REVISION OF OHADA COMPANY LAW : COMPOUND SECURITIES AND SUBORDINATED SECURITIES

Article publié au Recueil Penant n°887 Juin 2014

Others publications

The OHADA Uniform Act on Commercial Companies of April 17, 1997 ("the former OHADA Act on Commercial Companies") was revised by the OHADA Council of Ministers on January 30, 2014.

The revised OHADA Act, having been published in the OHADA Official Journal on February 4, 2014, came into force 90 days after this publication, i.e., on May 5, 2014. Existing companies and groupings have two years from this entry into force to bring their bylaws into harmony with the new Uniform Act.

Before discussing the new concepts introduced by this reform, it should be recalled that the validity of issues of "complex" or "compound" securities (such as bonds convertible into shares) has hitherto been debated by doctrine and consequently a source of uncertainty for practitioners.

The former OHADA Act on commercial companies

In Title II of Book IV of Part Two, entitled "Transferable Securities and Other Securities Issued by Public Limited Companies", the former Act made a classic distinction between the two main categories of transferable securities: shares (Chapter II) and bonds (Chapter III).

Article 744 paragraph 1 (Section 1: Definition of Chapter I: Common provisions of Title 2: Securities) stipulates that "limited company issue securities whose form, system and characteristics are listed in this Title".

An a priori restrictive conception of securities was thus adopted. However, this restrictive concept was counterbalanced by a broader definition of securities given by Article 744 paragraph 2 (second part of the definition), which provides in a more general way that these "confer identical rights by category and give access directly or indirectly to a share of the capital of the issuing company, or to a general claim on its assets. They are indivisible with respect to the issuing company".

This more open second paragraph of Article 744 has led some authors to argue that "the [former] Uniform Act thus offers potential for development for issuing companies, on a conventional basis "2 and that "SAs may create other securities whose regime is left to the free discretion of the parties "

Moreover, as Chapter IV of Title II is entitled "Other securities" in a very general way, some saw it as confirming that OHADA law authorized "complex" legal constructions combining shares and bonds, in addition to the classic concepts. However, this was not entirely convincing, since Chapter IV - containing just one article - was in fact concerned solely with subordinated bonds

Professor Issa-Sayegh, in the silence of the former OHADA Act, relied on Decree 53-811 of February 25, 1953 organizing the issue of convertible bonds (which survived the entry into force of the former OHADA Act on commercial companies) and on the contractual freedom prevailing in the bond regime, to conclude that it was possible to set up bonds convertible into shares.

These doctrinal positions, in favor of the possibility of issuing compound securities, were conversely questioned by other authors, more reluctant to recognize the validity of such legal instruments not expressly defined and organized by the OHADA Act on commercial companies.

Jurisprudence has never had to rule on these questions, to which OHADA law had to provide an answer by adopting a specific regime for compound securities, which the doctrine - but also economic players - had been calling for.

An expectation of economic players

The lack of a defined legal framework and doctrinal debates concerning the issuance of compound securities have severely limited the use of this type of instrument in the OHADA region.

However, the issuance of composite securities is increasingly becoming an important component of corporate financing in developed economies (notably in the United States, where complex securities originated), as well as in developing economies, in response to the "tailor-made" needs of financial investors who, in most cases, wish to have access to leverage that can be applied cumulatively or alternatively to capital and/or debt.

Highly prized by the stock markets, composite securities are also an essential tool in private equity transactions, which are expanding rapidly in the OHADA region, where more and more investment funds and family offices are becoming involved.

As a result, the revised OHADA Act overhauled common securities law (I) and introduced a specific regime for composite securities (II), which we present below. This reform was also accompanied by a clarification and extension of the subordinated securities regime (III).

It should also be noted that the growth in the practice of composite securities has been accompanied by that of so-called preferred shares, also "imported" from the United States, enabling shareholders to freely provide that certain shares will have preferential rights, by attributing to them voting rights or financial rights superior to other shares, temporarily or otherwise. To complete the system of composite securities, a specific system of preference shares has also been introduced into the revised OHADA Uniform Act (Articles 778-1 et seq.). This regime is the subject of a separate study.

REVISED COMMON SECURITIES LAW

The revised OHADA Act radically overhauls common securities law by (i) clarifying the concept of securities, (ii) generalizing their "dematerialization" (iii) while limiting the possibility for certain securities to take the form of "bearer securities".

Clarification of the concept of "transferable securities”

The revised OHADA Uniform Act clarifies the definition of securities and the various categories they cover, which as we have seen were previously made up of shares, bonds and other securities, without the latter category being clearly defined and delimited.

