The legal framework for corporate governance in France follows the broad global trend. Over the last decade, major changes have occurred in France. Two laws were passed to strengthening the legal position on corporate governance: the May 2001 Law on New Economic Regulations and the August 2003 Financial Security Law. These laws specifically target transparency and ethics within companies. France is thus taking a legalistic approach to corporate governance, rather than relying on voluntary or comply-or-explain codes. The unified French financial regulator, the Securities Markets Authority (AMF) was created by the 2003 Law. This law also requires the AMF to publish an annual Report on Securities Issuers' Corporate Governance and Internal Control, which it has done since 2005. A cause for concern is the substantial deviation from the "one share/one vote" principle in France. Many companies in France feature, in principle, one type of share (ordinary shares) but grant double voting rights to shareholders who have been registered for at least two years. This system was originally implemented to reward loyal shareholders. In practice, however, it is mainly to the benefit of strategic shareholders who use the double voting right system to reinforce their voting power.

General Overview

Corporate governance has undergone dramatic change in France since the mid-1990s. In the words of Michel Goyer, writing in 2003 for the Brookings Institution, the "old model of corporate governance has changed beyond recognition" (p. 2). Goyer identifies three areas that have led to a change in corporate governance culture in France as elsewhere. First is the increase in foreign ownership. Goyer cites more than 40 percent of CAC 40 largest French blue chips as being in the hands of foreign investors after decades of domestic cross-shareholdings. Second is the transformation of many French companies from large conglomerates with little accountability to focused companies that emphasize their core competency. Third is the introduction of managerial performance incentives, which makes a system of checks and balances even more necessary. As a result, a number of measures intended to increase shareholder protection and value have been adopted.

The Mazars website discloses that the French government has taken a legalistic approach to corporate governance, rather than relying on voluntary or comply-or-explain codes. Nonetheless, the groundwork for the main laws of 2001 and 2003 is found in the Viénot reports of 1995 and 1999 and the Bouton report of 2002, which helped to define the principles of corporate governance more precisely and completely. The two main laws that have been passed in France to strengthening the legal position on corporate governance are the 2001 Law on New Economic Regulations (Loi sur les Nouvelles Régulations Economique, or NRE) and the 2003 Financial Security Law (Loi de Sécurité Financière, or LSF). These laws provide the basic framework for corporate governance in France, specifically targeting transparency and ethics within companies.

In a comment on the LSF, Trevisani of Winston & Strawn LLP notes that the 2003 LSF led to reform in the following areas: (1) the establishment of the Securities Markets Authority, the Autorité des Marchés Financiers (AMF), which was formed from the merger of the Commission des Opérations de Bourse (COB), the Conseil des Marchés Financiers (CMF) and the Conseil de Discipline de la Gestion Financière (CDGF); (2) the reinforcement of investors' protection; and (3) the modernization of the auditing of company accounts and general improvement of corporate transparency.

Another outcome of the LSF was that, pursuant to Article 122 of the law, it obligates the AMF to publish an annual Report on Securities Issuers' Corporate Governance and Internal Control. The AMF's January 2008 report used a sample of 100 companies, of which 47 traded on Eurolist A, 3 on Eurolist B, 40 on Eurolist C, 8 on Alternext, and 2 companies that issue only bonds. The sample includes 38 of the companies in the CAC 40. In addition, following the transposition of the European Union's Transparency Directive into French law in January 2007, the AMF's 2008 report explains that companies are now required to file their reports on corporate governance and internal control with the AMF and to post the reports to their websites, along with the rest of the regulatory information defined in point 2 of Article 221-1 of the AMF General Regulation. The AMF report notes that the AMF is publishing a list of companies that do not meet their obligations.

Despite these substantial changes, however, Goyer reports in his 2003 paper that there are still areas where the "French system of corporate governance remains largely opaque" (p. 3). Goyer notes that French companies still use practices that "effectively disenfranchise minority shareholders" (p. 3). The use of unequal voting rights and ownership ceilings separates France from other economies. A 2005 Study by the Association of British Insurers (ABI) on the application of the one share/one vote principle across Europe found that in France, 69% of the companies analyzed deviate from the principle. The most common form of exception to the principle is the system of ordinary shares with double voting rights, which exists in 27 of the analyzed companies (64%). These companies feature, in principle, only one type of share (ordinary shares), but grant double voting rights to shareholders who have been registered for at least two years. According to the ABI study, this system was originally implemented to reward loyal shareholders. In practice, however, it mainly benefits strategic shareholders who use the double voting right system to reinforce their voting power.

