Category: Legal news

Case : Heirs of the Sultan of Sulu and North Borneo v. Malaysia – Ad-hoc Arbitration

On 28 February 2022, a sole arbitrator, Dr. Gonzalo Stampa, ordered Malaysia to pay USD 14.92 billion plus a 10% annual interest and costs to the heirs of the Sultan of Sulu and North Borneo, under a 19th century agreement.

This case has been the subject of great interest and debate in the arbitration community both in Spain and France.

Its unique historical background and the considerable amount claimed by the heirs of the last Sultan of Sulu and North Borneo (USD 32.20 billion) were already enough to attract the public’s attention.

In addition to that, the case involves an uncommon arbitration agreement, provides a valuable precedent regarding the relocation of the seat of arbitration and is expected to raise interesting questions at the stage of the recognition and enforcement of the decisions of the sole arbitrator before domestic courts.

Historical and Factual Background

On 4 January 1878, Muhammad Jamalul Alam, Sultan of Sulu and North Borneo, and Messrs. Alfred Dent and Baron Gustavus de Overbeck (the Austro-Hungarian Consul-General in Hong Kong), entered into a contract for the exploitation of natural resources in a territory along the north coast of the island of Borneo under the Sultan’s control (at the time a Spanish territory, now in the Malaysian State of Sabah). In exchange, the Sultan would receive annual rental payments.

Baron de Overbeck relinquished his rights under the 1878 agreement to Mr. Dent. From 1882 the British North Borneo Company assumed the management of Mr. Dent’s rights under the 1878 agreement.

On 22 April 1903, the Sultan and the British North Borneo Company entered into a confirmatory deed which provided that any dispute between them would be “brought for consideration or judgment of Their [British] Majesties’ Consul-General in Brunei”. At the time, the relevant territory had become a protectorate of the United Kingdom.

In 1963, the rights managed by the British North Borneo Company were transferred by the British government to the Malaysian State, which became responsible for the payments.

In 2013, a Filipino armed rebel group launched an attack against the Malaysian State of Sabah, where the territory subject to the 1878 agreement is found. After Malaysia secured back the territory, it refused to continue paying the annual rental, alleging links between the Sultan’s heirs and the armed rebel group.

On 2 November 2017, the Sultan’s heirs notified Malaysia of their intention to initiate ad-hoc arbitration proceedings based on the 1878 agreement and the 1903 deed.

Appointment of the sole arbitrator by the Superior Court of Justice of Madrid

The Sultan’s heirs were confronted with difficulties submitting the case to an arbitrator.

Their British Majesties’ Consul-General in Brunei was an institution at the time of the British protectorate which did not exist anymore in 2017, and the British Foreign Secretary refused to assume the role of arbitrator in the dispute.

In this context, the heirs requested Malaysia to proceed to the joint appointment of an arbitrator. Malaysia failed to do so. The heirs thus filed an application before the Superior Court of Justice of Madrid for the appointment of an arbitrator under Articles 8 and 15 of the 2003 Spanish Arbitration Act. The heirs chose Madrid as Spain had sovereignty over the territory at the time of the signature agreement.

On 8 May 2018, the Superior Court of Justice of Madrid upheld the jurisdiction of its Civil and Criminal Chamber to appoint an arbitrator based on a debated interpretation of Article 8.1 of the 2003 Spanish Arbitration Act and the possibility of a forum necessitatis. The Court also noted that Spain had sovereignty over the relevant territory at the time of the signature of the agreement.

On 22 May 2019, the Civil and Criminal Chamber of the Superior Court of Justice of Madrid appointed Dr. Gonzalo Stampa as sole arbitrator.

Jurisdiction, seat of arbitration and applicable law

Malaysia challenged the existence of the arbitration agreement and argued that Malaysian courts had jurisdiction over the matter, given the impossibility to refer the dispute to Their British Majesties’ Consul-General in Brunei.

In 2020, Malaysia obtained an anti-arbitration injunction from the High Court of Sabah and Sarawak (Malaysia), to prevent the arbitration from moving forward.
Despite this injunction, Dr. Stampa upheld his jurisdiction by a Preliminary Award dated 25 May 2020.

In the absence of detailed provisions in the 1878 agreement, the Preliminary Award determined Madrid as the place of the arbitration, considering it a neutral seat, and decided that the general principles of international law would apply as lex causae, specifically the UNIDROIT Principles.

Proceedings before domestic courts

In parallel, Malaysia challenged the appointment of Dr. Stampa before the Superior Court of Justice of Madrid which, on 29 June 2021, annulled Dr. Stampa’s appointment.

However, Dr. Stampa remained in office, stressing that he should not be “swayed by outside pressures, including unauthorised intrusion by local courts”, as he would later write in his Final Award.

On 17 September 2021, the Sultan’s heirs obtained from the Judiciary Tribunal of Paris an Enforcement Order of the Preliminary Award.

On 29 October 2021, Dr. Stampa then relocated the seat of arbitration from Madrid to Paris.

Malaysia lodged an appeal against the Enforcement Order before the Paris Court of Appeal and obtained an order to stay its effects.

In parallel, the heirs of the Sultan filed a constitutional recourse against the decision of the Superior Court of Justice of Madrid that voided the sole arbitrator’s appointment.

Meanwhile, Malaysia sent the sole arbitrator ex parte communications demanding the discontinuance of the arbitration and initiated criminal proceedings against him before the Criminal Court of Madrid.

