Shareholders' rights in private and public companies in France: overview
A Q&A guide to shareholders' rights in private and public companies law in France.
The Q&A gives an overview of types of limited companies and shares, general shareholders' rights, general meeting of shareholders (calling a general meeting; voting; shareholders' rights relating to general meetings), shareholders' rights against directors, shareholders' rights against the company's auditors, disclosure of information to shareholders, shareholders' agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.
Types of limited companies and shares
The main types of companies with limited liability are:
The société à responsabilité limitée (SARL).
The stock company which can be any of the following:
société anonyme (SA);
société par actions simplifiée (SAS); or
société en commandite par actions (SCA).
Liability of their shareholders cannot exceed their respective contribution to the share capital.
According to recent statistics:
The type of company most commonly used in France is the SARL.
The SAS, created in 1994 as a simplified form of the SA, has become the second most commonly used company form in France. Through its flexible organisation, the SAS has become an alternative to the SARL and SA, and might be considered as the form favoured by foreign investors.
Stock companies can issue ordinary shares, which grant their owners political rights (such as voting and information rights) and financial rights (dividend with liquidation rights) in proportion to their shareholding.
Stock companies can also issue preferred shares (actions de préférence) which can grant their owners particular rights (such as double-voting rights, prior access to information, or priority dividend rights).
In addition, stock companies can issue other financial instruments, such as bonds or securities convertible into share capital. These financial instruments mainly consist of:
Equity warrants (bons de souscription d'actions) (BSA).
Bonds redeemable in shares (obligations remboursables en actions) (ORA).
Share convertible bonds (obligations convertibles en actions) (OCA).
Bonds with attached equity warrants (obligations à bons de souscription d'actions) (OBSA).
An SARL cannot issue preferred shares or financial instruments except nominative bonds, provided that the company has appointed statutory auditors and has approved financial statements for at least three fiscal years.
Further, SAS and SARL companies are not allowed to offer their shares to the public.
An SA must have at least seven shareholders.
An SCA, which has two categories of shareholders, must have at least three limited partners (commanditaires, with limited liability) and at least one general partner (commandités, with unlimited liability).
If an SAS is set up as a société par actions simplifiée unipersonnelle (SASU) or an SARL is set up as an entreprise unipersonnelle à responsabilité limitée (EURL), it can only have one shareholder.
General shareholders' rights
The general rights of shareholders consist of political and financial rights. Political rights mainly refer to:
The right to vote in general meetings (GM).
Rights to bring a legal action to defend the shareholder's or the company's interests.
Financial rights include the right to receive dividends or part of the remaining assets of the company on its liquidation.
Such rights cannot be amended or suppressed, subject to preferred shares which can grant specific rights to their holders.
In some circumstances, shareholders can be temporarily deprived of their voting rights, for example if a shareholder is involved in a regulated agreement (convention réglementée) submitted to the shareholders for approval.
In addition, some rights are subject to thresholds. For instance the right for a shareholder to request from a court the appointment of an expert to report on a specific management operation requires a minimum shareholding of 5%.
Any modifications or limitations to the shareholders' rights must be authorised by a shareholders' meeting. Modifications or limitations have to be included in the bye-laws to be enforceable against all shareholders.
A shareholders' agreement can contain provisions to limit or modify the rights of their signatories. However, such provisions are only enforceable against signatories to the agreement.
Certain limitations are legally prohibited. For example, the dividend right cannot be totally cancelled for a shareholder. Further, preferred shares without voting rights cannot represent more than 50% of the share capital of a stock company (25%, in listed companies.)
Minority shareholders enjoy the same political and financial rights as other shareholders (see Question 5). However, particular rights have been granted to minority shareholders.
In an SARL, SA and SCA, any shareholder is entitled to ask written questions to the managing entity/director who will have to answer them during the GM. This right to ask questions is not subject to any shareholding threshold.
Any shareholder can bring a legal action against directors and the corporate management in the name of the company or in his own name, depending on whether the damage was caused to the company's interest or to the shareholder's individual interest.
