Written commercial agreement

Significant imbalance

Sudden termination of established relationships

Competition investigation – French law

Civil competition action

French competition law

Competition investigation – European law

European competition law

Vertical restraints

Distribution law

Liability for defective products

Consumer law

Prohibition of measures having equivalent effect

European business law

Corruption

Compliance

Economic law

Shareholders' agreements

Removal of company directors

Abuse of voting rights

Companies

Action for infringement (counterfeiting)

Rights conferred by the trademark

Patentability

Industrial property

Commercial rent review

Renewal of the commercial lease

Despecialization (change of use)

Commercial leases

Reform of contract law

Reform of the law of special contracts

Preliminary sales agreement

Obligation to deliver goods in conformity

Classification of the contract for services (contrat d'entreprise)

Effects of the agency agreement with respect to third parties

Business contracts

Ongoing contracts

Recovery claims

Court-approved transfer plan

Bankruptcy proceedings

Personal data breaches

White collar crime

Commercial law

500 Questions - Business Law

The pari passu clause, also known as the equal treatment clause, ensures a certain contractual balance by granting the original partners the same treatment and rights as potential new entrants in the event of a capital increase. Such a clause indeed allows them to subscribe to new shares under the same conditions as those offered to a third party.

As it guarantees its beneficiaries stability in t …

What can be the interest of a pari passu clause and what are its terms?

Partner or shareholder agreements (pacte d'associés or pacte d'actionnaires) are extrastatutory agreements concluded between all or only some partners of a company. In companies whose capital is divided into shares such as SARLs (limited liability companies), they are referred to as partner agreements, while in those composed of stocks, they are called shareholder agreements. Regardless of the type of company in which they occur, their content and legal regime are identical. These agreements arrange various aspects of the partners' lives, from their entry into the company to their exit.

Most concern the transfer of shares and are often aimed at preserving certain balances between partners: this is the case for preemption clauses, anti-dilution clauses, inalienability clauses, withdrawal or exclusion clauses, joint exit clauses (or tag-along clauses), buy or sell clauses, or buyback promises. Others aim to organize corporate life: its governance, the modalities for exercising voting rights or distributing profits, etc.

Why use a shareholders' agreement in addition to the articles of association?

like any contract, the shareholders' agreement offers great freedom to the parties, subject to its necessary compliance with mandatory public policy provision  and the articles of association ;

clauses not necessarily belonging in the articles of association may be the subject of extra-statutory agreements, like non-compete clauses , a party may rely on such a clause, even if the agreement has neither been dated nor registered, provided that the date is established by any means ;

while the amendment of the articles of association requires a decision by the partners in an extraordinary general meeting, generally unanimously, the amendment of the provisions of an agreement is significantly easier;

The shareholders' agreement offers the advantage of confidentiality compared to the articles of association, which are published in the Trade and Companies Register (except in the case of listed companies).

However, shareholder agreements also have certain disadvantages. The clauses contained in the shareholder agreement have limited scope as they create rights and obligations only for the parties to the agreement. Furthermore, in the event of a conflict between the articles of association and the agreement, the former always prevail .

The principle of the free revocability of corporate officers, which applies to directors and deputy general managers, provided it is based on a just cause, opposes any stipulation that aims to hinder or restrict the exercise of this right.

Cass. com., 17 March 2021, LawLex202300012022JBJ.

The provisions of the articles of association must prevail over those of a shareholders' agreement.

Cass. com., 5 June 2019, LawLex202200010194JBJ.

The member of the management board of a public limited company who has agreed to a non-compete clause contained in a shareholders' agreement and who has obtained a purely fictitious employment contract, itself accompanied by a non-compete clause, cannot request, after the termination of their mandate, the payment of financial compensation for the non-compete clause.

Cass. com., 10 October 2018, LawLex202300006159JBJ.

A party to a shareholders' agreement may invoke the non-compete clause it contains even if it has neither been dated nor registered, provided that it proves its date by any means.

Cass. com., 20 March 2024, LawLex202400002502JBJ.