The Final Award ordering Malaysia to pay USD 14.92 billion

Before the sole arbitrator, the Sultan’s heirs submitted that the 1878 agreement was an international private lease agreement of a commercial nature that was breached by Malaysia. They requested the termination of the 1878 agreement and the payment by Malaysia of the restitution value of the rights over the leased territory, which they estimated to USD 32.20 billion based on the fair market value of the hydrocarbon and palm oil related revenues from the relevant territory up until 2044.

On the contrary, Malaysia argued that the 1878 agreement was not a commercial agreement but an instrument for the permanent cession of territorial sovereignty which would be a non-arbitrable subject matter. However, Malaysia did not rebut the breach of the agreement, nor did it refute the valuation submitted by the heirs of the Sultan.

On 28 February 2022, after four years of proceedings, the sole arbitrator ruled in favor of the heirs of the Sultan, while reducing the restitution value to USD 14.92 billion.

On 3 March 2022, Malaysia applied before the Paris Court of Appeal to set aside the Final Award.

Comments

This historic case is significant not only due to the high value of the rights at stake and its geopolitical implications, but also due to the role played by Spanish and French courts in proceedings, as well as the tenacity of the sole arbitrator.

Indeed, this case is a welcome example of the assistance that State courts may provide to parties to allow arbitration proceedings to progress, even when confronted with the pressure of another State involved in the proceedings.

Moreover, the sole arbitrator’s confirmation of his jurisdiction and his decision to relocate the arbitration to Paris highlight the importance of the independence of arbitrators and their ability to resist to outside pressures.

Now, the proceedings pending before State courts will certainly give rise to interesting decisions in the future, notably regarding the interpretation and applicability of the arbitration agreement, the arbitrability of the subject-matter and more generally the enforceability of the Final Award.

Jacques Bouyssou, Partner, Marie-Hélène Bartoli-Vallet, Counsel & Juan Diego Niño-Vargas, Associate

Increased sanctions against Russia : crypto assets targeted

March 9 and 10, 2022, the European Union increased its sanctions against Russia et added new names on the list of the persons and entities subject to an asset freeze and a travel ban. As of March 15, 2022, 863 people and 53 entities are affected (Regulation (EU) 2022/396 of 9 March 2022 and Regulation (EU) 2022/408 of 10 March 2022).

The Council also modified the definition of transferable securities in Regulation 833/2014, revised, to include crypto assets. It is therefore prohibited to directly or indirectly purchase, sell, provide investment services, or deal with crypto assets issued by legal persons or entities established in Russia, with over 50% public ownership or control, or by legal persons or entities established outside the Union whose proprietary rights are owned for more than 50% by Russia (Regulation (EU) 2022/394 of 9 March 2022).

Russian retaliation: Russian operations of foreign groups may be seized

To retaliate, a Russian draft law provides mandatory sale of enterprises that refused to continue their business in Russia and are owned or controlled by persons from “unfriendly” countries (European Union, United Kingdom, United States, Australia, Canada, Japan, etc.), when the shareholders and/or the management bodies terminated the management of the enterprise or when they took actions that may lead to unjustified termination of activities, liquidation, or bankruptcy of the company.

Russia also subjected to prior consent of the Government Commission on Monitoring Foreign Investments, chaired by the Russian Finance Minister, all operations between Russian residents and people related to foreign unfriendly states regarding credits and loans, securities, and real property. Operations on foreign currency or using electronic means of payment are also subject to prior approval (Decree No. 81, dated March 1, 2022).

For any additional information, please contact the Compliance and Regulatory team.

Frédéric Saffroy, Partner & Alice Bastien, Associate.

In support of Ukraine and although this may seem trivial in view of what Ukrainians are undergoing – and are likely to undergo – the European Council adopted strong economic, financial, and trade restrictive measures in response to the invasion of Ukraine by Russia. The different regulations adopted up to March 3, 2022 – directly applicable – tighten the sanctions taken in 2014 against Russia following the illegal annexation of Crimea.

The new restrictions, besides the symbolic ones [1], specifically target financial institutions, Russian elites, state-owned companies, and several of Russia’s critical industries and sectors such as energy, transport, telecommunications, aviation and high-tech.

To fight the Russian disinformation campaign, the Council also prohibited Russia Today and Sputnik, two state-owned media, to broadcast in the European Union [2].

New sanctions may be implemented soon and could target crypto assets. At the same time, Europe provides help to Ukraine and Ukrainians [3].

Lastly, measures have also been taken by the United States, the United Kingdom, Canada, Australia and Japan.

1. Asset Freezes

All funds and economic resources belonging to any natural persons, or natural or legal persons associated with them, are frozen [4]. It includes funds or economic resources made available, directly or indirectly, to those natural persons.

As of March 3rd, 2022, 680 people and 53 entities, including the president Vladimir Putin, are subject to an asset freeze because of their affiliation with the State of Duma or because of their ties with the Russian government [5].

The same restrictive measures apply to Belarusian persons associated with the Lukashenko regime [6].

2. Import, Export, and Dual-Use Goods

Initially concerning goods and technology intended for military use or for a military end-user only [7], the prohibition to sell, supply, transfer or export dual-use goods and technology to any natural or legal person in Russia or for use in Russia extends from now on to any use. There is also an export ban on all goods and technologies used in the defence and security sector, in the oil refining process and in the aviation or space industry [8].

Dual-use goods and technology export in Belarus or for use in Belarus is also prohibited [9].

The import of goods originating from the areas of the Donetsk and Luhansk oblasts is forbidden. By derogation, trade contracts concluded before February 23, 2022, may be executed until May 24, 2022. In addition, there is an export ban on goods and technologies suited for use in the sectors of transport, telecommunications, energy and production of oil, gas, and mineral resources [10].

