Related Party Transactions in France - A Critical Assessment

Abstract

In France, the regulation of related party transactions (RPTs) involves three steps following the notification to the board of an RPT. First, the board gives its prior authorisation to the transaction. Those who are self-interested do not take part in the vote. Secondly, auditors prepare a report on RPTs. Thirdly, a general meeting of shareholders approves or rejects it. If the shareholders do not endorse the transaction, any adverse consequences will be borne by the interested insiders. The RPT can only be avoided if it was not approved by the board and is harmful to the company. This longstanding procedure has been designed to prevent company officers and substantial shareholders from using their power to influence a contract with the company on terms less advantageous than those that the company would have obtained from a third party in a fair and balanced negotiation.

This rather burdensome procedure often proved artificial and ineffective. Anti-tunnelling laws may have been unproductive because demand for them and shareholder protection more generally had traditionally been low in a culture where top management was a closed club. However, the addition of AMF recommendations in 2012 and legislative modifications in 2014 have increased the quality and quantity of information passed on to auditors and shareholders. The implementation of the 2017 Directive on Shareholders’ Rights may be the occasion to introduce further useful adjustments, such as a legislative clarification of the scope of French RPT law.

Keywords: related party transactions, corporate governance, France, tunnelling, conflict of interest

JEL Classification: K22; G34