By Thibaud Forbin, Partner, Chaintrier Avocats
On November 30, 2023, Law No. 2023-1107 was published, transposing the national interprofessional agreement on value sharing within companies.
Article 17 of Law No. 2023-1107 reforms the free share allocation regime by amending Article L. 225-197-1 of the Commercial Code. These amendments expand the use of free shares by raising the general allocation thresholds and allowing unlisted companies to grant free shares to employees and certain corporate officers of their subsidiaries. It also clarifies the rules regarding the calculation of the individual allocation limit.
In the absence of further clarification, the new wording of Article L. 225-197-1 of the Commercial Code took effect the day after its publication in the Official Journal. Consequently, this article applies to any decision to grant bonus shares made on or after December 1, 2023.
Change in general thresholds for the allocation of bonus shares
The extraordinary general meeting of joint-stock companies (the body of shareholders of simplified joint-stock companies) sets the maximum percentage of the share capital that may be allocated, upon decision by the management body of such companies, in the form of existing or to-be-issued bonus shares to [1]: the company’s salaried employees or certain categories thereof; and the chairman of the board of directors, the chief executive officer, the deputy chief executive officers, the members of the executive board, or the manager of a joint-stock company.
Principle
Prior to the enactment of the new law, the management body of the issuing company, acting pursuant to authorization granted by the extraordinary general meeting or the body of shareholders, could not issue and allocate, free of charge, a number of shares representing more than 10% of the share capital as of the date of its decision. This maximum percentage has been increased by 5% and is now 15%[2].
SMEs
This general threshold is also raised by 5%, increasing from 15% to 20% for SMEs [3]. However, the other conditions for applying this specific threshold have not been changed: the threshold applies only to the free grant of shares to the company’s employees and not to corporate officers, and it must be provided for in the articles of incorporation. The text does not prohibit the articles of incorporation from providing for an intermediate maximum percentage (18%, for example).
For the calculation of these general thresholds, free shares already granted but not yet definitively vested at the end of the vesting period, as well as shares no longer subject to a holding requirement, are not taken into account.
So-called “democratic” stock options
Article L. 225-197-1, I, paragraph 3 of the Commercial Code has been significantly amended.
Previously, the percentages set forth in paragraph 2 could be increased to 30% if the free share allocation benefited all of the company’s employees. This maximum percentage is now 40%.
The law provides for an additional case of free share allocation.
The maximum percentage is 30% when the allocation benefits employees representing at least: 25% of the gross wages taken into account for the social security contribution base and paid during the last fiscal year; and 50% of the issuing company’s salaried staff.
These two thresholds of 30% and 40% apply only if, beyond the 15% or 20% threshold, the difference between the number of shares distributed to each employee does not exceed a ratio of one to five.
In the case of allocations to corporate officers of the issuing company, their compensation and number are taken into account when determining the thresholds relating to total gross salaries and headcount.
Harmonization of Rules Concerning Groups of Listed and Unlisted Companies
Prior to this reform, only listed groups were permitted to grant free shares to employees or certain corporate officers of companies affiliated with the issuer. The law introduces a provision extending this option to unlisted groups, thereby harmonizing the two regimes.
Clarification of rules regarding the individual cap
No bonus shares may be granted to an employee or corporate officer who already holds more than 10% of the capital. Furthermore, a bonus share grant must not result in an employee or corporate officer exceeding this ownership threshold.
The new law excludes company securities held directly for more than seven years by the recipient in question from the calculation of this limit. The effect of this provision will be twofold in practice. First, it creates the possibility of resetting the individual limit after seven years of holding. It also clarifies the method of holding securities for the calculation of the individual limit by specifying that only securities held directly by the grantee must be taken into account. Prior to the new law, the question of whether to include securities held indirectly by the grantee through a personal holding company was controversial.
This clarification does not, in our view, rule out the risk of abuse of rights. We must therefore remain vigilant regarding the conditions for establishing an individual holding company to prevent the tax authorities from concluding that the “primary” motive for creating such a holding company was to evade or reduce the taxpayer’s tax liability by circumventing the rules governing the calculation of the individual threshold that allows for the exclusion of securities held by the holding company (the so-called “mini-abuse” of rights procedure, Article L 64 A of the General Tax Code introduced by Law No. 2018-1317 of December 28, 2018, Article 109). Even though the risk of abuse can never be completely ruled out, one must, for example, avoid a beneficiary transferring their securities to a holding company just before the free allocation of shares in their favor and, in any event, justify the creation of the holding company on other grounds (such as asset reorganization)
The law uses the term “securities” rather than “shares.” According to ANSA, this means that the individual threshold must be calculated by taking into account complex securities that include an existing equity component (ANSA News, December 4, 2023). The new law does not specify whether securities giving access to capital must be taken into account. Therefore, reference should be made to the definition of financial securities provided in Article L. 211-1 of the Monetary and Financial Code. Since securities giving access to capital (convertible bonds, stock subscription warrants, BSPCE, etc.) meet this definition, they should be included in the calculation of the individual threshold.