When the articles of association of a simplified joint-stock company set the terms for the dismissal of its chief executive officer, extra-statutory acts can only supplement them and not derogate from them.

Cass. com., 12 October 2022, LawLex202200008725JBJ.

What is a shareholder agreement?

The so-called preemption or preference clause is one of the most common stipulations in shareholder agreements. It governs the terms by which one of the signatories commits, in the event of transferring their shares, to sell them primarily to the other signatories of the agreement, in proportion to their shareholding. This clause, through which the signatories arrange the transfer or sale of their shares, allows for maintaining, in most cases, the balance among shareholders. It indeed helps to guard against an excessive dilution of rights in the capital of certain partners due to the departure of one of them.

The Court of Cassation considers these clauses valid, provided they do not infringe on the free negotiability of shares, a mandatory public policy provision, an imperative stipulation of the articles of association, or the corporate interest .

In accordance with Article 1199 of the Civil Code, the preemption clause binds only the signatories of the agreement. Therefore, its violation cannot, except in the case of fraudulent collusion between the transferor and the transferee, lead to the annulment of the transfer , but only, in the event of proven harm, to the awarding of damages to the beneficiaries of the agreement .

Advice: Shareholders should define the functioning of the preemption mechanism as precisely as possible to prevent any future conflict. It is recommended to:

describe the situations in which the preemption clause will be required to produce its effects (partial asset contribution, merger, transfer of shares, etc.) as the case law strictly interprets the provisions of these agreements;

determine a scheme for the allocation of shares, either in proportion to the current participation or according to other criteria;

specify the method of valuation of the shares and the price, as for any transfer of securities.

A shareholders' agreement, whose purpose, in the event of a proposed transfer to third parties, is to establish a preference in favor of the other shareholders, is not void, provided that it does not infringe on the free negotiability of shares, a mandatory public policy provision, an imperative provision of the articles of association, or the corporate interest.

Cass. com., 7 January 2004, LawLex202200010191JBJ.

The transfer of shares in a public limited company cannot be annulled when the possibility of exercising the right of preemption has been notified to its beneficiaries in accordance with the shareholders' agreement, and none of them wished to exercise it.

CA Paris, 7 May 2019, LawLex202300002248JBJ.

The breach of a preemption right provided by a shareholders' agreement cannot give rise to the awarding of damages to the beneficiaries of this right as long as they intended not to increase their participation, but rather to sell it.

Cass. com., 9 April 2002, LawLex202300005779JBJ.

What is the mechanism of preemption clauses contained in certain shareholders' agreements?

The inalienability clause prohibits the signatories of the agreement from transferring their shares for a specified period.

Due to the strong restriction it imposes on the free negotiability of shares, the validity of inalienability clauses implies, in accordance with Article 900-1 of the Civil Code, that the prohibition must be limited in time and justified by a serious and legitimate corporate interest, such as maintaining a blocking minority .

Regarding the time limit, shareholder agreements theoretically offer more flexibility than the bylaws of simplified joint-stock companies, for which Article L. 227-13 of the Commercial Code provides that the duration of the inalienability of shares cannot exceed ten years.

However, even if the clause meets these conditions, the debtor of the obligation may be judicially authorized to dispose of the property if the interest that justified the clause has disappeared or if a more important interest requires it. This regime, originally applicable only to gratuitous acts, has since been extended by case law to onerous acts.

A shareholders' agreement providing for a clause of non-transferability of shares is justified by a serious and legitimate interest as long as it aims to maintain a blocking minority.

CA Montpellier, 13 January 2009, LawLex202300013750JBJ.

What are the conditions required for the application of inalienability clauses contained in certain shareholders' agreements?

A shareholders' agreement may be concluded for a fixed or indefinite term. When it is for an indefinite term, each partner may terminate it at any time, in accordance with Article 1211 of the Civil Code, subject to the notice period provided or, failing that, a reasonable notice period . An agreement concluded for an indefinite term may be subject to a complaint of violating the prohibition of perpetual contracts referred to in Article 1210 of the Civil Code. The case law resolves the difficulty by holding that the agreement tainted by a perpetuity defect is not subject to annulment, but that each contracting party may terminate it at any time, subject to a notice period .