French case law has granted minority shareholders the right to challenge resolutions if they bring sufficient evidence that these resolutions have been voted exclusively in the interest of the majority shareholders and against the company's interests (abus de majorité).
In SA and SCA companies, a shareholder is entitled to submit a draft resolution to the company to be submitted to the GM. To do so, the shareholder has to own at least 5% of the share capital, if the share capital is up to EUR750,000. This 5% threshold progressively declines when the company's share capital is higher than EUR750,000.
Shareholders representing at least 5% of the capital (in SA, SCA and SAS companies) and shareholders representing more than 10% of the capital in SARL companies can ask the court to appoint an expert to report on a specific management operation.
In addition, minority shareholders can have some impact on the company's capital structure, in that a share capital increase or decrease requires the approval of at least 66.66% of the voting rights (SARL and SAS bye-laws may provide a higher percentage).
There are associations to represent minority shareholders but their influence differs. One of the most recognised is the Association for the Defence of Minority Shareholders (ADAM), which has been quite active against majority shareholders of some of the largest listed French companies, particularly in relation to mergers and acquisitions.
General meeting of shareholders
Calling a general meeting
SARLs and SASs with more than one shareholder and SAs have to hold an annual shareholders' meeting, to approve financial statements and allocate the results. The annual shareholders' meeting must be held within six months from the end of the fiscal year.
The chairman of the board (président du conseil d'administration), a director (administrateur) or member of the management board (directoire) in an SA, the chairman (président) in an SAS, and the managing director(s) (gérant(s)) in an SARL must submit to the shareholders the management report, the inventory and the financial statements of the prior fiscal year. The shareholders discuss the issues related to these documents and decide whether to approve them or not.
For SAs, SCAs and SARLs, the GM has a reserved competence for specific decisions listed in the Commercial Code. As such, the following must be approved by the GM:
The financial statements.
The allocation of the results.
The appointment or removal of board members and statutory auditors.
The ratification of agreements between the company and its board members.
These decisions are qualified as ordinary decisions and usually require a simple majority. A higher majority is required for extraordinary decisions, which mainly cover amendments to the bye-laws, and an increase or reduction of capital.
A change of the nationality of the company or an increase in the shareholders' commitments will require a unanimous vote of the shareholders.
For SAS companies, French law provides that the following decisions are reserved to the competence of the GM:
Approval of financial statements.
Increase or reduction of capital.
Appointment of statutory auditors.
Amendment of the bye-laws.
The bye-laws can reserve other decisions for the GM.
Regardless of the form of company, a GM can be held by videoconference if provided in the bye-laws. A shareholder can also vote by correspondence.
The bye-laws of SARL and SAS companies can allow the shareholders to adopt resolutions through a written consultation (not possible in SAs and SCAs). In this case, the draft resolutions have to be sent to the shareholders, who are asked to accept or reject them. This cannot be used to approve the financial statements, which requires a GM.
In addition, the bye-laws of SARL and SAS companies can allow the shareholders to adopt written unanimous decisions (not possible in an SA and SCA), except where a GM is mandatory.
SA and SCA
Notice, information and quorum requirements are the same in an SA and an SCA.
Notice. The managing directors in the SCA and the chairman of the board or management board in the SA have to convene the shareholders, at least 15 days before the general meeting on the first call (or ten days before, on the second call) by:
Mail or e-mail, where shares are registered in the company's register.
A press release in the official bulletin (Bulletin des annonces légales et officielles) (BALO) if the company is a listed company.
A press release in the official bulletin and by mail or e-mail, if the company is a listed company and the shares are registered in the company's register.
Information. On request, shareholders of SAs and limited partners of SCAs are entitled to have access to corporate documents relating to the company. Documents which have to be made available to shareholders are listed in the Commercial Code, and include the:
Minutes of the shareholders' meetings from the last three financial years.
These documents have to be consulted at the company's headquarters and shareholders are entitled to take copies of them.
In addition, the Commercial Code grants shareholders in an SA and SCA a specific right of information prior to a GM. Shareholders can require copies of documents listed by the Commercial Code, including the:
Agenda of the GM.