An interesting feature of the French corporate system is the role the government has traditionally played as an important stakeholder in the French industry. A 2002 KPMG report attributes this, in part, to the government's direct shareholdings in the French industry, although privatization programs have reduced this stake. Another important reason for the close ties between public and private sector is the circulation of senior executives between the civil service and the boardroom, a relationship strengthened by the French education system which produces both management and government officials who share a common outlook.

In terms of stock market capitalization, France ranked fourth in the world after the U.S., UK, and Japan in 2003, according to a 2005 assessment of the International Monetary Fund (IMF). Euronext Paris is the only stock exchange in France, replacing the Bourse de Paris. It was formed as a result of the partial consolidation of European stock markets that took place in 2000 and merged the stock exchanges in Paris, Amsterdam, Brussels, and, later on, Lisbon and Porto under the umbrella holding company Euronext NV. In 2007,the Euronext Stock Exchange merged with the New York Stock Exchange. The internal market structure of Euronext Paris remains as it was for the Bourse de Paris. It has three segments: the Premier Marché, the Second Marché, and the Nouveau Marché. According to Banque de France statistics cited by the IMF, equities are primarily traded by institutions and foreign investors.

According to the World Bank's 2008 Doing Business report, investor protection in France in 2007 was calculated to be slightly below the Organization for Economic Cooperation and Development (OECD) averages. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range from 0 to 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. France scores 10 in the disclosure index against an OECD average of 6.4. It scores only 1 in the Director Liability Index against an OECD average of 5.1 and 5 in the Shareholder Suits Index against an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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The French government has taken a legalistic approach to corporate governance, rather than relying on voluntary or comply-or-explain codes, according to the Mazars website. Nonetheless, the groundwork for the main laws of 2001 and 2003 was done in the Viénot reports of 1995 and 1999 and the Bouton report of 2002. These reports helped to define the principles of corporate governance more precisely and completely. The two main laws that have been passed in France to strengthen the legal position on corporate governance are the 2001 NRE and the 2003 LSF. These laws provide the basic framework for corporate governance in France, specifically targeting transparency and ethics within companies. In a comment on the LSF, Trevisani of Winston & Strawn LLP notes that the law led to reform in the following areas: (1) the establishment of the AMF; (2) the reinforcement of investors' protection; and (3) the modernization of the auditing of company accounts and general improvement of corporate transparency.

According to its website, the AMF is an independent public body with legal personality and financial autonomy. It sets rules for and monitors transactions involving the securities of publicly traded companies and ensures that tender offers are conducted in an orderly fashion. It also monitors companies to ensure that they provide complete and relevant information on a timely basis and in an equitable manner to all market participants. However, the publicly available information does not directly address France's compliance with this principle.

Principle II: The Rights of Shareholders and Key Ownership Function

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The 2004 IMF assessment of the French financial system noted that French companies are either SAs (Sociétés Anonymes) or SCPAs (Société en Commandité par Actions), which are like limited partnerships. The shares in a listed company can be held in both registered or bearer form, and must be negotiable. The IMF assessment noted that "all securities are dematerialized and hence even so-called "bearer shares" must be transferred through an electronic registry" (p. 167). The basic rights of shareholders in a French SA include the right to vote at shareholders meetings, which includes the annual general shareholders meeting (where annual audited accounts and the Board of Directors Management report are approved, and where directors are elected among other things); the right to receive information in connection with any proposal to be voted on at a shareholders meeting; and the right to receive answers at a shareholders meeting to questions submitted in writing in advance to the board of directors. The IMF assessment noted that "the rights and interests of shareholders cannot be changed without a vote, and in the case of classes, without a vote of the class affected" (p. 167).

Writing in 2002, Feldman noted that, while only the board can generally convene a shareholders meeting, in certain well-documented cases, any shareholder can request a court to name an individual to convene a shareholders meeting. In case of change of control (via tender offer or sale of a control block of shares), a majority of shareholders can convene a meeting without court action. The 2001 NRE Law also made a number of changes designed to increase accountability of management. It requires that the annual report of the board of directors state the remuneration and benefits that top management received from the company and entities it controls. This provision was further strengthened by the July 2005 Law to Promote Confidence and Economic Modernization, which, according to Grimonet's contribution to the 2006 International Financial Law Review Guide, increased the amount of information companies must provide to shareholders about executive compensation and instituted a certain degree of control of shareholders over such compensation. However, the publicly available information does not directly address France's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

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Feldman, in a 2002 article, explains that minority shareholders are protected to a limited extent by the requirement of a two-thirds majority for any change in the company's by-laws and unanimity for certain other changes. In addition, an individual shareholder can file a legal action based on improper actions taken by management, either for damages suffered personally by the shareholder as well as a derivative action on behalf of the company.

