Investing in a securitisation transaction, while potentially lucrative, involves the investor in a complex legal framework. Whether you hold fund units, securitisation company shares or debt securities, your position is defined by a set of precise rights and obligations. Understanding this framework is essential to securing your investment and understanding your room for manoeuvre. This is because, the key players in a securitisation transactionInvestors, in particular, operate in an ecosystem where each role is strictly defined by law. Ignoring these rules can expose you to unforeseen risks. It is therefore essential to have the support of a legal advice for investors and shareholders on banking and financial law in order to navigate these financial arrangements with peace of mind.
Role and non-interference of unit-holders of securitisation mutual funds (fct)
A securitisation fund (fonds commun de titrisation or FCT) is a structure with no legal personality, but is legally analysed as a co-ownership. Investors who subscribe to its units become co-owners. However, this status does not confer on them the prerogatives usually attached to the right of ownership. The fundamental principle governing the status of unitholders is that of non-interference in the management of the fund. In practice, unitholders have no direct power over the fund's day-to-day decisions. Management is entirely delegated to professionals whose role is regulated by law: the management company and the custodian. In accordance with article L. 214-180 of the French Monetary and Financial Code, the rules governing joint ownership are not applicable. It is the management company that represents the fund in dealings with third parties and in any legal proceedings, acting on behalf of the co-owners. This mechanism protects the integrity of management and ensures that operations are conducted professionally, but it places unitholders in a passive position. However, this principle can be modified. The fund rules, which constitute the contractual reference document, can include specific clauses granting unitholders certain rights, such as the right to be consulted on or approve strategic decisions. However, this flexibility is more theoretical than practical in operations aimed at the general public, and is more often found in private funds where there are few investors. To fully understand the securities issued, you need to know the legal forms of securitisation vehicles (FCT and ST) in France.
Decision-making procedures (ordinary and extraordinary)
Although the principle of non-interference prevails, practice has distinguished two levels of decision-making within a CTF, involving unit-holders in different ways. Ordinary decisions relate to the day-to-day management of the organisation. They include controlling the collection of receivables, cash management or the acquisition of new assets in accordance with the strategy defined in the regulations. These actions are the exclusive responsibility of the management company, which acts under the supervision of the custodian. Its latitude of action is deliberately broad so as not to paralyse the operation of the fund.
Extraordinary decisions, on the other hand, affect the fundamental rules of the fund and may directly affect investors' rights. Examples include a substantial change in the investment strategy, a change in the rules governing subordination between units or the early dissolution of the fund. The fund rules must provide for a specific procedure for adopting such decisions. Although it is legally possible to convene a general meeting of unitholders, it is rarely used because it is cumbersome and attendance is frequent. The most common solution is to subject such changes to the prior agreement of the unitholders, often by written consultation, with quorum and majority rules defined directly in the fund rules. These clauses are the only real safeguard for investors against changes that would distort their initial investment.
Debt and subordination of rights
The protection of unitholders is also ensured by a strict limitation of their liability. As co-owners of an earmarked fund, they are only liable for the fund's debts up to the value of their units, as specified in article L. 214-184 of the French Monetary and Financial Code. Any shortfall in assets, particularly when the FCT is liquidated, cannot under any circumstances give rise to an action against them to cover liabilities. Their potential loss is therefore limited to their initial investment.
Furthermore, the structure of a CTF's liabilities is often hierarchical. As a matter of principle, unitholders' entitlement to repayment and remuneration of their capital is subordinate to that of the fund's other creditors. According to article R. 214-235 of the French Monetary and Financial Code, they are not paid until all holders of debt securities (such as bonds) and any lenders have been paid in full. This legal subordination makes unitholders the fund's residual creditors, the first to absorb losses but who may also receive part of the liquidation surplus. The regulations may even create several classes of units, with different priority rankings, thus establishing an internal subordination between the unit-holders themselves.
Rights and obligations of holders of debt securities
In addition to shares, a securitisation vehicle may issue debt securities, usually in the form of bonds. These securities give their holders the status of creditors of the securitisation undertaking, distinct from that of co-owners. Their rights and obligations are defined by the general law applicable to the type of security issued (e.g. bond law) and by the specific stipulations of the issue contract and the regulations or articles of association of the entity. Debt security holders have priority of payment over unit holders, making them an investment with a generally lower risk profile. Understanding their position is central to understanding the role of investors and other participants in a securitisation transaction.
Obligations and representation of holders
Where the debt securities issued are bonds, French law requires a collective organisation to defend the interests of bondholders. Under article L. 228-46 of the French Commercial Code, which applies to securitisation companies, bondholders of the same issue are grouped together as of right in a "masse", which has legal personality. This group is the sole contact for the issuing company in all collective matters. It is represented by one or more representatives, elected by the general meeting of bondholders or designated in the contract of issue.
These representatives are responsible for protecting the common interests of the bondholders. They may perform all necessary management and custodial acts, and have the power to represent the group in legal proceedings. Although this mechanism is not legally required for CTFs, which have no legal personality, contractual practice very often reproduces this organisation in the fund rules to simplify relations with investors and provide a secure framework, especially in the case of public issues.
Negotiable and foreign debt securities
The securitisation vehicle may also issue negotiable debt securities (TCN), such as commercial paper or negotiable medium-term notes. These instruments, governed by articles L. 213-1 et seq. of the French Monetary and Financial Code, are generally issued for large unit amounts (minimum €150,000) and are intended for professional investors. They are more flexible than bonds, particularly as regards the collective representation of bondholders, who are not organised as a body. The rights of bondholders are defined almost exclusively by the financial information document drawn up for the issue.