To make the concept easier to grasp, article 744 of the revised Uniform Act now stipulates that securities, which can only be issued by simplified stock corporation7(SA, and now SAS8 ), can be distinguished (i) "negatively", from other securities or financial contracts and (ii) "positively", by reference to their intrinsic characteristics.

(i) Securities are thus distinguished, "negatively", from other financial securities, money market instruments or financial contracts, which may also be issued by simplified stock corporation in accordance with the Revised OHADA Act:

Securities are thus distinguished, first and foremost, from other financial instruments.

This "distinction" - which is not really a distinction at all, given the general terms used - conveniently brings OHADA rules into line with the possibility for regional authorities responsible for organizing financial markets (in the UMOA or CEMAC) to apply their own rules, which may indeed prove to be "competing" with OHADA rules.

Securities are further distinguished, in a more precise manner, by:

money market securities, the terms and characteristics of which are defined by the competent body of each Contracting State;
financial contracts, also known as forward financial instruments (such as SWAPs), where applicable under the conditions set by the competent authority of each State Party.

(ii)Securities also fall into two "positive" categories:

equity securities ;
debt securities (other than money market securities, see above) ;

with intrinsic characteristics (identical to the former Uniform Act):

confer identical rights by category and give direct or indirect access to a share of the capital of the issuing company, or to a general claim on its assets;
and be indivisible with respect to the issuing company.

A unified regime for securities that are now all "dematerialized”

The revised OHADA Act creates a new article 744-1, setting out a single legal regime for securities which, whatever their form, must henceforth be registered in an account in the name of their owner and be transferred from account to account.

The transition to a single system for the dematerialization of securities, which until now could still be transferred by simple "tradition" in the case of bearer shares (Art 764-1°)10, is thus effected by OHADA law for all simplified stock corporation and all securities (shares as well as bonds, and compound securities now expressly regulated).

The Revised Act now stipulates that transfer of ownership results from registration of the securities in the purchaser's securities account.

The securities are registered on the date agreed by the parties and notified to the issuing company (or in accordance with the rules laid down by the market authorities for securities admitted to trading in a central depository or delivered in an approved settlement and delivery system).

A limitation on the form of "bearer shares”

Securities, which, as indicated above, are registered in an account in the name of their owner and are transferred from account to account, may take the form of a bearer security or a registered security.

However, the revised OHADA Act (Article 748-1)11 prohibits unlisted shares from taking the form of bearer securities.

In principle, bearer securities may now only be issued for shares in listed companies, or bonds (or certain composite securities, of listed companies if they give access to capital) under the terms of the issue contract.

This revision of common securities law, with its now more clearly delineated contours, was accompanied by a new flexibility offered to investors: the introduction of composite securities, accompanied by clarification of the subordinated securities regime.

COMPOSITE SECURITIES

The purpose of compound securities: the creation of "tailor-made" financial tools

The revised OHADA Act creates a new Title 2-2 entitled "Compound securities", inserted into Book 4 of Part Two devoted to limited company (and therefore to simplified stock corporation, by the general reference made by Article 853-3).

Composite securities are "transferable securities" (subject to ordinary securities law), but giving access to capital or entitling the holder to the allotment of debt securities (Article 822 of the revised OHADA Act, 1st article of the new Title 2-2).

Note that this type of instrument is reserved for simplified stock corporation (SA and SAS), whether listed or not. These new securities should meet the need to adapt and "secure" complex legal instruments that have hitherto been little used in the OHADA zone, as expressed by regulated financial market players and the various private equity funds that are increasingly active in the OHADA zone.

Distinction between primary and secondary titles

This new option offered to simplified stock corporation leads to a distinction:

a primary security issued by the company, which itself constitutes a security, i.e., an equity security or a debt security (see the aforementioned article 744 of the Revised OHADA Act);
which gives access or entitlement to a secondary security, which may itself consist of an equity security (shares, preference shares) or a debt security (bond).

Establishment of a principle of free creation offering multiple possible combinations

As defined, compound securities leave room for a large number of possible combinations, as the drafters did not want to confine them to a restrictive list, but rather encourage the creation of "tailor-made" financial tools.

The primary security, generally defined as a transferable security, may therefore be converted, exchanged or redeemed for an equity or debt security, depending on the terms laid down at the time of issue (in the contract of issue).

Indeed, the general terms used, "access to capital" or "right to allocation" of debt securities, suggest that a great deal of freedom is also allowed (in the issue contract) to define the process of "transition" from the primary security to the secondary security, which may consist of a conversion, exchange or redemption right, or even the exercise of a warrant (see below).

Similarly, the initial status of the holder of the primary security (shareholder or bondholder) may ultimately be lost in the "transition" to the secondary security, or maintained, depending on the nature of the composite security and/or the stipulations of the issue contract.