3. Investment and SWIFT

After prohibiting the purchase, sell, or deal with transferable securities and money-market instruments issued by Russia, its government, the Central Bank of Russia, any entities acting on behalf of the Central Bank [11], or issued by legal persons and entities established in Russia with over 50% public ownership or control [12], the Council banned the investment, participation or contribution to projects co-financed by the Russian Direct Investment Fund [13].

As of March 12, 2022, it will be prohibited to provide specialised financial messaging services, which are used to exchange financial data (SWIFT), to seven banks (Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, Vnesheconombank (VEB), and VTB Bank) or to any legal person or entity established in Russia whose proprietary rights are directly or indirectly owned for more than 50 % by one of the bank listed [14].

For any additional information, please contact the Compliance and Regulatory team

Frédéric Saffroy, Partner & Alice Bastien, Associate

_____________________________

[1] A ban on the overflight of EU airspace by Regulation (EU) 2022/334 of 28 February 2022 and a suspension on the issuance of visas by Decision (EU) 2022/333 of 25 February 2022.

[2] Regulation (EU) 2022/350 of 1 March 2022.

[3] Provision of equipment and supplies to the Ukrainian Armed Forces through the European Peace
Facility, EUR 500 million support package to finance the Ukrainian Armed Forces, humanitarian aid and EUR 1,2 billion financial aid (Decision (EU) 2022/313 of 24 February 2022).

[4] Annex I of the Council Regulation (EU) 269/2019 of 17 March 2014, consolidated, set forth the list of the persons and entities concerned by the asset freezes.

[5] Regulation (EU) 2022/260 of 23 February 2022, Regulation (EU) 2022/261 of 23 February 2022, Regulation (EU) 2022/332 of 25 February 2022, Regulation (EU) 2022/336 of 28 February 2022.

[6] Regulation (EU) 2022/300 of 24 February 2022, Regulation (EU) 2022/353 of 2 March 2022.

[7] Regulation (EU) 833/2014 of 31 July 2014.

[8] Regulation (EU) 2022/328 of 25 February 2022.

[9] Regulation (EU) 2022/355 of 2 March 2022

[10] Regulation (EU) 2022/263 of 23 February 2022.

[11] Regulation (EU) 2022/262 of 23 February 2022.

[12] Regulation (EU) 2022/328 of 25 February 2022.

[13] Regulation (EU) 2022/345 of 1 March 2022.

[14] Regulation (EU) 2022/345 of 1 March 2022.

Continuing the expansion of foreign investment control, undertaken as early as 2014 (the famous “Montebourg decree” ) and reinforced in recently through the Covid-19 crisis, France has again extended the list of sectors for which foreign investments are subject to prior authorization by the Minister of the Economy. As from January 1, 2022 , foreign investors of all sectors must also provide new information to the authorities when applying for an authorization. Concerning the acquisition of voting rights by non-EEA investors, the 10% threshold triggering the authorization is maintained. The European Commission has updated its list of projects and programmes of Union interest.

R&D in renewable energies now subject to authorization

The order (“arrêté”) of September 10, 2021[1], on foreign investments in France, amending the order of December 31, 2019, adds a 9th technology – production of renewable energy – to the list of critical technologies subject to the foreign investment control procedure, namely cybersecurity, artificial intelligence, robotics, additive manufacturing (3D printing), semiconductors, quantum technologies, energy storage and biotechnologies (Article 6 of the order of December 31, 2019, as amended).

As from January 1, 2022 , foreign investments in France in research and development activities relating to technologies involved in the production of renewable energy will thus be subject to authorization.

According to the French Ministry of the Economy, this change should “strengthen the production of essential activities to ensure the greening of the French energy mix”. It is also justified by an objective of ensuring a self-sufficiency in the renewable energy sector, so that France does not depend on foreign actors.

Extension of the 10% threshold for the acquisition of voting rights

A new decree [2] extends for an additional year the provision reducing from 25% to 10% the threshold triggering the mandatory prior authorization for the acquisition of shares in a listed company performing controlled activities. Until December 31, 2022, non-EEA investors acquiring more than 10% of voting rights, regardless of the amount of the transaction, are subject to the prior authorization by the Ministry of the Economy.

New information to be provided to the authorities

As from January 1, 2022 [3], new information shall be provided by the investor in the application for authorization: (i) how French customers’ data of the target is managed, (ii) the list of the target’s EU customers (in addition to the French ones), (iii) the list of all target’s intellectual property rights (patents, trademarks, licenses) and (iv) the global strategy of the investor in France and in the EU, with examples of previous transactions and a focus on the relevant industry market.

Updated list of projects and programmes of Union interest

On September 29, 2021, the European Commission has updated the list of projects and programmes of Union interest to include those involving a substantial amount or a significant share of Union funding or projects and programmes regarding critical domains, mainly in the sectors of defence, infrastructure, space, nuclear, research, innovation, technology and health [4]. Where a foreign direct investment is likely to affect these programmes, the Commission may issue an opinion addressed to the Member State on grounds of security or public order.

Reminder of the principles applicable to foreign investments

Regardless of the amount of the transaction, any investment – direct or indirect – made through the acquisition of shares (takeover of a company, or for non-EEA investors, acquisition of more than 25% – or, until December 31, 2022 [5], 10% if the target company is listed on the stock exchange – of the voting rights of the target company) or acquisition of goodwill or assets (all or part of a branch of activity of a company) of a French company performing critical activities is subject to a prior authorization by the Minister of the Economy, under penalty of nullity and heavy financial fines.