Management and statutory auditors' reports.
A minimum shareholding is not required to exercise these rights. However, an additional right is granted to one or more shareholders representing more than 5% of the capital, who can ask the court to appoint an expert to report on a specific management operation.
General partners of SCAs can obtain copies of the corporate books and registers twice a year, and can ask written questions of the company.
Quorum. The quorum in SAs and SCAs is:
20% of the shares with voting rights on the first call (no quorum on the second call) for ordinary general meetings.
25% of the shares with voting rights on the first call and 20% of the shares with voting rights on the second call for extraordinary general meetings.
A management report and a draft of the resolutions have to be made available to the shareholders prior to any extraordinary meeting in an SA and SCA. Shareholders are entitled to ask questions to the management which have to be answered during the shareholders' meeting.
For an SARL:
The managing director has to convene the shareholders at least 15 days before the GM by registered letter. A French Decree dated 18 May 2015 provides that, as from 1 June 2015, shareholders can be convened by electronic means, subject to their individual acceptance.
Shareholders must be provided with the general meeting agenda and the management report at least 15 days before the general meeting.
There is no quorum for ordinary decisions. For extraordinary decisions, the quorum is 25% of the shares on the first call and 20% of the shares on the second call.
In SARLs, the management has to deliver to the shareholders:
A list of the inventory.
The financial statements.
The management report.
A draft of the resolutions to be submitted to the ordinary annual shareholders' meeting.
For an SAS, notice, information and quorum requirements are freely organised in the bye-laws. However, unanimous decisions of the shareholders are required in certain circumstances, for example to modify share inalienability clauses, shareholder exclusion clauses, or share transfer prior approval clauses.
As a general rule, one share gives one vote. However, preferred shares can create classes of shares which do not have a voting right or have double-voting rights. Bye-laws can also provide a double-voting right to shareholders holding their shares for more than two years, provided that the shares are registered in the nominative form.
According to the Loi Florange dated 29 March 2014, double voting has become the default rule for listed companies, except if the one share, one vote rule is expressly included in the company's bye-laws. The new double voting rule applies to shareholders who have held nominative shares for at least two years.
In addition, the bye-laws of an SAS can provide multiple voting rights for a class of shares.
Voting is conducted by a show of hands or by a poll vote, as decided by the GM bureau, except where the bye-laws decide otherwise.
Shareholders can delegate attendance through a proxy to another shareholder or to their spouse. If a proxy is granted without specifying any proxy-holder, the chairman of the GM is deemed to be able to vote on behalf of the shareholder granting the proxy. Such a proxy is only valid for a specific GM. In an SAS, proxy voting is freely organised in the bye-laws.
Shareholders of listed companies can group themselves into a specific association in charge of representing their interests. The Commercial Code provides that an association is entitled to exercise some rights originally allocated to individual shareholders who join the association. For instance, the association can raise questions to the management prior to the shareholders' ordinary general meeting, or require more detailed information from the company. However, shareholders still exercise their voting rights on an individual basis at shareholders' meetings, since there are no legal provisions enabling delegation of these rights to a shareholders' association. The Commercial Code requires a minimum share capital to set up such an association. If the share capital is less than EUR750,000, the association must represent at least 5% of the shareholding. This 5% shareholding decreases progressively if the share capital exceeds EUR750,000. Further, shares pooled in this association have to be registered in the nominative form for at least two years.
The bye-laws of SARL and SAS companies can allow the shareholders to adopt resolutions through a written consultation (not possible in SAs and SCAs). In this case, the draft resolutions have to be sent to the shareholders who are asked to accept or to reject them. This cannot be used to approve the financial statements, which requires a GM.
In addition, the bye-laws of SARL and SAS companies can allow the shareholders to adopt written unanimous decisions (not possible in SAs and SCAs), except where a GM is mandatory.
The GM has a reserved competence for specific ordinary and extraordinary corporate decisions listed in the Commercial Code. Usually, ordinary decisions include the:
Approval of the financial statements.
Allocation of the results.
Appointment or removal of managing officers and statutory auditors.