Finally, the revised OHADA Uniform Act authorizes the contract of issuance to stipulate that the securities (primary security) and the equity or debt securities (secondary security) to which they give entitlement may only be sold and traded together (Article 822-2).

This makes it possible, for example, to create securities (such as bonds) whose low remuneration would be attractive only insofar as it gave entitlement to preference shares, justifying the fact that these two instruments could not be traded separately.

New (or existing?) shares

The Revised OHADA Act clearly states that "access to capital" (i.e., the secondary security) conferred by the composite security is achieved by issuing new shares, i.e., by increasing the share capital (according to simplified procedures - Article 822-16, see below).

This seems coherent, given the prohibition on companies buying back their own shares except to cancel them or to allocate them free of charge to employees or managers (Articles 639 et seq. of the Revised OHADA Act).

The introduction, under OHADA law, of securities giving access to existing shares (to be acquired by the company itself for allocation to the holder of the primary security) will be tricky in practice, unless the security gives access to the capital of another group company, which is now possible (see below our comments on OCEANE issues).

Extension to group operations

The freedom to create has also been extended to the issue of securities by companies belonging to the same group of companies (Article 822-6). A limited company or a simplified stock corporation may thus issue composite securities (shares, bonds, warrants) giving ultimate access to capital:

the "parent" company of the issuer of the primary security (owning directly or indirectly more than half of its capital)
in the capital of the primary security issuer's "subsidiary" (directly or indirectly more than 50% directly or indirectly

Limit on conversions of equity securities

However, a safeguard is built in: it is specified that equity securities cannot be converted or transformed into debt securities. A share cannot therefore be converted into a bond (Art 822-3 of the revised OHADA Act).

This measure has been adopted in particular to prevent conversions of equity securities into debt securities, which rank higher, in the run-up to insolvency proceedings.

Setting aside the regulation of share promises

Article 822-4 of the revised OHADA Act removes the doubts surrounding transactions in this area - which created a source of uncertainty that was highly detrimental to their implementation in practice - and makes it clear that issues of composite securities made in accordance with articles 822 et seq. of the revised OHADA Act do not constitute a promise of shares, the trading of which is prohibited by article 760 of the revised OHADA Act.

EXAMPLES OF POSSIBLE COMBINATIONS

Convertible bonds (CB)

A convertible bond is a bond to which is attached an option to convert the bond into shares. This option gives the bondholder the right to convert the bond into new shares issued by the company at the time of conversion, in accordance with the conditions set out in the issue contract.

In return for this opportunity to become a shareholder of the company, the remuneration of the bond component of a convertible bond is generally lower than that of a "classic" bond.

This is an essential feature of this type of bond issue: the issuer offers the subscriber a lower yield-to-maturity in return for the granting of a conversion option, which can result in substantial gains.

For the issuer, this type of bond issue can therefore provide financing at rates lower than those for conventional debt, without affecting share capital (at least initially).

As mentioned above, bond issues convertible into shares have until now been considered possible by certain authors under the aegis of the former OHADA Uniform Act, but have been little implemented in practice, given the legal uncertainties weighing on their validity.

Bonds convertible into or exchangeable for new or existing shares (OCEANE)

In the case of bonds convertible into or exchangeable for new or existing shares (OCEANE), the issuer may redeem the bondholder in new shares (as in the case of OCEANE).

For this type of issue, however, care should be taken to comply with the provisions of articles 639 et seq. of the revised OHADA Act, which prohibit companies from buying back their own shares except to cancel them or to allocate them free of charge to employees or managers.

OCEANE issues could therefore be more easily envisaged for bonds giving entitlement to the allotment of shares in a parent company or subsidiary of the bond issuer, so as not to incur this prohibition on the company buying back its own shares (subject, however, to the rules on treasury stock set out in articles 177 et seq. of the Revised OHADA Act).

Bonds with warrants (WB)

The special feature of OBSAs is that their holders may, if they wish, subscribe for shares while retaining their bonds. The contract of issuance may therefore stipulate that the warrants may be detached from the bonds, and traded separately. It should be remembered that the revised OHADA Act

(Article 822-2) authorizes the contract of issuance to stipulate that securities and the equity or debt securities to which they give entitlement may not be sold or traded separately.

This type of composite security may also prove useful in warding off possible unfriendly takeovers, when the bonds are held by friendly entities

Bonds redeemable in shares (BRS)

The special feature of BRSs is that the bonds are redeemed exclusively in shares, so the issuer does not have to "disburse" the redemption of its bond issue.

The interest for the subscriber is an increase in share value between the issue of the BRS and the actual redemption in shares.