The mere fact that the agreement is concluded for the duration of the company's life does not suffice to confer upon it the status of a perpetual contract and therefore does not allow each party to unilaterally terminate it at any time . Conversely, a shareholders' agreement that does not mention any limitation of duration and contains no fixed or determinable term, but only its application as long as one of its signatories is a partner in a third-party company, must be considered as having an indefinite duration and terminable at any time.

Finally, even if concluded for a fixed term, the agreement must not provide for a term that is too distant. Such a grievance can be avoided if the agreement otherwise provides exit opportunities for its signatories .

To avoid the reclassification of the agreement as an indefinite contract (in perpetuity), the parties are advised to provide for a limited duration. This duration, even if modeled on the lifespan of the company, will protect the signatories from an attempt by one of them to renege on its commitments through a unilateral termination.

If a shareholder agreement of indefinite duration is always subject to unilateral termination, one of its signatories cannot exercise their right to terminate abusively, without granting the other a reasonable notice period.

Cass. com., 27 September 2017, LawLex202300003681JBJ.

A shareholders’ agreement that is vitiated by perpetuity is not rendered null and void, but each party may terminate it at any time, provided that the contractually stipulated time-limit is observed or, failing that, a reasonable time-limit is given.

Cass. com., 21 September 2022, LawLex202200011213JBJ.

The prohibition of perpetual commitments does not prevent the conclusion of a shareholders' agreement for the duration of the company's life, so that the parties cannot unilaterally terminate it.

Cass. 1re civ., 25 January 2023, LawLex202300001646JBJ.

The duration of twenty years for a shareholders' agreement is not considered excessive when it stipulates that it will cease to have effect for any shareholder who loses that status and provides that each of them has the ability to transfer their shares at any time.

Cass. com., 27 September 2005, LawLex202300006255JBJ.

Can a shareholders' agreement be concluded for an indefinite duration?

The tag along or joint exit clause requires the signatory who is considering an agreement for the transfer of their shares to obtain from the prospective buyer the purchase of the shares or stocks of their co-shareholders under the same financial conditions.

The parties are free to define the triggering event for the joint exit. It may involve a transfer, a transfer concerning only a portion of shares, a merger, or even a contribution.

The mechanism requires the transferring shareholder to notify the beneficiaries of the tag-along right, who are very often the minority shareholders, of their intention to transfer their shares. The latter are then free to sell theirs or remain in the company. Indeed, the obligation rests exclusively on the transferor, who undertakes to ensure that the transferee acquires the beneficiaries' shares. This is an obligation of result, the non-compliance of which can only lead to damages, due to the principle of the relative effect of contracts.

The tag along clause should not be confused with the drag along clause or forced exit clause. Under this mechanism, when a shareholder, usually a majority one, receives an offer to purchase all the company's shares from a third party, the other shareholders must agree to sell their shares under the same conditions. The forced nature of the sale should prompt the drafters of the agreement to carefully draft the clause determining the sale price, in order to protect the interests of minority shareholders. In fact, the court acknowledges the validity of these clauses when they do not undermine the equality of shareholders and does not hesitate, in such cases, to order their enforcement .

Advice: Pay particular attention to drafting the tag-along clause as the courts adopt a restrictive interpretation of its conditions of application. All exit scenarios must be defined as precisely as possible: indeed, the joint exit clause that only covers the scenario of the majority shareholder's transfer of shares to a third party cannot be implemented in the event of a contribution of these shares to a company.

A clause that involves the forced transfer of shares by all shareholders when more than 51% of them notify their wish to proceed with a global transfer of the securities may be subject to enforcement measures when it does not encounter any material, legal, or moral impossibility.

CA Paris, 21 December 2001, LawLex202300010519JBJ.

What is the difference between a tag-along and a drag-along clause?

The pari passu clause, also known as the equal treatment clause, ensures a certain contractual balance by granting the original partners the same treatment and rights as potential new entrants in the event of a capital increase. Such a clause indeed allows them to subscribe to new shares under the same conditions as those offered to a third party.