Since October 11, 2020 [6], foreign investments made by non-EEA investors shall also be notified to the European Commission and to other Member States. This screening mechanism reinforces the protection of activities and essential assets of the Union and coordinates the responses brought to the investors. Over the past year, just over 400 applications have been submitted. Nearly 80% have been authorized. Only 2% have been refused, 12% have been conditionally authorized and 7% have been abandoned [7].

For European and non-European investors, the controlled sectors include (i) activities likely to affect national defence, public order, or public safety (war materials and similar, dual-use goods, national defence secrets, information systems security, encryption, sensitive data storage, etc.) or (ii) the same activities when they concern essential infrastructures, goods or services (energy, water, transport, space operations, communications, integrity, security and continuity of a vital operator, public health, agricultural products, press) and (iii) R&D activities in the above-mentioned sectors and related to the critical technologies listed above and defined in the order of December 31, 2019 as well as to dual-use goods and technologies.

For any additional information, please contact the Compliance and Regulatory team.

Frédéric Saffroy & Alice Bastien

[1] : Order of September 10, 2021, regarding the foreign investments in France.

[2] : Decree n°2021-1758 of December 22, 2021.

[3] : Supra footnote 1.

[4] : EU Commission Delegated Regulation 2021/2126, September 29, 2021, amending the Annex to the EU Regulation 2019/452.

[5] : Supra footnote 2.

[6] : Date of entry into force of EU Regulation 2019/452 of March 19, 2019.

[7] : See the Commission’s summary: https://trade.ec.europa.eu/doclib/docs/2021/november/tradoc_159937.pdf

Stereotype #1: French 35-hour working week

This is the legal working time. However, many other schemes (e.g. working time calculated in days) are possible, as well as the possibility to do overtime. On average, French employees work 39.1 hours a week and executive employees 43.1 hours.

Case law focus: obligation of reinstatement at the end of an expatriation

The French Supreme Court confirmed that the legal obligation of reinstatement at the end of the expatriation only applies when an employee is sent from a parent company to a subsidiary, not between subsidiaries.

Also, contractual provisions on reinstatement are interpreted strictly: beware of the way they are drafted!

French Supreme Court – 10th Nov. 2021, n°20-10.954

Covid update

Taking into consideration the consequent new wave of pandemic, the health protocol at work has been updated:

• a minimum of 3 days per week of remote working is required (when the job is compatible).

• Convivial times are suspended.

• Recommendations on ventilation of premises are reinforced.

Case law focus: variable remuneration

The case law doesn’t include any obligation to negotiate between the company and its employees to set performance objectives. However, when the contractual clause on variable remuneration states that a commitment is made each year to set the employee’s objectives, the employer failing to do so shall pay the maximum variable remuneration provided in the employment agreement.

This decision is a new illustration of the importance to clearly set the variable remuneration conditions (through the contract or a policy) and to apply them strictly.

French Supreme Court – 4th Nov. 2021, n°19-21.005

Remote working: bill proposal to porvide a lump sum and voucher

A proposal has been submitted to the French Parliament to porvide people working remotely with a lump sum and voucher. In the proposal, the lump sum would be up to 600€/year and would be exonerated of social contributions and tax. It could be provided as vouchers, comparable to lunch voucher.

Case law focus: amicable termination

(i) While a situation of harassment is not per se an obstacle to an amicable termination, the latest can be deemed as void if the situation is so unbearable that the employee’s consent to the termination is affected.

French Supreme Court – 4th Nov. 2021, n°20-16.550

(ii) It is not possible to mutually terminate an employment contract outside of an “official” amicable termination process. However, the purpose of a transfer from one company to another within the same group is to continue the contract and not to terminate it, following the amicable termination process is not necessary.

French Supreme Court – 17th Nov. 2021, n°20-13.851

Article of the month: Reorganizations – beyond the law

As technical handling a social plan can prove to be, it is first and foremost a matter of organizing the work within a multidisciplinary team and avoiding pitfalls.

Jacques Perotto and Maxime Hermes present an overview of what you need to know to manage a successful restructuration process.

Read the article

Jacques Perotto, Partner and Maxime Hermes, Associate.

Reorganizations, and particularly collective dismissal plans, are often complex and can be quite long projects in France, which may come as a surprise for people familiar with jurisdictions where the process is relatively quick and smooth.

However, as technical as the legal aspects can be, the main issues often arise from strategical, practical and communication aspects. In this regard, it is essential to ensure that the internal and external communication is managed properly.

The involvement of staff representatives (for consultation purposes and the negotiation of the collective dismissal plan) and in particular the French Administration, (to approve the collective dismissal plan at the end of the process) can mean that some last-minute twists in the plot cannot be ruled out.

The purpose of this article is, for once, to set aside the legal aspects and draw attention to a few red flags.

Train for a marathon

When it comes to preparation (i.e. before entering the phase of consultation of staff representatives), the best advice is to “take your time”.

While it is paramount to maintain momentum and to move forward swiftly, experience has proven that rushing the preparation phase most often results in jeopardizing the credibility of the dismissal plan and in wasting time later.

⚠ When building the foundations of the project, the persons involved should be limited to an inner circle of decision makers, accompanied by an employment lawyer and/or a reorganization consultant if need be.

The preparation phase includes numerous and rather time-consuming tasks such as defining the economic rationale, scaling the project, preparing a budget, establishing a timeline, defining the future organization and the transfer of workload, drafting the (extensive) documentation, anticipating communication (both internal and external) and contingency plans…

⚠ For the sake of consistency, it is strongly recommended that the same person (or group of people) draft all the documentation and the content transmitted by all the appropriate stakeholders.