Approval of agreements between the company and its board members.
Extraordinary decisions generally include amendments to the bye-laws and an increase or reduction of capital.
The Commercial Code sometimes requires a unanimous vote for certain decisions. For example:
In an SAS, to amend certain clauses of the bye-laws, such as a share inalienability clause, a shareholder exclusion clause, and a share transfer prior approval clause.
In an SARL, to change the nationality of the company or to increase shareholders' duties.
In an SCA, certain decisions have to be adopted by all the general partners, such as an amendment of the bye-laws or the appointment of managing directors.
The voting requirements and majorities differ from one type of company to another:
In an SA, ordinary decisions are adopted by a simple majority vote. For extraordinary decisions, the threshold is two-thirds of the voting rights of the shareholders.
In an SARL, ordinary decisions are adopted by more than half of all shares on the first call and by a simple majority vote on the second call. Extraordinary decisions are adopted by at least three-quarters of all shares.
In an SCA, any decision must be adopted by both the general partners and the limited partners. A GM of the limited partners will take place according to the same requirements as a GM in an SA. The requirements of a GM of the general partners are provided in the bye-laws.
In an SAS, the requirement for the GM are freely organised in the bye-laws.
Shareholder rights relating to general meetings
In an SA or an SCA, if the GM has not been convened by the board of directors or supervisory board in the SA (or by the managing directors or supervisory board in the SCA) one or several shareholders representing at least 5% of the shareholding can request the judicial appointment of a representative (mandataire désigné en justice) to convene a GM. The request has to comply with the company's corporate interest and cannot be justified solely by the interest of the shareholders.
For special GMs, one or several shareholders have the same right if they represent at least 5% of the shares of the concerned category. This right can also be exercised by a duly registered shareholders' association in listed companies, in which case the 5% threshold progressively declines when the company's share capital is higher than EUR750,000.
In an SAS, the bye-laws freely determine the convocation rules of shareholders and can therefore provide the shareholders with a right to convene a GM, subject to a capital threshold or not.
In an SARL, the managing director (gérant) must call a meeting on a request from one or more shareholders representing half of the registered capital, or one-tenth of the shareholders representing 10% of the registered capital. Further, each shareholder, regardless of its stock interest, can request the judicial appointment of a representative to convene a GM.
In SAs and SCAs, a shareholder is entitled to submit a draft resolution to the company. To do so, the shareholder has to own at least 5% of the share capital if the share capital of the company is up to EUR750,000. This 5% threshold progressively declines when the company's share capital is higher than EUR750,000.
Any shareholder can require information from the company about the meeting's agenda. This information depends on the type of GM. For an ordinary GM, the shareholder can require copies of:
The financial statements.
The management report.
The brief summary of the company's situation during the last fiscal year.
A table presenting the company's results, for each of the past five fiscal years.
A form of proxy.
The statutory auditors' report, as the case may be.
The names of the managing officers, and the names of companies where they hold an office.
For an extraordinary GM, other specific documents can be required by the shareholder from the company.
In an SARL, any shareholder is entitled to ask written questions to the managing director, who will have to answer them during the GM.
In an SAS, the conditions under which a GM is held are freely organised in the bye-laws.
During the GM, shareholders can only debate issues on the agenda, except for the removal of board members which can be brought up during the GM. However, shareholders are free to amend the content of resolutions submitted to their vote, as the power of the GM is not limited to the rejection or approval of the draft resolutions.
Any shareholder can challenge a resolution adopted by the GM if it contravenes any compulsory provision of the Commercial Code, for example:
A breach of any competence or majority rule.
A violation of regulation related to the issue of securities.
The absence of statutory auditors for the approval of the financial statements.
Further, French case law has granted minority shareholders the right to challenge resolutions if they bring sufficient evidence that these resolutions have been approved exclusively in the interest of the majority shareholders and against the company's interests (abus de majorité).
There are no thresholds required to bring such a claim.