Bonds with warrants (WB)

The very broad definition of composite securities given by the revised OHADA Act also authorizes the issue of composite securities whose secondary security is a bond, such as WBs.

This type of composite security entitles its holder to subscribe to another bond, which can prove lucrative in the event of a fall in interest rates.

This potential advantage may enable the issuer to reduce the interest on the issue.

Share subscription warrants - WS - or bond subscription warrants - WB - ("dry" or "stand-alone" warrants)

The drafters have not expressly provided for the possibility of issuing "stand-alone warrants" (or "bons secs") to subscribe for shares or bonds, not backed by a bond or share already issued.

However, it could be argued that the broad definition given to composite securities should enable these warrants to be qualified as securities under the terms of the aforementioned Article 822, in that they constitute an advance on a future share capital increase (in the case of BSAs) or an advance on a future bond issue, and therefore a "claim" on the company giving access in fine to the capital or to another claim.

The issuance of WSs or WBs therefore now seems possible, even for unlisted companies, in view of the very broad definition of composite securities set out in Article 822 of the revised OHADA Act.

LEGAL STATUS OF COMPOSITE SECURITIES

The issue of composite securities

Issuance of compound securities giving access to the capital of the issuing company (e.g., bonds with warrants to subscribe for shares in the issuer).

Decision to issue compound securities

Under penalty of nullity, the issue must be authorized by the issuer's Extraordinary General Meeting, in accordance with the procedures for capital increases set out in Articles 562 to 572 and 588 to 618 of the Revised OHADA Act (Article 822-5).

Once authorized by the Extraordinary General Meeting, the decision to issue shares may now be delegated to the Board of Directors or Chief Executive Officer, for a period not exceeding 24 months and subject to a defined ceiling (Article 567-1 of the Revised OHADA Act).

It should also be noted that, as previously, when the capital increase is decided by the Extraordinary General Meeting, the implementation of the capital increase (on one or more occasions) and the determination of its terms may be delegated to the Board of Directors or the Managing Director (Article 568 of the Revised OHADA Act).

Report to be issued

The Extraordinary General Meeting votes on the report:

the Board of Directors or the Chairman of the simplified stock corporation or the Managing Director, as the case may be;
and on the Statutory Auditor's special report, even if the capital increase is carried out with pre-emptive subscription rights (Article 822-5, c.f. below).

The reports indicate, in particular, the characteristics of the securities giving access to the capital, the terms of allotment of the equity securities to which these securities give entitlement, and the dates on which the allotment rights may be exercised.

Preferential subscription right to the compound security to be issued

The shareholders of a company issuing securities giving access to the capital have, in proportion to the amount of their shares, a preferential right to subscribe to these securities (Article L 822-1).

This preferential right is exercised under the same conditions as the preferential right for ordinary capital increases, provided for in Articles 573 to 587-2 and 593 to 597 of the Revised OHADA Act.

This preferential subscription right concerns the composite security to be issued, and not the "deferred" capital security to which the security gives entitlement at the end ("secondary" security), for which the decision to issue the composite security automatically entails shareholders' waiver of their preferential subscription right (Article 587-2).

Thus, shareholders will have a pre-emptive right to subscribe to a bond convertible into shares, but will no longer be able to exercise such a right when the capital is actually increased by converting the bonds into shares.

This pre-emptive right to subscribe to the composite security may, however

be deleted, in favor of one or more named beneficiaries, it being specified that said beneficiaries may not take part in the vote if they are shareholders. étant précisé que lesdits bénéficiaires ne peuvent prendre part au vote s’ils sont actionnaires.

A special report is drawn up by the statutory auditor, in which he gives his opinion on the proposed deletion (Article 591 of the revised OHADA Act).

It should be noted that a special report is also required when the capital increase takes place with preferential subscription rights (see above), in which case the statutory auditor must give his opinion on the proposed issue and on the choice of elements for calculating the issue price and its amount.

be waived individually, either by a named person or without specifying a beneficiary, in accordance with the conditions set out in Articles 593 to 597 of the Revised OHADA Act for ordinary capital increases.

Application of restrictions on transfers of shares (Approval/Preemption/Inalienability)

Any restrictions applicable to the transfer of shares (approval, pre-emption or inalienability clauses in the bylaws or shareholders' agreements - in application of articles 765 to 773-1 of the revised OHADA Act) are applicable to compound securities giving access to capital.

Particular attention should therefore be paid to this issue when drafting the issuance contract, and prior to any sale of the compound security.

Issuance of compound securities giving access to the capital of another Group company (e.g. bonds with warrants to subscribe for shares in a subsidiary).

