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

Company Law (en cours)

The vast majority of shareholders' agreements concern the modalities of the transfer of shares. These agreements pursue a multitude of purposes: ensuring the maintenance of certain balances, ensuring that key individuals do not leave the company during its startup phase or during a restructuring, preserving the family nature of a company, conferring a closed character to a capital company, etc.

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Regulation of share transfers

LE BRAS, Promises of transfers of ownership interests and the prohibition of leonine clauses, Bull. Joly 1986, 587; MOURY, Restrictive clauses on the free negotiability of shares, RTD com. 1989, 187; CHARTIER, Preference and preemption clauses in case of transfer to third parties, RJ com. 1990, 77; LE NABASQUE, DUNAUD, ELSEN, Exit clauses in shareholders' agreements, Actes prat. 1992, No 5, 2; PRAT, Shareholders' agreements relating to the transfer of marketable securities, Litec 1992; BRUSCHI, Preference agreements, Dr. et patr 1999, 64; CLAUDEL, Extrastatutory leonine clauses - Paths to a compromise, Mélanges Jeantin, Dalloz 1999, 183; BAFFOY and LE NEAN, Agreements restricting the transfer of ownership interests, JCP N 2002, No 1254; VAMPARYS, Validity and effectiveness of drag-along and tag-along clauses in shareholders' agreements, BJS 2005, 82; ZOUEIN, Unilateral promises of forced share transfer. Reflections on obligation as guarantee and private penalty within the framework of shareholders' agreements, LGDJ, 2024.

The vast majority of shareholders' agreements concern the modalities of the transfer of shares. These agreements pursue a multitude of purposes: ensuring the maintenance of certain balances, ensuring that key individuals do not leave the company during its startup phase or during a restructuring, preserving the family nature of a company, conferring a closed character to a capital company, etc.

Among the most common clauses are preemption or preference clauses, by which the signatories commit, in the event of the transfer of their shares, to offer them first to the other signatories of the agreement, in proportion to their participation in the capital. The Court of Cassation considers them valid as long as they do not infringe on the free negotiability of shares, a mandatory public policy provision, an imperative stipulation of the statutes, or the corporate interest . Nevertheless, these clauses are interpreted strictly. Thus, an agreement concluded between the shareholders of a joint-stock company that subjects any transfer of the company's shares by one of the signatories to a right of preemption does not apply in the context of a reserved capital increase, which does not involve the transfer of existing shares but the issuance of new shares . Similarly, a right of preemption agreed upon in a shareholders' agreement, which only concerns transactions related to the shares of a joint subsidiary, does not apply to the indirect transfer of its capital resulting from the sale of shares of one of its parent companies to a third-party group .

Pursuant to Article 1199 of the Civil Code, the preemption clause binds only the signatories of the agreement. Therefore, its violation cannot, except in cases 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 . Furthermore, a joint shareholder of a joint stock company may take legal action to postpone an extraordinary general meeting whose agenda includes the issuance of securities giving access to the capital of the issuing company, as long as it occurs prematurely with respect to the preemptive right he benefits from under a shareholders' agreement .

Alongside preemption clauses, associates very often agree on unilateral promises to sell or buy, which allow the subscriber, whether as promisor or beneficiary, to be assured of selling their shares at a determined or determinable price or buying those of the other party. These promises generally complement provisions related to the voluntary or forced exit of an associate or shareholder. This is the case with promises to sell or repurchase the shares of an employee shareholder in the event of termination of their employment contract  or the shares of the chief executive officer in the event of their dismissal . They can also serve as an incentive for third parties to subscribe to a capital increase by providing them with a guarantee of reimbursement of the investment they would not have agreed to without them . The interest in using these promises is significantly diminished by the possibilities of contesting their validity, both on the grounds of price indeterminacy and their leonine nature.

