The sharing of capital gains on the sale of securities with company employees, introduced by the Pacte Act of 22 May 2019 and currently provided for in Articles L 23-11-1 to L 23-11-4 of the French Commercial Code, is an original measure. Indeed, in the event of a sale of securities, the capital gains would normally go entirely However, with this device, intended to promote cohesion between shareholders and employees, and to encourage the latter to become more involved in the company, whose performance would thus be increased, the employees are allowed to benefit from a part of the seller’s capital gains. Naturally, the interest in this system depends on the share of the capital gains that can go to the employees and its implementation will only be effective if the system is accompanied by fiscal and social advantages for the parties involved – both the seller and the employees who benefit from the operation.

The portion that can be allocated to employees represents a maximum of 10% of the amount of the capital gain, capped at 30% of the annual social security ceiling, i.e. the sum of 12,340.80 euros for 2022. This ceiling concerns the sums to be distributed among all the employees. Therefore, in order to assess the size of the financial advantage granted, it all depends on the number of beneficiary employees. It should be noted that the sharing of capital gains is only one of the tools for sharing between employees and shareholders. Profit-sharing and free shares are others.

It should also be noted that the sharing of capital gains is not only provided for in the event of the sale of securities, but also upon the redemption of securities. In this way, redemption is the reverse image of a sale. However, this raises questions because, while it is easy to understand that the seller may agree to share a capital gain, it is difficult to see how the sharing of capital gains works when there is a redemption. The difficulty is perhaps more apparent than real. There is a capital gain on the sale because the seller purchased the securities at a lower price than it sold them for. There is a capital gain on redemption where the securities at a higher price than it is paying to repurchase them.

The actors

The actors involved in the sharing of capital gains on the sale of securities are not ordinary. Of course, as in the case of profit sharing, there is the company and the employees. But, in the case of sharing capital gains, there is an additional actor who plays no role in the case of profit sharing – the selling shareholder.

The employees are the beneficiaries of the capital gains sharing. They include all the employees, French and foreign, of the company whose securities are covered by the sharing of capital gains, as well as, in the case of a group of companies, the employees of the parent and daughter companies. In order to be a beneficiary, the employees must meet certain conditions. In particular, they must be members of the company savings plan on the day of the transfer.

A commitment to capital gains sharing may be made by one or more transferring shareholders, who may be parties to a single capital gains sharing agreement or to several separate agreements. The transferring shareholders are the only debtors of the amount paid to the company whose securities are covered by the capital gains sharing.

The company whose shares are sold is only obliged to pay the amounts received to the beneficiary employees. It only has a relay role. If it receives nothing, it has no obligation towards the beneficiary employees, even if the transferring shareholders have cashed in a capital gain.

The concepts

The prerequisite for signing a capital gains sharing contract is that the company whose securities are covered by this contract has set up a company savings plan (PEE). We will ignore this condition below, in order to concentrate on the concepts of commitments and contract on the one hand, and capital gains and sharing on the other.

There are two commitments: the commitment to share the capital gains made by the shareholders and the commitment of the company to transfer the amount of the sharing commitment to the employee beneficiaries. These commitments are recorded in a contract, called a sharing contract. However, one may wonder whether, notwithstanding this contract, we are not in the presence of unilateral commitments of will. This appears to be the case because, although the company whose securities are covered by the sharing of capital gains is the co-contractor of the shareholders, the latter do not enter into any obligation with respect to the company, but  for the benefit of its employees.

The sharing contract does not create reciprocal rights and obligations between the company and the shareholders. There is no solidarity and the commitments have a relative effect: the non-transferring shareholders are not under any obligation. The commitments made by the transferring shareholders are made in favour of the employees, even though they are not parties to the sharing contract. Since signing a sharing contract is conditional upon the existence of a PEE set up by the company, and upon the employees' subscription to this PEE, it can be considered that the sharing mechanism benefiting the employees is contractually included in the PEE.

The capital gain to be shared has three distinctive features. It is limited in its amount, it cannot be seized and it is not transferable. This capital gain is paid to the parties after deducting all tax and social security charges. It is therefore necessary to distinguish the gross capital gain from the net capital gain, the latter being the capital gain after all deductions of expenses.

The gross capital gain is paid by the shareholders to the company whose securities are covered by their commitment. The net capital gain must be divided by the company among the employee beneficiaries, with the payments resulting from the division being made to the beneficiaries' savings plans. These plans are therefore the receptacle of the sums resulting from the capital gain. The Commercial Code sets out a time frame for making the payments: one month from the date of the shareholders selling the sold securities; and 90 days from receiving the payment from the shareholders for the company whose securities are being sold.

Conclusion

It is a fairly complete system that the Commercial Code puts in place. However, the texts seem more concerned with the sharing of capital gains on the sale of shares than on the sharing of capital gains upon redemption. However, the difficulty is more apparent than real, because even a redemption for the company is still a sale for the shareholder. The provisions written with sale in mind, will also therefore, apply without particular difficulty to redemption.