T O O U R F R I E N D S A N D C L I E N T S

January 8, 2003

French Usury Law Does Not Apply to Corporate Bonds

In a statement published Thursday, January 2, 2003 in the Journal Officiel,

responding to a question posed by Senator Marini, the French Minister of
Economy resolved a long-standing controversy by clarifying that French usury
law does not apply to corporate bonds (obligations) and debt instruments (titres
de créances). This issue, which has significant implications for French capital
markets, was addressed by the Minister after inquiries initiated by the law firm
Fried, Frank, Harris, Shriver & Jacobson (FFHSJ) in coordination with the
National Association of Stock Corporations (ANSA).

The French usury rule is set forth in L. 313-3 of the Code de la Consommation A Partnership
Including
(the French Consumer Code), which states: “[a] conventional loan [prêt Professional
conventionnel] constitutes a usurious loan when it is granted at a rate that exceeds, Corporations
at the time it is granted, by at least one-third the average effective rate applied New York
during the prior quarter of the year by credit institutions in loans of the same One New York Plaza
New York, NY 10004
nature with similar risks, as defined by the relevant administrative authority after 212.859.8000
consulting the National Credit Council.”
Washington, DC
1001 Pennsylvania Avenue, NW
The applicability of French usury law to obligations has been highly controversial Washington, DC 20004
202.639.7000
under French law. There is no case law concerning whether obligations are
“conventional loans” within the meaning of the statute. Nor is there any case law Los Angeles
350 South Grand Avenue
discussing subordinated loans of any type. Doctrinal authors have been divided on Los Angeles, CA 90071
the question. 213.473.2000

London
FFHSJ has taken the position in several publications that French usury law should 99 City Road
London EC1Y 1AX
not apply to high-yield debt instruments: International Financial Law Review United Kingdom
(IFLR, February 2002 and December 2002), Recueil Dalloz (April 2002), and 44.20.7972.9600
Revue Banque et Droit (August 2002). Paris
5, boulevard de la Tour Maubourg
75007 Paris
In October 2001, FFHSJ formally requested the Central Bank of France, the France
Commission des Opérations de Bourse (COB, the French market regulator), 33.140.62.22.00
ANSA, and the President of the Commission of Finance of the Assemblée www.friedfrank.com
Nationale (French House of Representatives), to clarify the scope of the usury
rules under French law.

Copyright © January 8, 2003 Fried, Frank, Harris, Shriver & Jacobson

French Usury Law Does Not Apply to Corporate Bonds

The Director of Operations of the Central Bank of France advised FFHSJ in

writing that the Central Bank does not consider obligations to be “conventional
loans” within the meaning of the usury law. The Central Bank argues that the
usury laws must be construed narrowly, since they are criminal in nature.
Consequently, in its view, the usury law would not apply to obligations, as it is
not clear on the face of the statute that an obligation is a prêt conventionnel.

On June 5, 2002, in response to a formal inquiry by FFHSJ, the Legal Committee

of ANSA issued an opinion stating that French usury law does not apply to
obligations, except in cases of fraud.

In his official response, published on January 2, 2003, to a question posed by

Senator Marini following inquiries initiated by FFHSJ and ANSA, the French
Minister of Economy stated: “The issuance of a debt instrument does not
constitute a conventional loan within the meaning of the usury statute as set forth
in Article L. 313-3 of the French Consumer Code concerning usury…A
determination of the usury rate cannot be made except by comparison with
operations of the same nature and bearing analogous risks, and the emission of
debt instruments is not included in the categories of loans (Arrêté of 25 June
1990, and Art. D. 313-6 of the Consumer Code) for which usury thresholds are
set, thereby making it impossible to know beforehand the usury rate for such
issuances. The provisions of Article L. 313-3 are intended to protect the
borrower. However, in the case of the issuance of a debt instrument, the
borrower, who is the issuer of the instruments, himself determines the interest rate
and the terms and conditions of the issuance. A protective statutory regime
[governing bond issuances] exists in favour of the lender, that is to say the
investor. The logic is therefore profoundly different; in addition, as these
provisions are punishable by criminal sanctions, they must be interpreted strictly.
In conclusion, while the non-application of the legislation on usury to the issuance
of debt instruments leaves no room for doubt, it should be noted that this question
is distinct from those raised by the public sale of high-yield bonds. It is up to the
relevant market authorities to respond to the questions of investor protection and
information for this segment of the market.” (Journal Officiel Sénat dated
January 2, 2003, p.42)

This response, coming from the Minister in charge of determining the reference
usury rates, removes a serious obstacle to high-yield lending in France, although it
does not address the issues raised by loans to French corporations that are
arranged in foreign financial markets.

Paris
Eric Cafritz 33.140.62.22.00
Delphine Caramalli 33.140.62.22.00

Fried, Frank, Harris, Shriver & Jacobson 2 January 8, 2003