A vision and a leadership

Reorganization should not be reduced to just an exercise in cutting off jobs.. Of course, the financial situation may be critical, and cutting expenses and positions is a matter of survival, but savings and dismissals should in most cases be the consequence of a financial and organizational project, and not its starting point.

Promoting a credible business vision to address the economic ground (economic difficulties or need to safeguard the competitiveness of the group) is therefore paramount to ensure successful reorganization.

⚠ The project should be promoted and managed by a team leader, who has the capacity and the legitimacy to make the final decision on various matters: finance, legal, HR…

The country manager or the group HR manager are natural choices, bearing in mind the task is time consuming and most of the working time of the team leader will be dedicated to the project for a few months. In this regard, a country HR Director / Financial Director / Operation Director may be the right choice.

Gather your A team

As well as the team leader, a fully dedicated PMO (either external or internal) is required to organize the work, to ensure project team alignment and to manage and meet deadlines.

Internally, most of the functions will be solicited at some point. Local HR (including Labor relations), Finance, Operations and Legal teams will be at the heart of the decision-making process and the preparation, but global teams, Health and Safety and communication teams will certainly be involved as well.

⚠ The appreciation by each internal stakeholder of the opportunity of the project may differ. In international groups, this may be particularly true between global divisions and local teams, which may have a different agenda and a different vision: don’t underestimate a possible cultural gap. Taking time to onboard everyone will never be a waste!

Externally, multiple consultants may come to assist throughout the process. The needs will depend on the nature of your activity, of the project, and of the internal resources you can mobilize: an external PMO may be relevant; the local HR Manager may be excellent for running day-to-day activity, but not necessarily experienced when it comes to crisis situations.

Employment lawyers and/or reorganizations consultants are the “must have” in the team. Consultant firms usually propose a range of skillsets for you to pick from: finance, strategy, organization, project management, application of “Florange” law (obligation to search for a buyer in some situations of site closure)…

A redeployment/outplacement firm will be also required, and in sensitive projects, a Public relations / Communication firm is often recommended.

 

Organization: the importance of being earnest

It is paramount to define everyone’s role and avoid multiplying meetings with all stakeholders: while it is important to have a 360° vision on the project, multiplying the meetings will result in diluting the decision-making process and wasting a lot of people’s time during a rather time-sensitive period.

⚠ While divergent point of views, and even pushback, may result in useful debates, the decision process should be clear at the very beginning to avoid stressful situations and wasting time. Keep in mind that some topics may be more important than others: in particular, as the main purpose of the process is to have a collective dismissal plan approved by the administration, legal issues regarding the validity of the procedure should prevail most of the time.

It is therefore recommended to define different type of meetings:

– Decision-making meetings, limited to the core project team;

– Regular alignment meetings for sharing information and decisions, which is crucial for the core team to take decisions with a transversal vision and for the stakeholders to be updated of the state of the project. These meetings will also be the occasion to check that the schedule is being respected;

– Day-to-day meetings to manage administrative topics (especially during the course of the consultation and the implementation of the plan);

– Thematic meetings to build up the collective dismissal plan, with the appropriate stakeholders.

⚠ Avoid working in silos: regular communication is once again essential. The approach should be iterative with daily reports of the progress made during alignment meetings.

Embrace the roleplaying game

Before starting the staff representative consultation process, the Administration and politics (either local and/or national, depending on the nature and the impact of the project) should be informed of the imminence of the procedure.

And this is where the roleplaying game begins…

⚠ A big project will be in the media and politicical spotlight, especially if it impacts an area with a high unemployment rate.

Spoiler alert: even if the project is built to limit the number of job cuts and ensure the sustainability of the company and the remaining jobs it offers, the management will become the target in the communication from the Unions, the speeches from politicians and the media.

All stakeholders will have different agendas, and their behavior and communication will be determined by it. Those who have a straightforward approach to social and public relations may face a cultural gap when confronted to some deceiving moves.

– The company’s target is to cut costs and ensure the long-term sustainability of the company through the reorganization.

– Unions and employees will either try saving the jobs at all costs (which may include attempts to undermine the project to delay it as much as possible) or maximize the level of the social measures. The project team will most likely face a mix of both approaches, which may lead to dissension between Unions.

– The role of the administration (ahead of the official inspection and approval of the plan) is to encourage social dialogue with Trade unions, to suggest improvements to the plan, to try limiting the number of redundancies, and to mitigate the long-term impact on employment in the area. In this context, the administration’s agenda, may be summarized as “the less fuss, the better”: beware of the possible inconsistencies between what is said to the company’s directors, what is said to the Unions and what is said officially!

Stay On Track in spite of turbulence

Ultimately, if the project is implemented seriously and sufficiently funded, its success will depend on the capacity of the team leader and decision makers to stay focused on the initial target, even when challenged by the other parties.

While being able to be agile and make some adaptations to the strategy in the course of the process, it is critical for the team leader and decision makers to remain aligned and consistent with the decisions taken despite the pressure from all sides.

Jacques Perotto, Partner, and Maxime Hermes, Associate

Dual-Use Items (or “DUI”) are substances, materials, equipment – including technology, software and know-how – which may have both civilian and military uses, or which may contribute – in whole or in part – to the development, production, handling, functioning, maintenance, stockpiling, detection, identification or dissemination of weapons of mass destruction (nuclear, biological, chemical).

In accordance with international commitments of the European Union Member States, the export of these goods is subject to authorisation (License) under Council Regulation (EC) No. 428/2009 of May 5, 2009 setting up a Community regime for the control of exports, transfers, brokerage and transit of dual-use items. In France, these licenses are issued by the Dual-Use Items Department (“Service des biens à double usage” or “SBDU“) of the Ministry of the Economy.