As mentioned above, a limited company or a simplified stock corporation may also issue securities giving access, at maturity ("secondary securities"), to the capital of its parent company or subsidiary (i.e., of a company "which directly or indirectly owns more than half of its capital or of the company of which it directly or indirectly owns more than half of the capital").

In this case, the issue is carried out according to the same procedures as those described above, and must be authorized by the Extraordinary General Meeting (EGM) of each company:

authorization of the Extraordinary Shareholders' Meeting of the company called upon to issue such securities, and
authorization from the company (parent or subsidiary) within which the rights are ultimately exercised.

In the absence of such authorization, the issue is null and void.

On the other hand, in our view, preferential subscription rights should logically be reserved for shareholders of the company issuing the security (i.e., the "primary" security), in accordance with Article 822-1 of the revised OHADA Act, which stipulates that shareholders of a company issuing securities giving access to the capital have, in proportion to the value of their shares, a preferential right to subscribe to these securities.

Issue of composite securities giving entitlement to the allotment of debt securities (e.g., bonds with issuer's bond warrants - OBSO).

In the case of complex securities, the revised OHADA Act requires that the issue of securities giving entitlement to the allotment of debt securities must also be authorized by the extraordinary general meeting of shareholders, under the same conditions as those laid down for the issue of securities giving access to capital (Article 822-5 of the revised OHADA Act).

In the case of the issue of securities giving entitlement to the allotment of debt securities made up solely of debt securities (e.g., OBSOs), the statutory auditor's report covers the company's debt situation, excluding the choice of elements for calculating the issue price.

Simplified completion of the deferred capital increase

Simplified formalities for deferred capital increases

The deferred capital increase, resulting from the exercise of rights attached to securities giving access to the capital (and the need to issue the "secondary security"), gives rise to simplified formalities:

there is no need for pre-subscription publicity: the notice required by Article 598 of the revised OHADA Act does not have to be sent (again) to shareholders, as they have already been notified prior to the issue of the "primary security" (c.f. Article 598 al 2, which stipulates that in the event of the issue of securities giving access to the capital, the notice must also mention the main characteristics of the securities, in particular the terms and conditions of allocation of the equity securities to which they give entitlement, as well as the dates on which the allocation rights may be exercised);
subscription forms are simplified, and are not required to mention the amount and terms of the capital increase (par value of shares, issue price), and to distinguish between amounts to be subscribed in cash and amounts paid up by contributions in kind;
the usual rules for paying up shares, depositing funds, offsetting payments and withdrawing funds do not apply, and there is no need to draw up a notarial declaration of subscription and payment (DNSV).

Completion date

Unlike capital increases under ordinary law, which are deemed to have been carried out (when carried out in cash) on the date the DNSV is drawn up, the deferred capital increase of a compound security is definitively carried out:

from the sole fact of exercising rights, where no payment is required;
and, where applicable, the corresponding payments when they are required.

Delegated authority to amend the bylaws

It is the responsibility of the Board of Directors or the Managing Director (or the Chairman in the case of a SAS), as the case may be, at any time during the current financial year and no later than the first meeting following its close, to:

record, where applicable, the number and par value of shares issued to holders of compound securities during the year;
makes any necessary amendments to the clauses of the bylaws relating to the amount of the share capital and the number of securities comprising it.

The decision of the Board of Directors or the Managing Director (or the Chairman in the case of a SAS) and the amended Articles of Association must be filed with the Clerk's Office within one month.

Treatment of broken bones

Given the breakdown of composite securities into "primary securities" giving entitlement or access to "secondary securities", it may happen that certain primary securities only give entitlement to fractions of secondary securities.

This would be the case, for example, of an issue contract providing that two bonds give the right to subscribe for one share, with the holder holding 5 bonds.

In such a case, the revised OHADA Act stipulates that when the holder of a security giving access to the capital is not entitled to a whole number of securities, the fraction forming a fraction is subject to a cash payment, this payment being equal to the product of the fraction of the share forming a fraction by the value of the share (Article 822-17 of the revised OHADA Act).

The contract of issuance should, however, specify the value on which the cash payment is to be calculated (based on objective data such as the share price, net book value, etc.), in order to avoid any debate on this point.

Possibility of suspending the allotment of shares for three months

In the event of the issue of new equity securities or new securities giving access to the capital, as well as in the event of the merger or demerger of the company called upon to issue such securities, the Board of Directors or the Managing Director (or the Chairman in the case of a SAS), as the case may be, may suspend, for a maximum period of three months, the possibility:

free allocation of shares to employees in accordance with article 626-1 of the revised OHADA Act;
acquire securities giving access to the capital in accordance with article 822-19 of the revised OHADA Act.

