Security fiducie over shares and shareholder loans: the borrower group’s guide

Why banks prefer a fiducie to a pledge

Understanding what the pool is after tells you where it will give ground and where it will not.

• A ring-fenced estate. Save in case of fraud, and subject to the tracing right of creditors holding security perfected before the contract, the fiduciary estate can only be seized by creditors whose claims arise from its preservation or management (Civil Code, art. 2025). Insolvency proceedings opened against the fiduciary do not affect that estate (Civil Code, art. 2024). Your other creditors can therefore no longer reach the shares.
• Security that survives your insolvency. The fiducie contract is excluded from the rules on ongoing contracts (Commercial Code, art. L. 622-13, VI) and, in the vote on a restructuring plan, banks that benefit from a fiducie granted by the debtor are counted only for the part of their claim it does not secure (Commercial Code, art. L. 626-30, V). With a pledge, the opening judgment prevents enforcement of a contractual appropriation clause (pacte commissoire) (Commercial Code, art. L. 622-7, I).
• The limit: the retention-of-use agreement. If the settlor keeps the use or enjoyment of the transferred assets under an agreement (convention de mise à disposition), no assignment or transfer to the fiduciary or a third party may take place merely because insolvency proceedings are opened, a plan is adopted or a claim that arose before the opening judgment is unpaid, on pain of nullity (Commercial Code, art. L. 622-23-1). That is why the banks will refuse to leave you the “use” of the shares: a settlor that keeps voting as before could argue that it retained them, and neutralise the security.
• The balance. It does not lie in obtaining a retention-of-use agreement, which the pool will refuse, but in organising your consultation and information rights so that they do not amount to use of the shares. That is the first of the seven points below. The outcome depends on how those rights are actually drafted: the risk can be reduced, never entirely removed.
• The hardening period. If the settlor later enters reorganisation or liquidation proceedings, a transfer into a fiducie made after the date of cessation of payments is void unless it secures a debt incurred at the same time, as is an amendment allocating assets already transferred to secure earlier debts (Commercial Code, art. L. 632-1, I, 10° and 11°). That is why the pool will want the fiducie signed together with the loan.

These rules mainly concern insolvency proceedings against the settlor. If it is the subsidiary that runs into difficulty, the fiducie gives the banks no right over its assets: through the fiduciary, they hold its shares, whose value follows that of the company. For earlier-stage difficulties, see our page on fiducie in restructuring.

What you actually transfer

Two classes of assets, each with its own formalities.

• The subsidiary’s shares. For an SAS, shares must be registered in an account in the name of their owner (Commercial Code, art. L. 228-1): the fiduciary is registered in that capacity, in practice on a share transfer order. For an SARL, an assignment of shares to a third party requires the consent of a majority of the partners holding at least half of the shares, unless the articles require more (Commercial Code, art. L. 223-14); as a precaution, the transfer to the fiduciary follows that procedure; in a single-member subsidiary, the decision lies with the parent. Check in advance: approval, pre-emption or lock-up clauses in the articles and any shareholders’ agreement, which may cover a transfer into a fiducie; any clause reserving the chairmanship to a shareholder, since a parent company acting as chairman ceases to be a shareholder on the day of the transfer; any existing pledges or non-transfer undertakings: a creditor whose security was perfected before the contract keeps its tracing right over the transferred shares (Civil Code, art. 2025), and a non-transfer undertaking can make the transfer a breach; they must be dealt with before the transfer, in practice with that creditor’s written consent; and the effect of the transfer on the subsidiary’s beneficial ownership filing, to be reviewed and updated if the information changes.
• Shareholder loan receivables. An assignment of receivables made under a fiducie is effective against third parties from the date of the fiducie contract or of the amendment recording it; it is effective against the debtor, here the subsidiary, only once notified to it by the assignor or the fiduciary (Civil Code, art. 2018-2). In practice, the subsidiary will then pay interest and principal to the fiduciary, unless agreed otherwise.
• Interaction with subordination. Banks usually also require your shareholder loans to be subordinated to the bank facility. Fiducie and subordination overlap: subordination sets the order of payments, the fiducie the ownership of the receivables. Both documents must say the same thing about what the subsidiary may pay you during the loan.
• Loans governed by foreign law. If your shareholder loan agreements are governed by a foreign law, the law applicable to the transfer of the receivable and to its effectiveness against the debtor and third parties must be checked agreement by agreement, before signing. It may be simpler to bring the loans under French law before transferring them.

The seven points the settlor must negotiate

The statute sets the frame; the contract strikes the balance. For each point, the rule and the borrower group’s negotiating reflex.