After four years of work, the 2009 Regulation has been repealed and replaced since September 9, 2021, by Regulation EU 2021/821 dated May 20, 2021. This reform aims at strengthening and standardizing export controls of DUI, to prevent human rights violations and adapt to the latest technological developments.

This reform does not change the main principles of Regulation EC 428/2009, but strengthens its efficiency by introducing new measures, the main ones being:

1 – Strengthening the effective control of cyber-surveillance items – The export of means aiming at monitoring, intercepting, extracting, collecting or analysing individuals’ communications (voice and data) is subject to license – even if they are not listed in Annex I to the Regulation – if the exporter has been informed by the competent authority that these items are or may be intended for use in connection with:

• internal repression and/or

• the commission of serious violations of human rights and international humanitarian law.

Moreover, if the exporter is aware, according to its due diligence findings, that cyber-surveillance items not listed are intended for any of the above-mentioned uses, he shall notify the competent authority (article 2, § 20 and article 5 of the Regulation).

In France, the manufacture, import, possession, rental or sale of communication interception devices are subject to prior authorisation. Any failure is punishable by a five-year imprisonment and a 300,000 euros fine (article 226-3 of the Criminal Code)

2 – Extended control of technical assistance – Technical assistance in connection with a DUI covers many operations (development, testing, manufacturing, assembly, repair, maintenance) in many forms (instructions, advice, training) and various means (in writing, by phone, orally). Such assistance – now defined by the Regulation – is subject to license in the same way as the DUI to which it relates. In particular, like “deemed export” as per the US EAR Regulation, technical assistance provided in a Member State to a resident of a third country who is temporarily in the country, is subject to authorization (article 2, § 10 & 11, of the Regulation).

3 – Internal Compliance Programme (or “ICP”) by companies holding global export licenses – The content of such programmes – which should include due diligence measures – will be defined by Member States (article 2, § 21 and article 12.4, § 3 of the Regulation). However, the European Commission has already issued its general guidelines in Recommendation 2019/1318 of July 30, 2019, and just issued guidelines on ICP for research involving dual-use items (Recommendation 2021/1700 of September 15, 2021).

4 – Two new general export licenses – One for intra-group export of software and technologies (EU007) and the other (EU008) for encryption (article 12.1.d of the Regulation).

5 – Creation of “large project authorisation” –It is a license which is either individual or global, and is valid for a maximum duration of 4 years for a specific large project (article 2, § 14, and article 12.3 § 2 of the Regulation).

6 – Enhanced cooperation between Member States and the European Commission, including by the creation of a Dual-use Coordination Group chaired by a representative of the European Commission and composed of a representative of each Member States (articles 23 and 24 of the Regulation). Also, when a Member State establishes national control lists of non-listed DUI for which a license is required, this Member States shall inform the other Member States and the Commission (it was merely an option before). The other Member States shall take this “national control list” into account.

Finally, it should be noted that France has adopted a decree, in June 25, establishing a general national control list “low value” for the export of six categories of DUI (orders under EUR 5,000.00 euros), including riot gas masks, electronic system coolers, heat exchangers, pump parts or toxin and virus filtration elements. However, this licence excludes many destinations countries including China, Egypt, Israel, Lebanon or Russia.

Frédéric Saffroy, Partner and Alice Combastet, Associate in Compliance and Regulatory.

On 15 september 2021, a major reform of French insolvency law was enacted, mainly to implement the European Restructuring Directive.

This directive made it mandatory for all EU Member States to offer a « preventive restructuring framework » for companies facing financial difficulties, thus allowing debtors to place themselves under the protection of the court before they actually become insolvent. But paradoxically, from a French perspective, its implementation is generally viewed as shifting the balance of powers in favour of creditors, by comparison with our existing insolvency law. The reason for that is simple : on the one hand, several types of preventive restructuring proceedings already exist in France  – namely mandat ad hoc, conciliation, and the various types of  procédure de sauvegarde (safeguard proceedings), but on the other hand, the directive includes a number of rules protecting creditors which are totally new in the French restructuring landscape, such as the absolute priority rule and the best interest test. Similarly, the directive now allows to « cram down » shareholders, thus avoiding scenarios where shareholders would be able to block a debt restructuring (by refusing any share capital increase) although they were out of the money.

The situation is all the more complex as, because of the COVID-19 sanitary crisis, new legal provisions increasing debtors’ protection have also been enacted since 2020, in particular in the framework of our « conciliation » proceedings. Some of those additional protections will be maintained, although amended.

In light of such reforms, the question arises as to whether foreign lenders should now consider that they will benefit from legal tools allowing them to take the lead in French restructurings.

1. Why was France viewed as “debtor-friendly”?

Back in 2011, the famous Cœur Défense restructuring had a major impact on how foreign lenders viewed the French market.

A real estate special purpose vehicle, holding the Cœur Défense building, had placed itself into French « safeguard proceedings » to prevent the risk that its sole creditor (a securitization vehicle) might decide to accelerate the loan which had financed the acquisition of the building. Simultaneously, its parent company, a Luxembourgish entity, had also placed itself under the protection of French safeguard proceedings (on the ground that its center of main interest was actually located in France), thus preventing the enforcement of the plege it had granted over the shares of the French SPV. Then, French courts imposed a debt rescheduling plan upon the sole creditor, whereby the debt was frozen for four years.

Thereafter, various strategies have been used by lenders to try to avoid facing a similar scenario. The famous « double luxco » structure was invented to circumvent French insolvency law by creating two Luxembourgish entities above the French borrowers, thus allowing the lenders to benefit from a Luxembourg law share pledge. Alternatively, in some cases, lenders were granted a French law fiducie over the shares of the borrower, whereby the ownership of the shares was transferred to a trustee. In a limited number of cases, golden shares have also been used.