A resolution of the GM can be challenged before a court within three years of it being passed. In some cases provided by the Commercial Code, the court must declare the resolution null and void if it contravenes compulsory legal provisions. For instance, the violation of majority or competence rules in SAs causes the nullity of the GM. Otherwise in limited cases, the Commercial Code leaves it up to the court to decide whether the resolution should be declared null and void. For instance, a violation of convocation terms or of shareholders' information duties may lead to the resolution being declared null and void, if the court considers it necessary.
Shareholders' rights against directors
The directors (administrateurs) of an SA and the manager of an SARL are appointed and dismissed by the shareholders. The managing director (directeur général) of an SA is appointed by the board of directors.
The members of the supervisory board (conseil de surveillance) are appointed by the limited partners (commanditaires, with limited liability).
The manager(s) is/are appointed and dismissed by the shareholders with the unanimous vote of the general partners (commandités, with unlimited liability and shares that cannot be freely transferred).
The rules regarding the appointment of the chairman (président) of an SAS are freely decided in the bye-laws.
In relation to the board of directors in SAs and the supervisory board in SCAs, a resigning member can be replaced by the other members. This co-optation has to be confirmed by a subsequent GM.
In an SARL, the manager can only be removed for cause.
The removal of directors of an SA or members of the supervisory board of an SCA can be freely decided, and can happen at any time at the request of the GM.
Specific rules restricting the removal of the chairman of an SAS can be included in the bye-laws.
If the bye-laws do not provide removal provisions, the manager of an SCA can only be removed by a court decision.
When justification for dismissal is required by a legal provision or the bye-laws, damages can be due to a director removed without cause. Further, even when justification is not required, a dismissed director can claim for damages if he/she shows that the circumstances of the revocation were abusive.
According to French case law, shareholders can challenge resolutions of the board of directors due to a violation of a legal provision. No minimum percentage of capital is required to challenge a board resolution. An interested person (directors, shareholders, creditors, and statutory auditors) can request a court to declare a directors' resolution null and void.
Directors of SAs must manage the company in accordance with the powers granted to them.
Directors have a duty of loyalty and care to the company (fiduciary duties). Compliance with such duties is monitored by the courts, on a case-by-case basis. Further, directors must not act in their personal interest or in the interest of any other party other than the company itself.
According to the AFEP/MEDEF Corporate Governance Code (see Question 27), each director must act honestly and in good faith, with a view to pursuing the best interest of the company and exercising the diligence and skill of a reasonably prudent person.
Directors can be liable to the company for mismanagement, or a breach of law or the bye-laws.
According to French case law, even a minor fault can constitute mismanagement and involve the director being liable. The fact that the director acted in good faith with due care, in the honest belief that the action was in the best interest of the company and within the director's authority, may not be sufficient to exclude the director's liability.
Different criteria can be used by the courts to determine whether directors have complied with their fiduciary duties and acted in the best interests of the company. The courts can consider:
The presence or absence of the directors at board meetings.
The questions asked by or documents requested by the directors from the management.
The director's discretion and confidentiality.
Shareholders are entitled to bring legal action against directors of the company for any matters relating to their individual shareholder's interest. If the claimant argues that its personal interest has been violated, it has to prove that the damage it suffers from the director's negligence differs from the company's damage and from the other shareholders' damage. This may be difficult to prove, as the damage is often shared with all shareholders or the company.
Shareholders are also entitled to bring legal action in the name of the company against the directors. In such a case, any compensation granted by the court will benefit the company.
Legal action can be brought by shareholders against a director who is negligent due to a violation of a legal provision, a breach of the bye-laws, or deliberate or negligent misconduct (faute de gestion).
French case law also considers that directors can be sued by shareholders where they do not comply with their duty of loyalty to the company or the shareholders.
Directors' liability cannot be limited or excluded. However, directors can take out insurance against damages they may have to pay because of their civil liability to the shareholders and the company.
Transactions involving (directly or indirectly) directors and the company constitute regulated agreements (conventions réglementées) (except for standard agreements concluded under normal conditions, and in an SA transactions between two companies where one holds directly or indirectly all the shares of the other).