Unless otherwise stipulated in the issue contract, the equity securities obtained, at the end of the suspension period, by exercising the rights attached to the securities, give entitlement to the dividends paid in respect of the financial year during which they were issued.

The information contained in the notice by which the Board of Directors or the Managing Director (or the Chairman in the case of a SAS), as the case may be, suspends the possibility of obtaining The holders of securities giving access to the capital are notified of the suspension by registered letter with return receipt requested, at least seven days before the effective date of the suspension. If the company's securities giving access to the capital are admitted to trading on a stock exchange, or if all its securities giving access to the capital are not in registered form, the notice containing these particulars is published, within the same timeframe, in a newspaper authorized to carry legal advertisements. In addition to the information specified in article 257-1, this notice shall mention the dates on which the suspension comes into effect and ends.

Fate of rights used or acquired by the issuing company

Rights attached to securities giving access to capital that have been used or acquired by the issuing company or by the company called upon to issue new equity securities are cancelled by the issuing company (Article 822-19 of the revised OHADA Act).

Protection of holders of securities giving access to the capital

Specific rules to protect holders of compound securities have been introduced, but only for holders of securities giving access to the capital.

The rights enjoyed by holders of securities giving access to the capital may be affected, or even wiped out, by subsequent transactions or decisions taken by the issuing company.

This protection of holders involves (i) the introduction of specific mechanisms to protect them against certain operations by the issuer, (ii) the grouping of holders into a "mass" and (iii) the recognition of a specific right of communication.

Specific framework for certain issuer operations

Prohibited Operations

As from the issue of securities giving access to equity securities, and for as long as there are rights attached to each of the components of these securities (Article 822¬11), the company called upon to allot these equity securities is prohibited, on pain of nullity (Articles 822-7 and 822-8 of the Revised OHADA Act):

1. change its form or purpose;
2. change the rules governing the distribution of profits;
3. amortize its share capital;
4. carry out a capital increase reserved for named persons (with cancellation of preferential subscription rights in accordance with the procedure set out in Articles 586 et seq. of the Revised OHADA Act).

Modification of the form and purpose (prohibition #1 above) of the issuing company may, however, be authorized, without further conditions, (i) upstream by the contract of issuance and (ii) downstream by the general body of securityholders, subject to implementation of the procedure set out in article 822-14 of the revised OHADA Act (see below).

The other transactions prohibited as a matter of principle (prohibitions #2 to #4 above) may also be authorized "upstream" by the contract of issuance or "downstream" by the general body of securityholders, in accordance with the procedure set out in article 822-14 of the Revised OHADA Act (see below), but only subject to the provisions necessary to maintain the rights of holders of securities giving access to the capital under the conditions set out in articles 822-10 et seq. of the Revised OHADA Act (see below).

It should be noted that preferred shares may be created, but also subject to the provisions necessary to maintain the rights of holders of securities giving access to the capital, also under the conditions defined in articles 822-10 et seq.

Lastly, it should be noted that the company may not require holders of securities giving access to its capital to repurchase or redeem their rights, unless otherwise stipulated in the issue contract and except in the event of early dissolution not resulting from a merger or demerger (Article 822-13).

Free operations but subject to conditions

1. New issues of equity securities with pre-emptive subscription rights reserved for shareholders, distribution of reserves and premiums and creation of preferred shares

The company called upon to allot the equity securities or securities giving access to them must take the necessary measures to protect the interests of the holders of the rights thus created if it decides to issue, in any form whatsoever, new equity securities with preferential subscription rights reserved for its shareholders, to distribute reserves, in cash or in kind, and contribution, issue or merger premiums, or to modify the distribution of its profits by creating preference shares (Article 822-10 of the revised OHADA Act).

These necessary measures comprise three distinct mechanisms:

First mechanism (opening of an exceptional period): to enable holders of these rights to exercise them, if the period provided for in the issue contract has not yet opened, so that they can immediately participate in or benefit from the above-mentioned transactions;

Nota: For the application of this first provision, where there are securities giving access to the capital, the company issuing new equity securities with preferential subscription rights reserved for its shareholders, if the rights attached to securities giving access to the capital can only be exercised on certain dates, opens an exceptional period to enable holders of rights attached to securities giving access to the capital who would exercise these rights to subscribe for new securities.

If the rights attached to securities giving access to the capital may be exercised at any time, the Company shall take the necessary steps to enable holders who exercise these rights to subscribe for new shares.

