction of the shareholders, this decision could hardly be challenged in legal terms, unless the possibility of abuse of majority or the civil liability of the dominant shareholders were to be considered if the increase in dividends was to contribute to the company's collapse at a later date.

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[1] Consequently, any contractual or statutory obligation to pay dividends would a contratio remain subject to the prohibition of distribution if the company intens to benefit from the support measures.
[2] With regard to the granting of a State-guaranteed loan, a termination clause will be introduced in the loan contract at the time the application is processed.

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