Legal reform of the French bond regime

In accordance with the "Sapin II Act” adopted on 09 December 2016, the French Government is entitled to amend by way of an ordonnance the French legal regime pertaining to bonds. Pursuant to such Act, a draft decree (the "Decree") and a draft ordonnance (the "Ordinance") were published and a consultation process was launched and ended on 20 February 2017. Following the completion of such consultation process, the new rules could be adopted prior to the French elections this year.

The objective of the reform is to modernise the French legal framework applicable to bonds so as to make it more flexible and attractive, both from a domestic and international perspective. In that respect, the reform aims not only at enhancing the legal framework applicable to the issue of bonds, but also at creating more flexible rules applicable during the life of the bonds.

The contemplated reform focuses on the following key points:

Requirements upon issuance - easier access to financing

The requirements relating to the issuance of bonds are eased in several ways.

Companies without two approved balance sheets: Companies which do not yet have two duly approved balance sheets will be allowed to issue bonds without first obtaining from the auditors the relevant assets and liabilities verification report, provided that they benefit from a guarantee granted by a company with two approved balance sheets. In addition, the Ordinance sets out the rules relating to the provision of the assets and liabilities verification report (if applicable). This new provision is likely to be used by groups of companies, the relevant subsidiaries having the ability to obtain financing directly without having to go through their mother company.

Corporate authorisations: The board of directors or the directoire will have the ability to delegate within one year to any person the power to carry out a bond issue and to decide the terms and conditions, whereas under the current regime the form of delegation is more restricted (except for credit institutions, which already benefit from this flexibility). In practice, this should allow issuers to react more rapidly to market conditions and take advantage of markets windows.

Appointment of the représentant de la masse: A few interesting provisions will be included regarding the représentant de la masse. First, the latter will no longer have to be domiciled in France but in a Member State of the European Union. In addition, the Ordinance removes the existing deadline for the représentant to be appointed within one year following the issue date and at the latest before the first scheduled repayment. It is unclear at this stage how this will operate in practice since there will no longer be any prescribed timing for the représentant to be appointed. If the bonds are offered to the public, the Ordinance provides that the initial représentant(s) has(have) to be appointed in the relevant terms and conditions.

Bonds with a denomination or minimum purchase amount of €100,000: The terms and conditions pertaining to bonds with a denomination or a minimum purchase amount of €100,000 may provide that all or part of the legal provisions relating to the masse of bondholders, the représentant de la masse and the bondholders’ general meetings (including the relevant voting rules) will not apply. The terms and conditions may further provide how bondholders may vote together with other creditors, subject to the prior approval of the latter.

Secured bonds: The Ordinance provides for more flexibility in that the security may be constituted either before the issue date or at the same time as the issuance. If the security is constituted before the issue date, the Ordinance further provides that the représentant(s) de la masse may be parties to the documentation constituting the security on behalf of the future masse of bondholders so as to ease the issuance process.

Bonds issued by credit institutions or investment companies: Credit institutions and investment companies which issue bonds (which do not give rights to shares of the issuer) will be able to subscribe to their own bonds, while under the current regime, they may acquire but not subscribe to their own bonds. This subscription right will apply to the extent that the relevant credit institution or investment company is carrying out one of the following investment services: placement, underwriting, execution of orders for the account of third parties or negotiation for its own account. In addition, the 15% holding limitation of its own bonds by an issuer will no longer apply to such category of issuers when they will be acting within the framework of a placement or underwriting activity, provided in that case that the maximum period during which the issuer may hold its own bonds is reduced to 60 calendar days.

Life of the bond transaction - a more flexible regime

Convening of bondholders’ meetings: The Ordinance introduces a significant amendment to the rules relating to bondholders’ meetings: it will be possible to provide, in the relevant terms and conditions, the method and formalities relating to such convening, ie without complying with the existing rules relating to the formalities and timing of such convening. If the issuer decides to use this possibility to depart from the existing rules, the Decree provides that the terms and conditions should in that case specify how the convening notice will be communicated to the bondholders. It further provides that the body in charge of convening a bondholders’ meeting should be in a position to justify, at any given time, that the notice was delivered in accordance with the terms and conditions. Furthermore, such communication should be made within a reasonable time prior to the holding of the bondholders’ meeting in order to allow sufficient time for the bondholders to analyse the points set out in the agenda. The rules relating to the communication of the convening notice remain unchanged failing any specific provisions to the contrary in the relevant terms and conditions.

Correction of manifest error in the terms and conditions: In respect of bonds with a denomination or minimum purchase amount of €100,000, the issuer will be able to amend the relevant terms and conditions without the consent of the bondholders in order to correct any manifest error.

Bondholders’ decision taking process: The Ordinance provides that the terms and conditions may provide that bondholders’ decisions will not take place by way of a bondholders’ meeting, but rather through a written consultation process as further set out in such terms and conditions. The Ordinance is not specific about such written process, which should leave issuers a certain degree of freedom in organising the terms of such written consultation in the relevant terms and conditions.

Requirement for existing bondholders’ approval prior to the issue of secured bonds: Under the existing regime, any issue of bonds including a preferential right in comparison with the existing bondholders is subject to the prior approval of the bondholders’ general meeting (provided that the issuer may nevertheless proceed with the new issue without such approval if it redeems early the existing bonds). The Ordinance amends this rule and provides that such prior approval is only necessary if the new bonds are to be secured by a sureté réelle (a security over a specific asset) which does not benefit the existing bondholders. In other words, if an issuer considers issuing bonds which grant a preferential right in comparison with the existing bonds, but do not grant a sureté réelle, such prior approval will no longer be required.

Release of existing security: Under the existing regime, the représentant de la masse may not grant any release over security during the life of a bond transaction unless certain conditions are fulfilled (ie a decision to that effect has been taken by the bondholders’ extraordinary general meeting). The Ordinance allows the release to take place pursuant to the terms set out in the terms and conditions. The latter could provide, for example, that the représentant may grant partial release of collateral within a pool of collateral depending on the variation of the value of the secured assets during the life of the bond transaction. If the terms and conditions do not contain any provision to that effect, the existing and less flexible rules will apply in the event of release of security before the maturity date.