As it guarantees its beneficiaries stability in their level of participation in the event of a capital increase, this clause can be equated with anti-dilution or non-dilution clauses, which pursue substantially the same objective.

Advice: To avoid litigation, the parties should define precisely:

the terms under which a subscription right will be offered to existing shareholders, which may involve notifying them of the transaction by registered letter with acknowledgment of receipt several days before the date of the issuance,

a deadline by which existing shareholders must exercise their right.

Third parties to a shareholders' agreement, which include the company itself or shareholders of the company who are not signatories to the agreement, can only with difficulty rely on its stipulations. On one hand, the lack of publicity of this extra-statutory agreement prevents third parties from knowing of the agreement's very existence. On the other hand, pursuant to Article 1199 of the Civil Code, the contract creates obligations only between the parties. External to the articles of association and the company, the agreement does not bind the latter, even if it was signed in its presence . Furthermore, the shareholders' agreement, which creates personal obligations, is not transferred as an ancillary to the transferees of the company's shares. Article 1199 further emphasizes that third parties cannot either request the performance of the contract or be compelled to perform it. Therefore, the stipulations of an agreement cannot be enforced against non-signatories . However, Article 1200 of the same code requires third parties to respect the legal situation created by the contract and allows them to rely on it, notably to provide evidence of a fact. Consequently, while agreements are not enforceable against third parties, their non-performance can be invoked by them when it causes them harm, on the basis of tort liability .

Advice: To guard against difficulties in enforcing the agreement against third parties, the parties may refer to the agreement in the articles of association including the penalties for breaching it.

The mere fact that an agreement was signed in the presence of a company is not sufficient to make it accountable for the obligations provided by it and to confer upon it the status of a party, as long as it only intervened as an agent for certain parties for the future management of those obligations.

CA Paris, 8 February 2022, LawLex202300012501JBJ.

The obligations established by the provisions of a shareholders' agreement relating to the transfer of a company's shares do not weigh on the beneficiary of the transfer, but on the holders of the shares intended to be transferred.

CA Paris, 29 November 2022, LawLex202300012503JBJ.

A company may invoke, on the basis of tort liability, the breach by one of its shareholders of the non-compete clause entered into in an agreement to which it is a third party.

Cass. com., 18 December 2007, LawLex200800000010JBJ.

Can a third party invoke a shareholders' agreement?

The answer is clearly negative regarding legal rules. The Court of Cassation consistently holds that the provisions of a shareholders' agreement cannot in any way infringe upon mandatory public policy provisions such as the free revocability of directors of an SA . A shareholders' agreement could not deprive a shareholder of their fundamental right to participate in collective decisions either.

Regarding the articles of association, their provisions must always, in principle, prevail over those of a shareholders' agreement: extra-statutory acts can only supplement the articles of association, not derogate from them .

As an exception, the Court of Cassation does allow a shareholders' agreement to derogate from a clause in the articles of association and to disregard it: this is the case when all the shareholders have consented to the derogation .

Any provision of the shareholders' agreement that aims or has the effect of undermining the free revocability of the director of a public limited company is unlawful.

Cass. com., 26 April 2017, LawLex202200005854JBJ.

When the articles of association of an SAS provide for the ad nutum dismissal of the managing director without compensation, the latter cannot invoke a management agreement that provides for compensation in the event of dismissal for just cause.

The partners of an LLC may, by a unanimous decision made within the framework of a written consultation, derogate from a clause of the articles of association.

Cass. com., 12 May 2015, LawLex202300003402JBJ.

Can the provisions of a shareholders' agreement derogate from the law or from the articles of association?

The breach of a shareholders' agreement can, in principle, only cause harm to one of its signatories.

Two types of sanctions are then possible:

attempt to pursue specific performance of the obligation contained in the agreement, when it was an obligation to do, and there is no, as required by Article 1221 of the Civil Code, manifest disproportion between its cost to the debtor and its interest to the creditor;

for the party claiming to be the victim of harm, to request the award of compensation.