As a matter of fact, though, the use of so-called « hostile » safeguard proceedings, in the same way as in the Cœur Defense case, remained very exceptional.

Another specific feature of French restructurings was the treatment of shareholders. Unlike in a number of other jurisdictions, they did retain the possibility to prevent any debt to equity swap. Therefore lenders had to accept, in some cases, that shareholders would not be totally wiped out (e.g. they would retain a small portion of the share capital) although they were out of the money.

2. Does the “court-imposed debt rescheduling plan” still exist after the reform?

The concept of « court-imposed plan » traditionally refers to a debt rescheduling, over up to ten years, which the court is entitled to impose upon creditors, even if a majority (or all) of them expressly refused to grant it. Such a scenario is particularly feared by creditors, also because the rescheduling plan may provide for very low installments on the first years (e.g. 1% of the debts to be paid on year 1 and 2 ; 5% each year as from year 3 to year 9 ; and 63% on year 10).

This traditional « court-imposed plan » will no longer exist in safeguard proceedings, except for entities which are too small for classes of creditors to be created. Instead, the court will now be in position to impose a « cross-class cram down » upon dissenting creditors and / or shareholders, but only if at least a class of creditors voted for the plan and if a number of other conditions are met, including the absolute priority rule (i.e. a class of creditors must be paid in full if the restructuring plan includes any type of payment in favour of a class of a lower ranking). In other words, the support of at least some creditors will be necessary for the debtor to obtain the adoption of a debt restructuring plan.

The situation will be quite similar in the framework of redressement judiciaire (rehabilitation proceedings). The possibility to adopt a « traditional » court-imposed plan still exists, but only if no plan has been adopted through the vote of the classes of creditors and, interestingly, creditors may elaborate and put to the vote their own restructuring plan (which they are not allowed to do in safeguard proceedings).

3. Is secutiry enforcement easier after the reform ?

The reform does not facilitate security enforcement in the framework of insolvency proceedings.

The French Cour de Cassation (the highest civil and commercial court) had adopted on 25 November 2020 a case law which was extremely favourable to creditors, by allowing them to enforce security interest granted by a company to secure the debt of a third party (e.g. a subsidiary), even in case of insolvency proceedings. For example, according to this case law, the creditor of a subsidiary was entitled to enforce the pledge granted by its parent company over its shares, even if the parent company itself was subject to insolvency proceedings.

Interestingly, the reform aims to annihilate this case law. Double luxco or fiducie structures will therefore remain attractive tools for creditors.

In addition, the reform makes it easier for debtors to obtain a grace period, in summary proceedings, against creditors refusing to negotiate a consensual restructuring in the framework of confidential conciliation proceedings.

It is also worth noting that the law now weakens security interest granted over future assets (such as future receivables), by providing that as from the date of the commencement of insolvency proceedings, future assets are excluded from the scope of the existing security interest (except for the so-called « Dailly law » assignments of receivables which can be granted to financial institutions).

4. Have shareholders lost their ability to block debt to equity swaps ?

The answer is yes (at least in companies of a significant size), and that is one of the key features of the reform.

In safeguard proceedings and in rehabilitation proceedings, the court now has the power to « cram down » not only the classes of dissenting creditors, but also shareholders.

This being said, it is worth noting that shareholders may benefit from a derogation to the absolute priority rule if such derogation proves « necessary to reach the goals of the plan and if the plan does not excessively affect the rights of the affected parties ». It remains to be seen whether this derogation will often be invoked in practice.

Conclusion– In light of the above, there is no doubt that the reform will dramatically change the way restructurings of large companies are handled in France, in particular because the debtor will no longer be able to rely on a credible « plan B» consisting of a court-imposed debt restructuring over ten years. That does not mean, however, that the French legal system is no longer « friendly » to debtors. Very efficient tools are available for debtors to negotiate and, if necessary, impose a debt restructuring upon all stakeholders, thus preserving the viability of the business. It would be more appropriate to say that the French restructuring environment is no longer « shareholder-friendly », as shareholders will now face the risk of being crammed down in the same way as creditors.

Gilles Podeur, Partner in Restructuring.

This article was originally published on mondaq.com on September, 30 2021.

The French commercial code (section L.651-2) provides for sanctions against executives of French companies who have contributed by their management errors to a lack of assets, and French courts do not hesitate to apply such sanctions.

The goal is to repair the damage caused to the company and to remove those managers from business life.

1. Who are the executives concerned?

French law simply refers to de jure or de facto managers.

Thus, a legal representative of a foreign company appointed as president of a French company argued not to be exposed to sanctions himself, not being directly the CEO in France, while another asserted that he accepted the mandate as CEO for free.

The French High Court (« Cour de cassation ») considered that not to receive any remuneration is not a criterion for liability (cass.com. 9 December 2020 n° 18-24730), nor does the indirect mandate prevent from sanctions.

The same degree of severity was applied to a CEO assistant (« directeur général délégué ») who argued not to have any independence regarding his decisions, acting internally only as an assistant to the general manager.

The French High Court nevertheless considered that the CEO assistant is empowered towards third parties with the same duties as the CEO himself, and thus subject to the same sanctions (cass.com 5 May 2021 n° 19-23575).

Consequently, the acceptance of a mandate as executive manager in a French company could be risky!

2. Could simple negligence be considered as a management error?

In principle, with reference to section L.651-2 of the French Commercial Code, simple negligence cannot be subject to sanctions, but the question is, whether the fact that a manager could not have ignored the error, could be considered as a simple negligence, or automatically constitutes an intentional fault.