Finally, to adapt to international transactions, a securitisation vehicle can issue debt securities under foreign law. This offers great flexibility and makes it possible to structure attractive financing for international investors used to other legal standards, such as English or New York law. In this case, the rights and obligations of holders will be determined by the chosen foreign law, subject to compliance with French international public policy rules.
Rights and obligations of shareholders of securitisation companies (st)
Unlike FCTs, securitisation companies (STs) are public limited companies (SAs) or simplified joint stock companies (SASs) with legal personality. Investors who subscribe for shares acquire shareholder status. In principle, their rights and obligations are governed by ordinary company law, but the Monetary and Financial Code provides for a number of exemptions to adapt its operation to the specific features of securitisation. These special features are essential to understanding the operation of these vehicles, which are one of the two most common forms of securitisation. Legal forms of securitisation vehicles (FCT and ST) in France.
Application of ordinary company law (exceptions)
In principle, a shareholder in a public limited company enjoys the traditional rights associated with this status: the right to attend general meetings, the right to vote, the right to information and the right to dividends. However, the legislator has introduced a number of relaxations to make the governance of these structures more fluid. For example, under Article L. 214-179 of the French Monetary and Financial Code, the ordinary general meeting of an SICAV may be held without a quorum. Similarly, the rules governing multiple directorships have been relaxed.
Another notable exception is the obligation to delegate management to an external management company, as is the case for FCTs. The management bodies of the ST (Board of Directors or Chairman) retain their legal powers, but delegate the actual exercise of these powers to the management company under the conditions laid down in the Articles of Association. The aim of this hybrid organisation is to combine the legal certainty offered by legal personality with the expertise of a professional manager. Shareholders must therefore be aware that, although they are in a classic corporate structure, the real power of management is exercised by a third party.
Provisions common to units, shares and debt securities
In addition to their specific features, the various securities issued by a securitisation undertaking, whether they be FCT units, ST shares or debt securities, are subject to a common set of rules designed to govern their issue, circulation and the rights they confer.
Prohibition on buy-back by the organisation
A fundamental difference with undertakings for collective investment in transferable securities (UCITS) is the absence of liquidity organised by the issuer. Article L. 214-169, V, 5° of the French Monetary and Financial Code expressly prohibits unit holders or shareholders of a securitisation undertaking from requesting the repurchase of their securities by the undertaking. This rule is justified by the very nature of securitisation: the securitisation vehicle's assets are made up of claims or risks that are not liquid. Investors cannot therefore "exit" their investment by turning to the issuer. Their only option for recovering cash before the final amortisation of their securities is to sell them on a secondary market, if one exists.
Public offering and admission to trading (prospectus and rating)
When securities issued by a securitisation vehicle are offered to the public or admitted to trading on a regulated market, the law imposes enhanced disclosure requirements to protect investors. The issuer must draw up a detailed prospectus, subject to approval by the Autorité des marchés financiers (AMF). This document must provide a clear and comprehensive presentation of the characteristics of the transaction, the associated risks and the situation of the issuer.
In addition, article L. 214-170 of the French Monetary and Financial Code requires a financial rating agency to assess the transaction. This agency produces a report analysing the credit risks and assigns a rating to the securities issued. This document must be attached to the prospectus. The rating plays a central role in the investment decision, as it provides a synthetic and independent assessment of the credit quality of the securities offered to the public.
Form (registered or bearer) and issue rules
Like most securities, securities issued by a securitisation vehicle may be in registered form (the name of the holder is recorded in the issuer's records) or bearer form (ownership is evidenced by registration in a securities account with a financial intermediary). The choice is generally left to the discretion of the founders in the by-laws or articles of association. The issue rules, meanwhile, are largely defined by these same documents. They specify the objectives of the issue, which must be consistent with the purpose of the company: to finance the risks it acquires. It is possible to provide for successive issues to replenish the company's assets, or for the funds to be released gradually by subscribers, although this latter practice is rare.
Rights conferred (recomposition of flows, participation in profits and losses)
The great flexibility of the legal framework for securitisation means that securities with a wide variety of rights can be created. This is one of the main attractions of this mechanism. The by-laws or articles of association can stipulate that different categories of securities (units, shares or bonds) confer different rights to capital and interest. This is known as "recomposition of flows" or "tranching". For example, an issue may be structured in several tranches of securities: a "senior" tranche which will be repaid first and offer a lower return, and one or more "subordinated" tranches (mezzanine, equity) which will bear the first losses in the event of default on the underlying assets, but will offer a higher return in return.
This structure makes it possible to modulate participation in the company's profits and losses. Holders of subordinated tranches assume a greater risk but have a higher expectation of gain, capturing the liquidation bonus, for example. Conversely, holders of senior tranches enjoy better protection but limited returns. Whatever their rank, investors' liability is always limited to the amount of their contribution.
The complexity of securitisation structures and the diversity of rights attached to securities require in-depth analysis before any investment. If you are considering investing in this type of transaction, a support from our team of lawyers specialising in banking and finance law is essential to assess the risks and secure your interests.
Sources
- Monetary and Financial Code
- Commercial code
- Regulation (EU) 2017/2402 of 12 December 2017 (Securitisation Regulation)
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