Regarding the transfer price, it must, in accordance with Articles 1591 and 1592 of the Civil Code, be determined or determinable. This is not the case, notably, when the transfer price cannot be determined other than by a clause that merely caps the amount in certain scenarios  or when the promise sets a price only for some of the shares in question, while the price of the others is neither determined nor determinable . Conversely, the price of a promise to transfer shares is determinable if it is set by reference to the amount of shareholders' equity on a precisely specified date, excluding any other additional valuation elements . The fact that the clause provides for the use of a third-party expert to set the price of a share transfer provided for by a unilateral promise of sale is sufficient to make the price determinable, in the presence of objective elements in the document to reach the market price, such as taking into account the group's consolidated debt and excluding the portion of shareholders' equity corresponding to the capital increase subscribed by the transferee . Furthermore, the existence of several formulas for determining the transfer price of shares in a shareholders' agreement is not objectionable when their implementation does not depend on the will of the company's directors but on the collective of the partners .

Conversely, the predetermination of the price in a promise to purchase shares has been used by some litigants as evidence of the violation of the prohibition of leonine clauses, when there is a significant difference between the value of the share on the day the option is exercised and the price as determined by the calculation method set by the clause. Those invoking it claim that it constitutes, for the stipulator, a means of shielding themselves from the contribution to losses or reserving the sole benefits, in violation of the provisions of Article 1844-1, para. 2, of the Civil Code. However, case law considers that a promise to purchase shares concluded at a determined price constitutes a stipulation unrelated to the corporate contract, devoid of impact on the allocation of profits to the partners and their contribution to losses . Indeed, the conclusion of a transfer agreement between partners, whose sole purpose is to ensure, for a freely agreed price, the transfer of ownership interests  or the balance of agreements concluded between the parties  does not undermine the corporate contract and does not fall under the prohibition of clauses that have the effect of exempting one of the partners from any contribution to corporate losses. Similarly, the conclusion of a promise to purchase shares at a freely negotiated minimum price, subject to the suspensive condition that one of the parties ceases their functions within the company they manage, does not affect their contribution to losses . Ultimately, case law readily admits the validity of such promises when the existence of a corporate risk  is not excluded.

3) Anti-dilution clause and pari passu clause

Anti-dilution or non-dilution clauses aim to ensure their beneficiaries maintain a stable level of participation in the event of a capital increase. The signatories of a shareholders' agreement cannot circumvent the non-dilution clause it provides in favor of one of them by reducing the capital to zero without offering to buy back their shares under the conditions of the sales promise associated with this clause .

The pari passu clauses, also known as equal treatment clauses, pursue a similar objective. They indeed aim to ensure a certain contractual balance by granting original partners the same treatment and rights as potential new entrants. Such a clause allows them, during a capital increase, to subscribe to new shares under the same conditions as those offered to a third party.

The inalienability clause prohibits the signatories of the agreement from transferring their ownership interests for a specified period. In accordance with Article 900-1 of the Civil Code, the validity of inalienability clauses requires that the prohibition be time-limited and justified by a legitimate serious social interest. Such an interest may consist of maintaining a blocking minority . Even in this case, the debtor of the obligation may be judicially authorized to dispose of the asset if the interest that justified the clause has disappeared or if a more important interest arises. Originally, this regime was only applicable to gratuitous acts, but it has since been extended by case law to onerous acts .

The standstill clause, also known as a non-aggression or non-acquisition  clause, is one that stipulates that none of the signatories is able to launch a public offer on the company, alone or in concert with third parties, without first obtaining the agreement of the other signatories.

The tag-along clause, 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-partners under the same financial conditions. The parties are free to define the triggering event for the joint exit. It may involve any transfer, a transfer concerning only a portion of shares, a merger, or even a contribution. They must pay particular attention to the drafting of the clause, as case law considers that a clause that only addresses 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 . The selling shareholder must notify the beneficiaries of the joint exit right, who are often the minority shareholders, of their intention to transfer their shares. The latter are then free to sell theirs or remain in the company, as the obligation rests solely on the seller, who undertakes to ensure that the buyer acquires the beneficiaries' shares. This is a result obligation, the non-compliance of which can only lead to damages, due to the principle of the relative effect of contracts.

