Introduction of a new corporate duty of care into French Law

The bill regarding the duty of care of parent companies and other companies with effective control of groups was finally voted through by the French National Assembly on 21 February 2017.

However, the French Constitutional Council has received a request from 60 senators challenging the law’s conformity with the French Constitution. They consider that the text violates the principle of clarity, accessibility and intelligibility of the law. Their arguments also concern the fact that the law does not respect the principle of proportionality and necessity of penalties, the principle of liability, the principle of equality and finally the freedom to conduct business. The French Constitutional Council has until 23 March 2016 to hand down its decision.

Scope of the law

The law will apply to any company having its head office in France which, at the end of two consecutive financial years, employs at least 5,000 employees by itself and in its direct or indirect subsidiaries whose head offices are also located in France, as well as to any company having its head office in France and employing at least 10,000 employees itself or in its direct or indirect subsidiaries regardless of where their head offices are located.

The law therefore does not apply to parent companies governed by foreign law, since the text is included within the chapter of the French Commercial Code regarding public limited companies (société anonyme par action), which are governed by French law.

However, even though a foreign parent company would not be subject to the obligations introduced by the law, any subsidiary with its head office is in France and which reaches the relevant employee thresholds will be subject to such obligations.

The introduced obligation will only apply to companies subject to the obligation provided for in Article L.225-102 of the French Commercial Code, ie public limited companies and limited partnerships with share capital in accordance with Article L.226-1 of the French Commercial Code which provides that certain provisions governing public limited companies apply to them.

Content and scope of the duty of care

The law will impose due diligence requirements on companies with the aim of identifying any risks and of preventing any violations of human rights and fundamental freedoms, any threats to the health and safety of people and the environment.

However, the law does not apply to corruption, which is now governed by the new "Sapin II" law, published on 10 December 2016 (see our article on the "Sapin II" law).

These risks and infringements must be identified with regard to the company’s own activities, but, more challengingly, also to the activities of directly or indirectly controlled companies, as well as the activities of subcontractors and suppliers with whom a commercial relationship is established.

It should be noted that under French law a company is controlled (i) when a majority of its voting rights are held by another company, (ii) when a majority of the members of its administrative, executive or supervisory bodies are appointed by another company for two successive financial years, or (iii) when a dominant influence is exerted over the company by virtue of a contract or the terms and conditions of its constitution (Article L.233-16 of the French Commercial Code).

In practice, the targeted companies will have to put in place the following vigilance measures:

• risk mapping
• due diligence on all subsidiaries, subcontractors or suppliers with whom a commercial relationship is established
• appropriate actions to mitigate risks or prevent serious harm
• the creation of a system to ensure alerts are raised over risks that eventuate, and
• a system to control the implementation of the above measures.

These measures could evolve when the Ministerial Order implementing the law is published in the coming weeks, in addition to the awaited decision of the French Constitutional Council.

The affected companies will be required to release their due diligence plans and reports on implementation through their annual report (ie article L.225-102 of the French Commercial Code).

Penalties

The company may be issued with a notice requiring compliance with the obligations introduced by the law. If the company fails to comply with the formal notice within three months, it may be required to comply with it by way of a court order, at the request of any person having an interest in bringing proceedings before the competent court. Expedited applications before the Courts are also possible where a need for urgency can be shown. Who has an interest in bringing proceedings is not defined by the law.

Moreover, the company may eventually be ordered to pay a civil penalty, the amount of which will be determined in relation to the seriousness of the alleged misconduct. The amount of the civil penalty may not exceed €10m. This civil penalty cannot be deducted from the taxable income of the company.

Finally, if the misconduct has caused loss, the company or any of its direct or indirect subsidiaries could be liable for it. The judgment on liability may be made public.