• 1. Voting and governance of the subsidiary. The fiduciary is the shareholder; it votes. Negotiate a tiered structure: in normal times, the fiduciary votes as the settlor directs, or at least after consulting it; a closed list of decisions (distributions, changes to the articles or share capital, new debt, security, disposals of significant assets) also requires the banks’ consent; the banks’ instructions only bind after a default. Make sure the list is closed and that day-to-day management stays with the subsidiary’s management. Two constraints pull in opposite directions: a vote directed by the settlor protects its tax regimes (see formalities), but feeds the argument that it kept the use of the shares (point 3). The clause must be drafted with both in mind.
• 2. Cash flows. Dividends from the subsidiary and interest on your shareholder loans fall, in principle, into the fiduciary estate. Negotiate their upstreaming to the settlor as long as no default has occurred, within the limits of the subordination, with a precise timetable. Without such a clause, the subsidiary’s cash flows remain blocked for the whole loan.
• 3. The retention-of-use agreement. It protects you if the settlor becomes insolvent, which is precisely why banks refuse it (Commercial Code, art. L. 622-23-1). If you obtain it, it comes at a price that the pool will build into its terms. If you give it up, obtain information and consultation rights drafted so as not to amount to use of the shares.
• 4. Events of default and the enforcement instruction. Enforcement starts with an instruction from the banks to the fiduciary. Negotiate objective events of default, a cure period and prior notice to the settlor and the protector. Beware of broad cross-default clauses that trigger enforcement for an incident on another group financing.
• 5. Enforcement. Where the fiduciary is not the creditor, the banks may require delivery of the shares or, if the contract so provides, their sale and payment of the price; unless there is an official quotation on a trading venue, their value is set by an expert appointed by agreement or by the court, and any clause to the contrary is deemed unwritten; if no buyer comes forward at the appraised price, the fiduciary may sell at the price it considers, on its own responsibility, to reflect the value (Civil Code, art. 2372-3). If the banks take the shares, they pay you the difference between their value and the secured debt; if the shares are sold, the fiduciary returns to you the part of the price exceeding the debt; in both cases, after settlement of the debts arising from the preservation or management of the fiduciary estate (Civil Code, art. 2372-4). Negotiate the choice of expert (an agreed panel, with the choice left to the settlor), a draft report open to comment, and the date on which the balance is due to you.
• 6. Reloading and release. If the deed expressly so provides, the transferred ownership may secure debts other than the original one, including to new creditors (Civil Code, art. 2372-5). The reloading agreement must be registered on pain of nullity, and its registration date sets the ranking between creditors. This helps a refinancing, but it is also a way to extend the security: require your consent to any reloading. A reloading granted after cessation of payments for earlier debts is exposed to nullity (Commercial Code, art. L. 632-1, I, 11°). Finally, organise the release: return of the shares and receivables promptly after repayment, at whose cost, with which documents.
• 7. The fiduciary. Only credit institutions, certain financial institutions, investment firms, portfolio management companies and insurers, as well as lawyers (avocats), may act as fiduciary (Civil Code, art. 2015). Its fees are in practice borne by you: negotiate them. If the fiduciary estate is insufficient, your own estate answers for liabilities arising from its preservation or management, unless the contract provides otherwise (Civil Code, art. 2025): have those liabilities limited to the fiduciary estate, bearing in mind that such a clause only binds creditors who have expressly accepted it. Finally, provide for its replacement; absent a clause, the settlor, the beneficiary or the protector may ask the court to appoint a provisional fiduciary or replace it if it fails in its duties, endangers the interests entrusted to it or becomes subject to safeguard or reorganisation proceedings (Civil Code, art. 2027).

Formalities and tax: the essentials

• Mandatory terms. On pain of nullity, the contract specifies the assets transferred, the duration of the transfer, the identity of the settlor, the fiduciary and the beneficiaries, and the fiduciary’s mission and powers (Civil Code, art. 2018), plus, for a security fiducie, the secured debt (Civil Code, art. 2372-2).
• Registration. On pain of nullity, the contract and its amendments are registered within one month of their date with the tax office of the fiduciary’s registered office or, if the fiduciary is not domiciled in France, with the non-residents’ tax office; the appointment of a protector and the information on the identity of the fiducie’s beneficial owners must, on the same sanction, be recorded in a written deed drawn up by the fiduciary and registered in the same way (Civil Code, art. 2019). The fiduciary must also file a declaration of existence of the fiducie within fifteen days of its creation (General Tax Code, art. 238 quater L; Annex III, art. 344 M). Fiducies are recorded in the national register of fiducies (decree no. 2010-219 of 2 March 2010). These deadlines should be managed like court deadlines.
• Tax neutrality of the transfer. Article 238 quater B of the General Tax Code excludes from taxable profit the gains on transferring assets recorded on the settlor’s balance sheet, where the settlor carries on an industrial, commercial, agricultural or professional activity, or a civil activity subject to corporate income tax, is designated as a beneficiary, records on its balance sheet the rights representing the transferred assets, and the fiduciary gives the accounting and tax undertakings the article requires. The return of the assets to the settlor at the end of the contract is governed by a separate regime, which requires in particular that the contract end without liquidation of the fiduciary estate and that the settlor give undertakings in the deed of return (General Tax Code, art. 238 quater K). The contract and its amendments are in principle subject to a fixed registration duty (General Tax Code, art. 1133 quater). For a foreign parent company, whether these regimes apply depends on its tax position in France.
• Where the settlor is a French group company. Where the transfer meets the conditions of art. 238 quater B, shares transferred into a fiducie still count for the participation exemption and for tax consolidation, and the holding period is not interrupted, provided the settlor keeps the voting rights or the fiduciary exercises them as the settlor directs, subject to limitations agreed to protect the secured creditors’ financial interests (General Tax Code, arts. 145, 1, and 223 A, I; for tax consolidation, the shares must also carry dividend and voting rights). The tax authorities read that proviso strictly (BOI-IS-BASE-10-10-10-20, § 205): a general power of instruction granted to the banks may cost you these regimes. The voting clause should therefore also be drafted with your tax adviser.
• For a foreign parent company. The treatment of the transfer in your country of residence, and the effect of the fiducie on withholding taxes on dividends and interest paid by the subsidiary, must be checked under the applicable tax treaty and your domestic law before signing.