All of French Company Law: ordinary law of companies and specific regime for different types of companies

Company Law (en cours)

When, at the end of a fiscal year, the company generates a positive result, the partners can sovereignly decide to distribute dividends or allocate the profit to reserves. Prudence recommends opting for the latter solution, which allows financing the company's needs or protecting it against potential future losses. There are several types of reserves: mandatory, statutory, or optional. While, in p …

Types

When, at the end of a fiscal year, the company generates a positive result, the partners can sovereignly decide to distribute dividends or allocate the profit to reserves. Prudence recommends opting for the latter solution, which allows financing the company's needs or protecting it against potential future losses. There are several types of reserves: mandatory, statutory, or optional. While, in principle, reserves are not intended to be distributed, a dividend withdrawal from optional reserves may, exceptionally, be decided by the general meeting. Such a withdrawal proportionally reduces the amount of shareholders' equity .

In joint stock companies and SARLs, Article L. 232-10 of the Commercial Code requires the establishment of reserves under penalty of nullity of any contrary resolution, amounting to one-twentieth of the profit for the fiscal year, reduced, if applicable, by previous losses. This “legal reserve,” which ceases to be mandatory when its amount reaches one-tenth of the share capital, serves as a guarantee for third parties dealing with the company and cannot be distributed to shareholders or partners, nor allocated to the repurchase or redemption of the company's shares or interests .

To always ensure a certain level of shareholders' equity, the company's statutes may provide for the establishment of so-called “statutory” reserves , which are deducted from the distributable profit. The methods for establishing these reserves and the rate of deduction from the distributable profit fall under contractual freedom. In the event of dismemberment of ownership interests, the statutory reserves are unavailable to both the usufructuary  and the bare owner .

Once the mandatory and statutory reserves have been funded, the partners may voluntarily decide to create others, known as “optional,” “extraordinary,” or “free” reserves. The decision to establish such reserves can lead to differing views among partners, with some feeling aggrieved at having to create a reserve instead of receiving dividends, while others may consider them essential for the company's development. These differences sometimes lead to disputes that can result in a conviction for abuse of voting rights. Indeed, a partner holding half of the shares in an SARL who opposes the allocation of profits to reserves commits an abuse of equality, especially when the company requires significant self-financing for its investments and working capital due to the time gap between financing its productions and collecting sales revenues, while distributing the entire accounting result as dividends would reduce its credit with banks . Conversely, the systematic allocation of profits to reserves since the company's creation, without incorporating them into capital, constitutes an abuse of majority rights when it has had no effect on the company's investment policy, while the majority partners have received substantial unjustified remuneration given the roles they perform  and which have allowed them to make personal investments substituting those that should have been made by the company . The same applies to the allocation of profits to reserves by an SCI when it does not stem from a necessary prudence or investment policy and neither corresponds to the corporate purpose nor to a requirement of sound management, but solely aims to favor the majority partners to the detriment of the minority partner . However, decisions to allocate profits to the extraordinary reserve for seven consecutive years do not constitute an abuse of rights, as long as they have contributed to the company's favorable situation by exercising a prudent policy allowing significant financing without needing to resort to external fund advances . Similarly, decisions to reserve profits aimed at securing loans contracted for significant investments and ensuring their safe and sustainable repayment cannot constitute an abuse of majority .

The particularity of optional reserves lies in the fact that the general meeting may, in accordance with Article L. 232-11 of the Commercial Code, decide to distribute them as dividends, either because the fiscal year's result is not profitable and the partners still wish to receive an amount, or because they want to recover the equity contribution made to the company. In the latter case, the distribution can only occur in addition to the one regularly deducted from the fiscal year's profits. To prevent attempts at disguised distribution of mandatory reserves, the law specifies that in either case, the meeting must clearly indicate the reserve account from which the deduction is made. Furthermore, although the texts do not expressly require an annual general meeting decision for the approval of accounts, it has been judged that an exceptional dividend paid by deduction from the amount of reserves and retained earnings, outside the annual general meeting, could constitute a fictitious dividend within the meaning of the last paragraph of Article L. 232-12 of the Commercial Code, even within a group of companies .

When the result is neither distributed to the partners as dividends nor placed in reserve, it is allocated to a “retained earnings carried forward” account  . The retained earnings carried forward refers to an accounting entry listed under the shareholders' equity category of the balance sheet, which allows the company to protect itself against potential future losses and to increase the corporate assets without cost. Just like the establishment of optional reserves, the decision to allocate the result of a fiscal year to the retained earnings carried forward account can lead to disputes. Indeed, the resolutions of general meetings of an SCI that decide to allocate almost all profits to a retained earnings carried forward account, not justified by specific needs or projects, nor dictated by the corporate interest, and which result in placing the minority partner in a precarious personal situation, constitute an abuse of majority  . Furthermore, it follows from the combination of Articles L. 232-11, para. 1, and L. 232-12, para. 1, of the Commercial Code, which are mandatory, that the retained earnings of a fiscal year are included in the distributable profit of the following fiscal year. Only the meeting that approves the accounts of this fiscal year can decide its allocation and, if applicable, its distribution. Therefore, the resolution of a general meeting other than the one approving the accounts of the fiscal year and deciding the distribution of a dividend taken from the retained earnings of a previous fiscal year is subject to nullity  .

Cass. com., 30 May 2018, LawLex202200009025JBJ.

CA Angers, 23 November 2021, LawLex202200008854JBJ.

Cass. com., 4 November 2020, LawLex202200005118JBJ.

T. com. Paris, 23 September 2022, LawLex202300003710JBJ. Contra CA Lyon, 31 May 2018, LawLex202300011717JBJ, considering that distributions of reserves do not necessarily have to be made at the time of the approval of the accounts.

Cass. com., 13 September 2017, LawLex202200008861JBJ, specifying that a real estate civil company (SCI) cannot be condemned as a third party holding sums owed by its manager and associate to the Public Treasury, as long as it is not a debtor to the latter in the absence of a decision by the competent corporate body to distribute the profits that have been allocated to the retained earnings account.

Cass. 3e civ., 12 November 2015, LawLex202200005114JBJ; Cass. com., 1 July 2003, LawLex202200008860JBJ.

Cass. com., 12 February 2025, LawLex202500000997JBJ.

Cass. 1re civ., 22 June 2016, LawLex202200008857JBJ, considering that the usufructuary, who may claim distributed profits, has no rights over profits allocated to reserves.

Cass. com., 10 February 2009, LawLex202200008855JBJ, emphasizing that the participation of a usufructuary in the general meeting deciding on the allocation of profits to a reserve account does not constitute an indirect donation to the bare owner, as only their distribution in the form of dividends confers upon them the nature of fruits.

Cass. com., 16 June 1998, LawLex202200008862JBJ.

Cass. com., 30 August 2023, LawLex202300014052JBJ.

Cass. com., 6 June 1990, LawLex202200005112JBJ.

Cass. com., 17 June 2008, LawLex202200006085JBJ; 22 April 1976, LawLex202200008953JBJ, specifying that the systematic allocation of all profits to the extraordinary reserve constitutes pure and simple hoarding, subjecting all these sums, which the company does not use, particularly for investment, to the consequences of monetary fluctuations.

Cass. com., 23 June 1987, LawLex202200008952JBJ.

Company Law (en cours)

54. Types

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54. Types

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