Second provision (subsequent exercise of rights): take the necessary steps to enable them, if they exercise their rights at a later date, to subscribe for the new securities issued on an irreducible basis, or to receive them free of charge, or to receive cash or assets similar to those distributed, in the same quantities or proportions and on the same terms, except as regards entitlement to dividends, as if they had been shareholders at the time of these transactions;

Nota 1: for the application of this second provision, where there are securities giving access to the capital, the company making the free allotment of shares transfers to an unavailable reserve account the amount required to allot the said shares to the holders of rights attached to securities giving access to the capital who would subsequently exercise their right in a number equal to that which they would have received had they been shareholders at the time of the main allotment.

Nota 2: For the application of this same provision, where there are securities giving access to the capital, the company making the allocation of free shares transfers to an unavailable reserve account the amount necessary to allocate the free shares to holders of rights attached to securities giving access to the capital who would subsequently exercise their right in a number equal to that which they would have received if they had been shareholders at the time of the main allocation.

Third mechanism (adjustment of terms and conditions): either adjust the subscription terms and conditions, conversion bases, terms of exchange or allotment initially provided for in order to take into account the impact of the above-mentioned transactions.

Nota 3 : for the application of this third provision, the adjustment equates, to the nearest hundredth of a share, the value of the shares that are obtained in the event of exercise of the rights attached to the securities giving access to the capital after the completion of the transaction and the value of the shares that would have been obtained in the event of exercise of these rights before the completion of the transaction.

To this end, the new bases for exercising rights attached to securities giving access to the capital are calculated taking into account:

In the event of an issue with pre-emptive subscription rights, and in accordance with the terms of the issue agreement:
Or the ratio between the value of the preferential subscription right and the value of the share after detachment of this right, as determined by the average of the opening prices quoted during all trading sessions included in the subscription period;
Or the value of the preferential subscription right and the value of the share after detachment of the preferential subscription right, based on the average of the opening prices quoted during all trading sessions during the subscription period;

This value is equal to the weighted average of the prices quoted for the shares over at least the last three trading days preceding the start date of the issue;

In the case of bonus share issues, the number of shares to which each existing share entitles its holder;
In the event of a distribution of reserves, in cash or in kind, or of share premiums, the ratio between the amount per share of the distribution and the value of the share prior to the distribution. This value is equal to the weighted average of the share prices for at least the last three trading days prior to the distribution date ;
In the event of a change in the distribution of profits, the ratio between the reduction in entitlement to profits per share and the value of the share prior to the change. This value is equal to the weighted average share price for at least the last three trading days prior to the date of the change;
In the case of capital amortization, the ratio between the amount per share of the amortization and the value of the share prior to the amortization. This value is equal to the weighted average of the share prices for at least the last three trading days prior to the date of amortization.

Unless otherwise stipulated in the issue contract, the company may simultaneously take the measures provided for in the first and second provisions above.

In all cases, it may replace them with the adjustment authorized by the third provision.

If the shares are not admitted to trading on a stock exchange, this adjustment is provided for in the contract of issue.

2. Reduction of share capital

In the event of a capital reduction motivated by losses and carried out by reducing the nominal amount or the number of securities making up the capital, holders of securities giving access to the capital are treated in the same way as shareholders of the company: the rights of holders of securities giving access to the capital are reduced accordingly, as if they had exercised them before the date on which the capital reduction became final (Article 822-9 of the revised OHADA Act).

In the event of a "coup d'accordéon" in which the share capital is reduced to zero before being increased, it would nevertheless be consistent to consider that the rights of holders of securities giving access to the capital should be subject to the implementation of the necessary measures under Article 822-10, in particular so that they can immediately participate in or benefit from the increase.

3. Merger

If the company called upon to issue the equity securities is absorbed by another company or merges with one or more other companies to form a new company, or carries out a demerger, the holders of securities giving access to the capital exercise their rights in the company or companies receiving the contributions (Article 822-12 of the revised OHADA Act).

In this case, the bondholders' meeting is not required to vote, unless otherwise stipulated in the issue contract.

The number of shares of the acquiring or new company(ies) to which the holders of securities giving access to the capital are entitled is determined by adjusting the number of shares to be issued or allotted under the issue contract for the number of shares to be created by the transferee company(ies).

The contribution auditor issues an opinion on the number of shares thus determined.

Approval of the proposed merger or demerger by the shareholders of the company or companies receiving the contributions or of the new company or companies entails the waiver by the shareholders of their pre-emptive subscription rights in favor of the holders of securities giving deferred access to the capital.

The transferee company(ies) or the new company(ies) shall automatically replace the issuing company in its obligations towards the holders of said securities

Meeting of holders in a specific body for compound securities

The holders of securities giving future access to the capital, after detachment, where applicable, of the rights of the original security, are grouped by operation of law, for the defense of their common interests, into a body which enjoys civil personality and is subject to provisions identical to those laid down for the body of bondholders (Article 822-14 of the revised OHADA Act).