First, in the event of a partner's failure to fulfill their commitment to subscribe to a capital increase, the judge may order the convening of a new meeting and compel them to comply with this commitment . In contrast, when the investment agreement and the shareholders' agreement provide that after a certain period the investor's claims may be converted into shares, without including a clause requiring the company to convene a general meeting for the purpose of increasing the share capital, the latter is not entitled to seek the enforcement of these agreements by asking the judge to order the parties to organize such a meeting, especially before the expiration of the agreed period .

Similarly, a clause that involves the joint transfer of the shares of all shareholders when more than 51% of them notify their wish to proceed with a global transfer of the shares may be subject to enforcement if it does not encounter any material, legal, or moral impossibility. The judge may order the enforcement of a shareholders' agreement that provides that in the event of the hiring of a minority shareholder by a competing undertaking, the minority shareholder will be required to transfer their shares at the majority shareholder's first request, even if the terms for setting the price have not yet been established. The right to enforcement must, however, be combined with the principle of full compensation. Its implementation will be halted whenever it would result in guaranteeing the claimant a benefit greater than their loss .

Then, like any obligation to do or not to do, the violation of a shareholders' agreement traditionally results in damages. However, the substitution of the beneficiary of a preemption clause for the transferee of shares cannot, in principle, be granted . The principle of compensation implies proof of the legality of the agreement  and that of actual harm .

As an exception, the nullity of a transfer of shares may be declared when the company's articles of association expressly provide that a violation of the provisions of the shareholders' agreement results in the nullity of the transfer of shares .

The court may order the convening of a new extraordinary general meeting to proceed with the capital increase provided for by a memorandum of understanding, in order to compel one of its signatories who voted against it at a first meeting to comply and require them to subscribe.

CA Paris, 30 June 1995, LawLex202300002866JBJ.

When an investment agreement and a shareholders' agreement provide that after a certain period the investor's claims may be converted into shares, without including a clause requiring the company to convene a general meeting for the purpose of increasing the share capital, the latter is not entitled to seek the enforcement of these agreements by asking the court to order the parties to organize such a meeting, especially before the expiration of the agreed period.

CA Aix-en-Provence, ch. 3-4, 13 June 2024, LawLex202400004598JBJ.

The violation of a non-acquisition of shares obligation contained in a shareholders' agreement cannot be sanctioned by the forced transfer of the acquired shares to the other signatory of the agreement if this would have the effect of increasing their stake in the company concerned beyond their damage.

Cass. com., 24 May 2011, LawLex202300004852JBJ.

The violation of the preemption procedure provided for by a shareholders' agreement results in damages, as it concerns an obligation to act, and not by substituting its beneficiaries for the transferee, in the absence of proof of fraudulent collusion between the latter and the transferors.

Cass. com., 7 March 1989, LawLex202300012021JBJ.

The general manager of a public limited company who seeks compensation for the harm caused by the termination of his duties in violation of a shareholders' agreement must be dismissed, as the restrictions that the agreement imposes on the free revocability of directors are unlawful.

The investor who sells their shares in violation of a shareholders' agreement incurs liability and must compensate for the damage resulting from the loss of opportunity for their former associates to negotiate the block sale of their shares under the initially envisaged valuation conditions and to present a united front of minority shareholders benefiting from a blocking minority.

CA Paris, 29 September 2009, LawLex202300013800JBJ.

The violation of a preemption right provided by a shareholders' agreement cannot give rise to the award of damages to the beneficiaries of this right as long as they intended not to increase their participation, but rather to sell theirs.

When a company's articles of association expressly provide that the violation of the provisions of a shareholders' agreement results in the invalidity of irregular share transfers, there is no need to substitute this sanction with the awarding of damages for non-compliance with an obligation to do or to refrain from doing something.

CA Paris, 13 June 2019, LawLex202300012500JBJ.

500 Questions - Business Law

277. What can be the interest of a pari passu clause and what are its terms?

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Les notions juridiques connexes

277. What can be the interest of a pari passu clause and what are its terms?

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Les notions juridiques connexes

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