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Court of Appeal rules on marketing of notes linked to a foreign fund which is not authorised to be marketed and sold by the AMF

The Paris Court of Appeal has handed down the first ever French court decision on the legality of the marketing and selling of notes, on the French financial markets, which are linked to the performance of a foreign investment fund which is not itself authorised to be sold in France. This is a controversial topic among capital market lawyers.

In July 2007, a French company (investor) entered into a contract with Société Générale to subscribe for the purchase of Euro Medium Term Notes (EMTN) issued by SGA Société Générale Acceptance NV and guaranteed by Société Générale, with a maturity of two years. The subscription agreement was contained in a document entitled "certificate à levier indexé sur le Fonds Premia" issued in July 2007 by SGA Société Générale Acceptance NV. Pursuant thereto, the investor agreed to irrevocably subscribe for the EMTN issued by SGA Société Générale Acceptance NV. The subscription agreement was governed by English law.

The EMTN were index linked to the performance of, and their value was calculated in part by reference to, the value from time to time of an investment fund, Premia, constituted in Jersey (the Fund).

The subscription, sale and purchase of such EMTN on the French financial market was, at all relevant times, and is per se lawful under French law. However, the "commercialisation" (which covers both the marketing and the sale) on the French financial markets of the shares of a foreign investment fund which is not an authorised investment fund for the purpose of Articles L. 241-1 II and D. 214-11 of the French Financial and Monetary Code is contrary to French law.

As a result of the liquidity crisis which began in August 2007, the value of the investment in the EMTNs declined very significantly. By January 2009, when the investment was finally liquidated, it had lost more than 80% of its initial value.

In proceedings initially brought before the Paris Commercial Court, the investor sought the nullification of the subscription agreement on the grounds of the alleged illegality of its "cause" under French law. The investor claimed from Société Générale the restitution of the sums initially invested in the EMTN pursuant to the subscription agreement on the basis that the making or execution of the subscription agreement, although not in itself unlawful, was intended to, and did, involve indirectly the "commercialisation" on the French financial markets of the shares of an unauthorised fund (ie Premia) so as to render the subscription agreement void.

Société Générale argued that the making and execution of the subscription agreement was lawful under French law and was not intended to, and did not involve indirectly the unlawful "commercialisation" on the French financial market of the shares of an unauthorised fund. Société Générale also argued that in any event the subscription agreement was lawful according to the law by which it was expressly governed, ie English law, and the payments made by the investor pursuant to the subscription agreement were not recoverable from Société Générale under English law.

On 20 October 2011, the Paris Commercial Court annulled the subscription contract but decided that the investor was not entitled under English law to recover the sums it had paid pursuant to the subscription agreement, applying a long-standing rule of English law that restitution is not generally available in relation to illegal agreements. The investor appealed.


The Court of Appeal held that the subscription agreement was valid as the financial characteristics of the EMTN were not the same as the characteristics of the shares of the Fund; for example, the leverage and risk were different. This decision is in line with the 2005 guidance of the French regulator (ie the Autorité des Marchés Financiers or AMF) on the conditions that must be met for a French contractual fund which has invested substantially in a foreign fund not authorised to be "commercialised" in France2 to be regarded as having been indirectly "commercialised" in France.

The court also found that Société Générale had not deceived the investor as to the characteristics of the subscription agreement in the EMTN. The Fund’s location in Jersey was not an essential element that needed to be specified in the marketing materials that had been provided to the investor prior to the sale of the notes. The court also emphasised that the investor decided to invest in the EMTN knowing that the return of the capital investment was not guaranteed, and with full knowledge of the associated risks.

As the subscription agreement was declared valid, the court did not address the restitution rules in English law.

This decision is still subject to a potential appeal from the investor before the Cour de cassation.


This is a positive ruling for financial institutions on a long-standing controversial topic in the French regulatory sphere. The investor in this case lost most of its original investment and so sought to show that Société Générale had in fact sold, behind the mask of an EMTN programme, a foreign alternative fund unauthorised to be marketed and sold by the AMF. The bank in this case was able to argue successfully that the financial characteristics of the notes in question were different to the financial characteristics of the linked foreign fund so no indirect "commercialisation" had taken place. The ruling shows that the courts are willing to analyse the structure and characteristics of foreign fund linked products in order to ascertain whether it is a genuine offering or a mask for the marketing and sale of a foreign fund that is itself unauthorised by the AMF.

Allen & Overy LLP acted for the bank.


1. Please note that these Articles were amended by Ordonance No 2013-676 dated 25 July 2013 and Decree No 2013-687 implementing the AIMF Directive in France. 
See page 4 of the Revue Mensuelle de l’Autorité des marchés financiers – No 17, September 2005.

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