Where the original security is a bond, the "masse" is formed only when the rights of access to the capital are detached. If necessary, a separate "masse" is formed for each type of security giving the same rights.

The purpose of the "masse" is to protect the interests of its members, but it will also enable the issuer to have someone with whom to discuss any amendments to the contract of issue.

Indeed, the general meetings of holders of securities giving access to the capital are called upon to authorize any amendments to the contract of issue and to rule on any decision affecting the conditions of subscription or allotment of capital securities determined at the time of issue (Article 822-14 al 2 of the revised OHADA Act).

Each security giving access to the capital entitles the holder to one vote, the quorum and majority conditions being those determined for Extraordinary General Meetings (Articles 552 to 554 of the Revised OHADA Act).

Meeting expenses and, more generally, all costs relating to the operation of the various bodies are borne by the company called upon to issue or allot new securities representing its share capital.

Finally, it should be noted that when the securities giving access to the capital are bonds intended to be converted or redeemed into equity securities or exchanged for equity securities (OC, ORA or OCEANE), the provisions applicable to the body of bondholders created in accordance with the general provisions applicable to bond issues (Article 785 of the Revised OHADA Act) apply, subject to the specific provisions applicable to the body of holders of compound securities giving access to the capital (second, third and fourth paragraphs of Article 822-14 of the Revised OHADA Act).

Right to access company documents

Holders of securities giving access to the capital have a right to obtain from the company issuing the securities they are entitled to receive, corporate documents sent by the company to shareholders or made available to them (Article 822-20 al 1 of the revised OHADA Act).

The right of communication is exercised by the mass:

when the rights to a share of the share capital are incorporated in or attached to bonds, the right of communication is exercised by the representatives of the bondholders (in accordance with articles 791 and 797 of the revised OHADA Act);
once the rights have been detached from the original security, the right of communication is exercised by the representatives of the newly-formed body of holders of the detached rights.

In all cases, the representatives of the various masses have access to the General Meeting of Shareholders, but without the right to vote. They may not, in any way, interfere in the management of the company's affairs (Article 822-20 al 4 of the revised OHADA Act).

Right to access company documents

As we indicated in the introduction, subordinated securities were already "in the making" in the former OHADA Act on commercial companies, but in a rather confused way in Article 822 (the only article in Chapter IV then entitled "other securities"), which was merely a clumsy reproduction of the provisions of the former Article L. 339-7 of the French law of July 24, 1966 then in force at the time of the adoption of the OHADA Uniform Act on commercial companies. Article 822 also referred to participatory loans, a reference fortunately not included in the revised OHADA Act...

Article 747-1 of the revised OHADA Act creates a new category of securities: subordinated securities.

This new article has been inserted into section 4 of Title II of Book 4 of Part II of the revised OHADA Act, entitled "Subordinated securities", which now provides that when securities are issued representing claims on the issuing company or giving the right to subscribe to or acquire a security, it may be stipulated that these securities are only redeemed after other creditors have been paid in full.

In these categories of securities, an order of priority of payment may also be stipulated. Under OHADA law, therefore, it is now possible to set up deeply subordinated notes (Titres Super Subordonnés - TSS) which are only repaid after other creditors have been paid off, thereby establishing a right to last-ranking claims.

Subordination", a term inspired by Anglo-Saxon law (not to be confused with "subordination" in employment contracts), is a new term in OHADA company law.

The option of subordination is reserved for bond issues (referred to as subordinated or super-subordinated bond issues), but is now also open to simple warrants.

Quasi equity

Super-subordinated securities are the riskiest debt instruments, and offer a higher return than other debt instruments.

These securities, which can be likened to "quasi-equity" (from a prudential point of view) in that they are issued for an indefinite period, have an annual remuneration that is generally conditional on the payment of a dividend or the achievement of a profit.

Super-subordinated notes are generally issued by banks to strengthen their capital base. In France, for example, they were used by the government in 2009 to bolster the equity of certain banks in difficulty.

However, this type of issue can also enable companies to strengthen their balance sheet structure without affecting their share capital and while preserving their senior debt, thus opening up alternatives to the other hybrid tools for accessing company capital also introduced by the revised OHADA Act (notably preference shares, which affect share capital and therefore have a dilutive effect).

Notion to be distinguished from particular subordination

Finally, it should be noted that this subordination of securities, instituted by company law, should not be confused with special subordination agreements, a contractual practice whose purpose is to enable one creditor to be preferred to another, by derogating from the common law ranking of payments in collective proceedings.

This contractual practice is not governed by OHADA law.

François NOUVION
Partner