In SA and SCA companies, a regulated agreement is subject to the prior approval of the board of directors or supervisory board. The approval has to be justified and the board must explain why the transaction is in the company's interest. Subsequently, this agreement must also be submitted to the GM for ratification.
Regulated agreements already authorised by the board which have been enforced in the previous year must be re-examined by the board every year. The auditor must then report to the GM about the services provided and paid during the past year according to these regulated agreements.
French law does not provide for any prior approval in an SARL and SAS, but the relevant agreement has to be submitted to the shareholders for ratification.
Shareholders can refuse to ratify an agreement already executed between the company and any of its directors. In this case, the agreement remains valid but the director involved in the transaction, and as the case may be the board which authorised it, is liable for any damage caused to the company as a result of the agreement.
In addition, the Commercial Code lists some agreements which cannot be signed between the directors and the company (conventions interdites). For instance, directors cannot benefit from any loan, advance or guarantee from the company, even with prior approval. Such an agreement will be declared null and void.
Shareholders acting in the name of the company can bring legal action against directors, if the directors should have refrained from entering into an agreement because of a conflict of interest (see Question 19).
In an SA, French law does not impose a certain number of non-executive, supervisory or independent directors. However, the presence of independent directors is recommended by the AFEP/MEDEF Code of Corporate Governance (Code) for listed companies, which is not binding (see Question 27).
For a listed SA with a scattered shareholding, the Code recommends having at least half of its directors as independent directors. For a listed SA controlled by another company, the Code recommends having at least one-third of its directors as independent directors.
An independent director is defined as a director who does not hold any managing position in the company and does not have any particular relationship with the company. Such rules also apply to the members of the supervisory board in listed SAs with a management board, as well as to listed SCAs.
In addition, the board must include employees' representatives where the company has both:
More than 5,000 employees in the company and its direct and indirect subsidiaries in France, or more than 10,000 employees worldwide, for at least two successive fiscal years.
A workers' committee (comité d'entreprise).
No such rule exists in an SARL or SAS.
In SARLs, SCAs and SASs, the conditions of remuneration of managing officers are provided in the bye-laws. Generally, where the bye-laws provide that their remuneration is fixed other than by a shareholders' decision, the remuneration is a regulated agreement (conventions réglementées) subject to the approval of the shareholders (see Question 20).
In SAs, the remuneration of directors is determined by the shareholders' meeting, and the remuneration of the managing director(s) is fixed by the board.
French law requires that the annual management report includes the total remuneration and benefits of all kinds paid to each company officer during the accounting period, including any allotment of capital securities, debt instruments or securities giving rights over the capital or entitlement to an allotment of debt instruments, in the company and also in the companies of the group. This report is subject to shareholders' approval at the annual GM.
Service contracts between the company and any company officer are subject to the shareholders' approval when they are not concluded in normal conditions. In SAs, these agreements must first be approved by the board before being ratified by the shareholders.
Shareholders' rights against the company's auditors
Statutory auditors are appointed by shareholders for a six-year term. Revocation before the term of their office requires the authorisation of a court judge, who will check whether this request is based on a proper cause or not.
A person with a certificate of qualification to act as an auditor can be an auditor if he is an EU citizen or a citizen of a state which admits French nationals to exercise auditors' activities in its own territory. This person must not have been responsible for acts contrary to honour or honesty, or of similar events that led to disciplinary action or disqualification, and must not have been subject to personal bankruptcy.
According to the auditors' deontological code, issued by the French entity in charge of professional statutory auditors (Compagnie Nationale des Commissaires aux Comptes, CNCC), an auditor must be independent from the companies for which he certifies the accounts. For example, an auditor cannot audit any entity with which he has any familial, financial or professional relationships.
When performing their duties, auditors can incur civil and criminal liability and be subject to disciplinary sanctions.
In particular, if the audited accounts are inaccurate, auditors, in addition to their civil liability, can incur criminal liability. If auditors knowingly assert or confirm inaccurate information in the accounts, they can be prosecuted and punished by a five-year prison sentence and a EUR75,000 fine.
It is not possible to limit or exclude auditors' liability. Therefore, auditors are required to obtain insurance to cover their civil liability and the amount of damages they may have to pay.