The tag-along clause must be distinguished from the drag-along clause or forced exit clause, under which when a partner, usually the majority shareholder, receives an offer from a third party to purchase all the company's shares, the others agree to sell their shares under the same conditions. The forced nature of the transfer 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. The court has recognized the validity of such clauses when they do not infringe on the equality of partners and has ruled that specific performance may be ordered against a dissenting shareholder, provided there is no material, legal, or moral impossibility .

The withdrawal clause allows its beneficiary to request one of the signatories to potentially repurchase their shares when one of the events mentioned in the agreement occurs, while the exclusion clause authorizes the partners to exclude one of them and require them to transfer their shares when their holding is linked to the status of employee or corporate officer and they have been dismissed and removed from their duties .

The buy or sell clause grants one party the option to propose to another to buy back its shares at a determined price. In this case, the latter either agrees to sell its shares at the proposed price and exits the company, or refuses, in which case it is obliged to acquire the first party's shares at the same price. The drafting of the clause must, once again, be given particular attention and should provide, notably, for the consequences of a withdrawal of this offer when the proposal to purchase the shares comes from a third party. Indeed, the court considers that a buy or sell clause provided in the event of an offer to purchase all the company's shares by a third party cannot be applied when the minority shareholder, who opted for the “sell” option, could not sell their shares due to the withdrawal of the third-party offer, so they cannot be compelled to acquire the majority group's shares under the “buy” option, which can only be exercised as an alternative to the first .

Cass. com., 7 January 2004, LawLex202200010191JBJ.

Paris, 24 November 2015, LawLex202300006167JBJ.

Cass. com., 9 October 2012, LawLex202300000309JBJ.

Cass. com., 3 February 2015, LawLex202300000260JBJ.

Paris, 27 October 2015, LawLex202300000365JBJ.

CA Paris, 18 October 2005, LawLex202300006266JBJ.

Cass. com., 10 January 1989, LawLex202200003642JBJ.

Cass. com., 20 May 1986, LawLex202200003430JBJ; 24 May 1994, LawLex202200003235JBJ; 19 May 1998, LawLex202200003643JBJ; 19 October 1999, LawLex202200003462JBJ; 8 March 2005, LawLex202200003241JBJ; 21 June 2023, LawLex202300008437JBJ, JCP E 2023, No 1255, obs. BARBIERI; RJDA 2023, No 593.

Cass. com., 16 November 2004, LawLex202200003268JBJ, prec., considering that a promise to repurchase shares, which aims, by setting a minimum sale price, to ensure the balance of agreements concluded between the parties and guarantees its beneficiary, the lender, the reimbursement of the investment to which they would not have consented without this determining condition, does not exempt the latter from any contribution to losses, even if it is a unilateral commitment; 3 March 2009, LawLex202200003240JBJ, regarding a promise granted in consideration for subscribing to a capital increase.

Cass. com., 12 March 1996, LawLex202200003438JBJ.

Cass. com., 22 February 2005, LawLex202200003237JBJ, considering that the promise to purchase shares subscribed by a shareholder, decoupled from any reciprocal promise to sell them, does not have a leonine character, as its implementation is subject to the exercise of an option at the expiration of a certain period and for a limited time, from which it follows that the shareholder, outside this period, remains subject to the risk of disappearance or depreciation of the shares; 23 March 2010, LawLex202200003269JBJ, indicating that the promise to repurchase shares of a minority partner held in a subsidiary, at a minimum sale price, does not exempt its beneficiary from any contribution to losses, as it is accompanied by a transition period during which the latter provides the company with his experience and knowledge of the operation of this unit, and that over the five-year period during which the repurchase promise cannot be exercised, he commits to serving as the company's president only during the first two years.

