Managing Shop Committee Consultation in French Business Transfers

Excerpt from EuroWatch
published by WorldTrade Executive, Inc.

By Eric Cafritz, Frédérique Jaïs and Olivier Genicot (Fried, Frank, Harris, Shriver & Jacobson LLP)

French law requires employers to share information and consult with the shop committee in cases of M&A, and there are EU requirements as well.

There is controversy as to the appropriate time for management to disclose a transaction with potentially exposive labor consequences if the timing is wrong. It can also be surprising as to when the shop committee rules apply such as in cases where the transction is negotiated and managed entirely outside of France.

General Scope of Obligation to Consult with Shop
Committees with Respect to Business Combinations
Companies on both ends of acquisition transactions are required to inform and consult with their shop committees. Under Article L. 2323-19 of the Labor Code, an employer must inform and consult with the shop committee “regarding any modification in the economic or legal organization of the company, notably in the event of a merger, sale, (...), or acquisition or sale of a subsidiary within the meaning of Article L. 233-1 of the French Commercial Code.” The employer must consult with committee members regarding the effects that the contemplated transaction may have on employees.

Furthermore, where there are “exceptional circumstances affecting the employees’ interests to a considerable extent, particularly in the event of relocations, the closure of establishments or undertakings or collective redundancies,” the European shop committee (or, if applicable, the select committee),8 has the right to request a meeting with the employer so as to be informed and consulted regarding the contemplated transaction. It has the right to meet, at its request, the central management, or any other more appropriate level of management within the EU-wide company or group of companies having its own powers of decision, so as to be informed and consulted on measures significantly affecting employees’ interests.

Direct Changes of Control
The nature of the information and consultation duty differs as between the acquirer, the seller, and the target company.

With respect to the acquiring company, its shop committee must be informed and consulted prior to acquiring a stake in another entity. Although the acquisition of a stake is separately defined by Article L. 233-2 of the French Commercial Code as the acquisition of 10% to 50% of the share capital of another entity, the French Supreme Court has held that in the absence of a specific cross-reference to the Commercial Code in Article L. 2323-19 of the Labor Code, the acquisition of less than 10% of the equity of a target company triggers the obligation to inform and consult with the shop committee.

With respect to the seller, its shop committee must also be informed and consulted if it sells a subsidiary in which it holds more than 50% of the equity. According to case law, the seller’s shop committee must be informed and consulted no matter how insignificant the subsidiary may be to the seller.

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