Business Contracts

The contribution of an asset to a company has similar effects to a sale in that it transfers ownership and risks to the company as a legal entity. 

In principle, a company does not acquire legal personality until it is registered . Consequently, the transfer of ownership and the transfer of risks do not take place until the formalities for registration in the Trade and Companies Register have been completed. Before that date, the undertaking does not have legal personality and therefore has no assets of its own . In accordance with the adage “res perit domino”, the risk of destruction or deterioration of the asset falls on the contributing partner. However, it is possible to delay the transfer of ownership, and hence the transfer of risk, by means of an agreement, except in the case of limited liability undertakings where the law requires immediate payment of the contributions . By way of exception, the transfer of ownership and risks may take place even before the company is registered, provided that certain publicity formalities are carried out in order for the contribution of ownership to be valid: at the time of registration of the undertaking, the full effectiveness of the transfer will be retroactive to the day of completion of the said formalities. 

Under the terms of Article 1843-3, paragraph 3, of the Civil Code, “where the contribution is in the form of ownership, the contributor is liable to the undertaking in the same way as a vendor is to a purchaser”. Like the seller, the contributor is bound to warranty against latent defects in the property he is contributing to a company . He is also liable for eviction  , whether caused by himself  or by a third party, i.e. disturbances that could affect the peaceful enjoyment of the property contributed. 

Similarities in rules do not preclude differences. Certain rules applicable to a sale are excluded in the case of a contribution by an undertaking. 

For example, an action for rescission on the grounds of injury for inadequate consideration does not apply in the case of a contribution of immovable property to a company . On the other hand, in a case where a contribution of property had been reclassified as a sale, the Court of Cassation logically accepted that a purchaser acting in good faith could bring an action for rescission on that basis .

A corporate contribution is also exempt from the right of pre-emption . A contribution by which a partner transfers ownership of an item of property to an undertaking in return for shareholding rights, and not for a price, does not constitute a sale and is therefore not subject to the pre-emption clause in the shareholders' agreement . Thus, where a shareholders' agreement provides for a reciprocal right of first refusal in the event of a “transfer”, a contribution to an undertaking, which is not, in principle, comparable to a transfer, does not fall within the scope of the first refusal clause . However, if the agreement establishing the right of pre-emption expressly provides for the contribution of assets, the agreement is legally binding. 

The same logic applies to preferential agreements (pactes de préférence). Where a property is the subject of a preferential agreement, its contribution to an undertaking does not constitute a breach of the agreement if the agreement provides only for its sale, to the exclusion of any other method of disposal . Thus, the lessee of premises used for commercial purposes, who was the beneficiary of a preferential agreement on the leased property, could not obtain invalidity of the transfer of the said premises to a company, since the agreement which referred to “the disposal of the property for valuable consideration”, stipulated that the lessee would be informed of any transfer for valuable consideration, with an indication of the price offered and the general terms and conditions of the proposed sale, and would be given a copy of the promise to sell or the preliminary sale agreement, which excluded from its scope the transfer to a company . On the other hand, a preferential agreement does preclude a contribution by an undertaking, if it is expressly for it .

Where the contribution is made for the benefit of a joint venture or a de facto company, the partner who contributes the property in kind bears the risk of the property since these two types of undertakings, which have no legal personality, cannot have their own assets.

Cass. com, 15 December 2009, LawLex202200001646JBJ. However, this is not the case where the shareholders have stipulated a mutual right of pre-emption in the event of a total or partial transfer of shares: CA Paris 14 February 2012, LawLex202200001658JBJ, holding that the contribution of more than 50% of the shares of a company to another company in breach of the shareholders' agreement providing for a mutual right of pre-emption in the event of the transfer of all or part of the shares, characterizes a manifestly unlawful disturbance which renders the said contribution unenforceable against the beneficiaries of the right of pre-emption and justifies the transferor being required to offer them the sale of his shares.

Cass. 1re civ. 5 March 1951, LawLex202200001647JBJ: the contribution of a building to a company does not constitute a breach of the preferential agreement by which the owner undertook, in the event of the building being put up for sale, to give preference to the beneficiary, provided that the agreement in question, contained in a lease agreement drafted in clear and precise terms, provided only for the sale of the rented building, to the exclusion of any other method of disposal.

Cass. 3e civ, 15 January 2014, LawLex202200001460JBJ.

For an application a contrario, See Cass. com., 9 November 2010, LawLex202200001376JBJ: the merger-takeover transaction, which results in the dissolution without liquidation of the absorbed company and has no counterpart in the allocation to the absorbed company of corporate rights within the absorbing company, does not constitute a corporate contribution made in breach of the preferential agreement granted over the leased premises in the event of a sale, exchange or corporate contribution.

Cass. 1re civ. 12 June 1945, LawLex202200001503JBJ; Cass. com. 10 June 1953, LawLex202200001589JBJ. 

Cass. com, 10 June 1953, LawLex202200001589JBJ, quashing the appeal order for contradictory reasons, since after holding that the transferees of the shares and the sub-purchasers of the property contributed were to be considered as bona fide third parties, in law, the court applied to them the provisions of Article 1681 of the Civil Code, in the event of rescission of the sale, even though the apparent deed in this case was a contribution to the company, as such, which could not be rescinded on the grounds of injury for inadequate consideration , and not the veiled deed of sale.

Cass. soc., 16 February 1961, LawLex202200001620JBJ: where it is carried out without fraud, the contribution to a company of a farmed holding also escapes the right of pre-emption of the lessee, who cannot offer the lessor the company rights that the latter wishes to acquire. 

CA Versailles, 13 January 2011, LawLex202200001628JBJ.

40. Legal regime