In a decision dated 3 February 2021 (cass.com. 3. February 2021 n° 19-20.004), the French High Court considered that the impossibility to ignore the status of insolvency (« état de cessation des paiements ») does not exclude de facto an error by simple negligence while the same court judged (cass.com. 5 February 2020 n° 18-15/075) that the knowledge of an error demonstrates obviously the intentional element of the management error and insofar excludes any qualification as simple error.

Consequently, it is not advisable to ignore any problem a manager of a French company has to be aware of.

3. What does « lack of assets » mean?

Since the sanction of the faulty manager is linked to a « lack of assets » in the frame of an insolvency or liquidation procedure, the liquidator has at least to prove that the management error contributed to such a lack and that such a situation occurred during the mandate of the concerned manager, in other words if the dismissal is stated before the lack of assets occurs and even if the publication and formalities are not already completed, the manager cannot be held liable.

Consequently, once a manager is aware of major difficulties and is not able to proceed with their improvement, he should withdraw as soon as possible from his mandate and evidence his dismissal, for example by registered letter with acknowledgement of receipt.

4. What are the sanctions the manager may face?

On the one hand, the manager may be condemned to reimburse in part or in total the lack of assets and, on the other hand, sections L.653-2 and L.653-8 of the French Commercial Code provide for personal bankruptcy or the prohibition to direct, manage or administrate a French commercial cooperation.

Nicola Kömpf, Partner.

Law n°2020-1525 of 7 December 2020 “to accelerate and simplify public action“, known as the “ASAP” law, was published in the Official Journal on 8 December 2020.

Most of the new rules will come into force on 1 June 2022.

Regarding the environment part of this law, Article 57 has modified the rules relating to polluted sites and soils and to the cessation of activity of Installations Classified for the Protection of the Environment (ICPE).

The application decree was published in the Official Journal on 21 August 2021.

What are the main points to remember about this decree?

1. Information on polluted sites and soils (SIS)

It should already be noted that this addition was not provided for in the ASAP law and that it has been integrated into the Environmental Code by the decree.

It should be remembered that Article R.125-43 of the Environmental Code excluded from the perimeter of the soil information sectors (hereinafter SIS), the land within the boundaries of ICPEs in operation and in the process of being closed.

This article has been amended and allows the said land to be included in the SIS when the operator of the classified installation has disappeared or is insolvent and the installation has been made safe in accordance with the ICPE regulations.

Also new, mines in operation, including those in the process of being closed, are now listed in the SIS exclusions.

2. Decontamination of polluted sites and soils (articles R.512-39-3 for ICPEs subject to authorisation and R.512-46-27 for installations subject to the registration regime)

The operator has a period of six months from the final shutdown of its plant to send the prefect a decontamination report specifying the measures taken or planned to ensure the protection of the environment and/or public health.

The decree’s contribution is to allow the operator to postpone, upon express and justified request, the decontamination as well as the operations to determine the future use of the site.

Thus, the operator must notify the prefect of its intention to postpone the decontamination and transmit a statement of the justifications associated with this request within a certain period.

The prefect will then rule on this request, specifying in particular

• The measures conditioning the release of the land concerned.

• The prior information required before the implementation of the decontamination operation.

• The periodic re-evaluation of the justification for the postponement.

It should be noted that the absence of a response from the prefect within four months is equivalent to a refusal of the request.

3. The submission of a certificate by a certified company

From now on, the operator must have the remediation work carried out by a company certified in the field of polluted sites and soils or with equivalent skills in providing services in this field.

A decree will define the reference system with which this company must comply, and the audit procedures implemented by the certifying bodies as well as their accreditation conditions.

The text specifies that the company providing the attestation of the adequacy of the measures proposed for the decontamination of the area may be the same as the one that produced the decontamination report but not the one that carried out the work.

4. Substitution of the third-party applicant by another third party applicant

From now on, another interested third party may substitute itself for the third-party applicant with the agreement of the latter and the operator by sending a request to the prefect.

The decree adds a paragraph to the current Article R.512-76 of the Environmental Code, which details the applicable procedure and specifies that the silence of the prefect for more than two months after receipt of the request for substitution of the third-party applicant is deemed to be a rejection.

5. Safety certificate for certain ICPEs subject to declaration

For ICPEs subject to declaration, the obligation to provide an attestation by a certified company is limited to making the site safe.

The list of headings concerned is set out in the new article R.512-66-3 of the Environmental Code “these have been selected mainly on the basis of the dangerousness of the substances used and the feedback from the DREALs“.

6. Review of future use in the event of unforeseen technical impossibility

Concerning installations subject to authorisation and registration, from now on, in the event of technical impossibility resulting in manifestly excessive additional costs for the rehabilitation of the land, the operator may send the prefect a memorandum presenting the work carried out, the planned work not carried out and the difficulties encountered.

This statement will also set out the justifications for the impossibility of meeting the requirements.

After consultation with the mayor or the president of the EPCI competent in urban planning matters and the owners of the land concerned, the prefect may revise the use determined and modify the applicable requirements accordingly.

Finally, it should be noted that the decree specifies that “after the rehabilitation work has been carried out, the Prefect may, if necessary, take measures to monitor and preserve the memory of the site, as well as restrictions on use“.

Thus, the decree shows the will of the Ministry of Ecological Transition not to call into question the police power of the Prefect who can intervene at any time in the rehabilitation operations of polluted sites and soils.

Philippe Mathurin, Partner and Fahima Gasmi, Counsel in Environment.