Cass. com., 7 May 2019, LawLex202300013742JBJ.

Cass. com., 15 September 2009, LawLex202300005966JBJ.

CA Montpellier, 13 January 2009, LawLex202300013750JBJ.

MORTIER, Generalized inalienability serving companies, Actes prat. ing. sociétaire 2008, 2, 1 and The new era of inalienability clauses, JCP N 2008, 1064; THOMAS-RAYNAUD, Inalienability clause stipulated in an onerous act and creditors' rights, a balance found, D. 2008, 963.

FERRY, The sanction of a non-acquisition agreement, French Company Law May 2021, 5.

CA Douai, 25 March 2021, LawLex202300012514JBJ.

Paris, 21 December 2001, LawLex202300010519JBJ.

For an application, See Versailles, 31 March 2010, LawLex202300009031JBJ.

CA Paris, 10 March 2015, LawLex202300013798JBJ.

Paris, 7 May 2019, LawLex202300002248JBJ, rejecting the request for annulment of the transfer based on collusion, since the possibility of exercising the right of preemption had been notified to the beneficiaries, in accordance with the shareholders' agreement, and none of them wished to exercise it.

Cass. com., 9 April 2002, LawLex202300005779JBJ, rejecting the existence of any harm to the beneficiaries of the agreement, since they wished not to strengthen their participation, but rather to sell theirs.

Cass. com., 7 July 2020, LawLex202300006254JBJ.

Cass. com., 21 September 2022, LawLex202200011213JBJ, JCP E 2023, No 1017, note DONDERO;

JCP G 2022, No 1292, obs. SCHILLER; RDC 1/2023, 54, obs. HAMELIN; Gaz. Pal. 14 March 2023, 58, obs. PRODHOMME and DEUCHLER; RLDA 2023, No 7706, obs. PEREZ; JCP E 2023, No 1222, No 15, obs. CAFFIN-MOI. - Also see CA Paris, 29 January 2013, LawLex202300006247JBJ.

Cass. com., 21 June 2023, LawLex202300008437JBJ, JCP E 2023, No 1255, obs. BARBIERI; RJDA 2023, No 593. - See also Cass. com., 7 May 2019, LawLex202300013751JBJ; 6 May 2014, LawLex202300001693JBJ, specifying that the promise of sale is not identified with an exclusion clause; Paris, 18 October 2005, LawLex202300006266JBJ.

See, for illustrations, Cass. 1re civ., 23 September 2020, LawLex202300005770JBJ; Cass. com., 3 March 2009, LawLex202200003240JBJ; 16 November 2004, LawLex202200003268JBJ, Rev. sociétés 2005, 593, note LE NABASQUE; RTD com. 2005, 111, note CHAMPAUD and DANET; BJS 2005, 270, note MATHEY; RDC 2005, 396, note LUCAS; JCP E 2005, 131, No 1, note CAUSSIN, DEBOISSY and WICKER; Dr. sociétés 2005, 12, note HOVASSE; D. 2005, 2950, note HALLOUIN and LAMAZEROLLES; RDBF 2005, 29, note CERLES; JCP G 2005, I, 117, note CAUSSIN, DEBOISSY and WICKER; D. 2004, 3144, note LIENHARD; RDBF 2005, 32, note COURET; Dr. et patrimoine February 2005, 133, note PORACCHIA; D. 1994, 503, note COURET.

Cass. com., 21 September 2022, LawLex202200011213JBJ, JCP E 2023, No 1017, obs. DONDERO; JCP G 2022, No 1292, obs. SCHILLER; RDC 1/2023, 54, obs. HAMELIN; Gaz. Pal. 14 March 2023, 58, obs. PRODHOMME and DEUCHLER; RLDA 2023, No 7706, obs. PEREZ; JCP E 2023, No 1222, No 15, obs. CAFFIN-MOI.

Company Law (en cours)

205. Regulation of share transfers(1)

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205. Regulation of share transfers(1)

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