The 2005 IMF assessment states that the fair and equal treatment of shareholders is enshrined in the Company law (the Code de Commerce and the Code Civil) and applicable COB (Commission des Opérations de Bourse) guidance, which were to be integrated into the AMF rules at the time of the IMF assessment. These include the requirements for takeover and allotment procedures, and prohibitions on selective disclosures. The IMF assessment notes that "although the AMF does not have direct jurisdiction over corporate organization for example, if a company law provision is not met and is likely to be detrimental to investors' rights, the AMF may ask for a court order to force the issuer to comply with its legal obligations" (p. 167).

As a practical matter however, the OECD notes in a 2004 survey of corporate governance in Europe that, in France, corporate networks, voting agreements, and hierarchical groups are a device for concentrating voting power without concentrating ownership and cash-flow rights. Furthermore, there are certain measures that can prevent change of control in French companies. A 2005 study by the ABI on the application of the one share/one vote principle across Europe found that, in France, 69% of the companies analyzed deviate from the 'one share/one vote' principle. The most common form of exception to the principle is the system of ordinary shares with double voting rights, which exists in 27 of the analyzed companies (64%). These companies feature, in principle, only one type of share (ordinary shares), but grant double voting rights to shareholders who have been registered for at least two years. According to the ABI study, this system was originally implemented to reward loyal shareholders. In practice, however, it mainly benefits strategic shareholders who use the double voting right system to reinforce their voting power. Feldman notes in 2002 that the double voting rights can be restricted to shareholders from the European Economic Area (the European Union plus Norway, Liechtenstein, and Iceland). However, the publicly available information does not directly address France's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

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Although France is known for the strong involvement of stakeholders in corporate culture, the publicly available sources do not directly address France's compliance with this principle.

Principle V: Disclosure and Transparency

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The 2005 IMF assessment notes that issuers with a French listing "are subject to periodic financial disclosure obligations (publication of annual audited and semi-annual accounts as well as quarterly turnover, in the case of issuers of shares)" (p. 165), as demanded by the Code de Commerce and supplemented by the AMF's Règlement Général. In addition, the 2001 NRE and the 2003 LSF were passed with a specific focus on transparency and ethics within companies. The 2003 LSF puts on the CEO and the President of the Board the onus of providing directors with all the information and reports needed before Board meetings. In addition to the annual report, the president of the Board of Directors or Supervisory Board is also expected to provide a report on the internal controls of the company, as reported by Trevisani in 2004.

The AMF's 2007 Annual Report on Securities Issuers' Corporate Governance and Internal Control notes that, following the transposition of the European Union Transparency Directive, amendments were made to Title II of Book II of the AMF General Regulation and approved by the Ministry of Economy, Industry and Employment on January 4, 2007. The amendments mean that the report on corporate governance and internal control is now part of the regulatory disclosures governed by point d) of Article 221-1 of the AMF General Regulation. However, the publicly available information does not directly address France's compliance with this principle.

Principle VI: The Responsibilities of the Board

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The 2003 LSF puts on the CEO and the President of the Board the onus of providing directors with all the information and reports needed before Board meetings. In addition to the annual report, the president of the Board of Directors or Supervisory Board is also expected to provide a report on the internal controls of the company, as reported by Trevisani in 2004. The 2007 AMF Annual Report on Securities Issuers' Corporate Governance and Internal Control states that 85% of the companies (as opposed to 76% in 2005) report that their board includes one or more independent directors, with an average ratio of independent directors to total directors of 44%. One company in the "Eurolist A/B" sub-sample and 10 companies in the "Eurolist C" sub-sample expressly report that they have no independent directors. It is further stated, that an independent director is defined in 82% of the reports of companies with one or more directors. According to the World Bank's 2008 Doing Business report, France scores only 1 in the Director Liability Index against an OECD average of 5.1. However, overall, the publicly available information does not directly address France's compliance with this principle.