Disclosure of information to shareholders
In addition to the information for a GM (see Question 14), shareholders are entitled to permanent information rights.
Shareholders are entitled to review the register of the shareholders' meetings and the financial statements for the last three financial years. This review can only take place at the corporate office of the company. Any shareholder can exercise this right at any time, and can be assisted by an expert, provided that this expert is duly registered on a list held at the clerk office of the court. Shareholders can take a copy of any document (except for the list of inventory in an SARL).
If the documents are not provided to the shareholders at the corporate office, the shareholders can file a complaint at the commercial court, which can impose a continuing penalty on the company until it provides the documents.
Shareholders of an SA, SCA and SAS are also entitled to ask written questions, twice per fiscal year, to the president of the board or the management board in an SA or to the chairman in an SAS, about any fact likely to jeopardise the continued operations of the company.
In addition to the annual and half-year reports that listed companies must provide each year, a listed company must also comply with the permanent information requirements of the French stock exchange authority (Autorité des Marchés Financiers, AMF) (www.amf-france.org/en_US/?langSwitch=true).
Listed companies must disclose to the public as soon as possible any privileged information. This is information of a precise nature that has not been made public, relating directly or indirectly to one or more issuers of financial instruments, or to one or more financial instruments, which, if made public, would be likely to have a significant effect on the price of the relevant financial instruments or of related financial instruments. In other words, privileged information is a type of information that may be the basis for a decision to invest.
Further, a listed company preparing a financial transaction that is liable to have a significant impact on the market price of a financial instrument, or on the financial position and rights of holders of that financial instrument, must disclose the characteristics of the transaction to the public as soon as possible.
Any change to privileged information must also be disclosed to the public.
Further, listed companies must ensure that the same information disclosed abroad is disclosed simultaneously in France.
The reference corporate governance code in France is the AFEP-MEDEF Code of Corporate Governance (Code) (www.afep.com/en/content/challenges/corporate-governance-transparency-responsibility-and-oversight). It is not binding and only applies to listed companies. The Code was issued to promote better governance, in particular better transparency, information and regulation of executive officers' remuneration. In addition, the Code aims at reducing conflicts of interest in a company. For example, it recommends that there should be a minimum number of independent directors on all boards of directors.
Directors have to explain to shareholders in the company's annual report if they have not complied with the AFEP-MEDEF Code (comply-or-explain principle). In this respect, they must also indicate in the annual report the alternative measures they took to pursue the goal of the provision they did not comply with.
Shareholders are entitled to information for a GM (see Question 14) and permanent information (see Question 25). Shareholders are entitled to review the register of the shareholders' meetings and the financial statements for the previous three financial years.
As long as shareholders are able to prove that they actually hold at least one share, the company cannot refuse to provide information shareholders are entitled to receive.
Under French law, the effects of a shareholders' agreement are limited to the signing parties, as a matter of principle. Therefore, third parties cannot be liable for a breach of a provision of a shareholders' agreement. However, French case law provides for a few exceptions, in case of bad faith of the third party.
Except for listed companies, shareholders' agreements do not have to be disclosed to the public or registered in a public registry.
In listed companies, any clause in an agreement that allows preferential terms and conditions to be applied to the sale and purchase of shares representing at least 0.5% of the capital or voting rights of the company which issued the shares must be submitted to the company and to the French stock exchange authority (Autorité des Marchés Financiers, AMF) within five days following its signing. Such information is then disclosed to the public. If the parties fail to disclose this information, the related provisions of the shareholders' agreement are suspended.
The GM can decide to distribute dividends to shareholders after the approval of the financial statements, provided that the company has made a net profit.
In principle, shareholders have a right to dividends in proportion to their shareholding in the capital. This rule can be amended by creating preferred shares with specific dividend rights (actions de préférence). As such, a priority dividend (dividende préciputaire) can be granted to holders of preferred shares. In any case, the dividend right cannot be totally cancelled for a shareholder.
The GM can also decide to distribute an interim dividend (acompte sur dividende) before the accounts are approved, provided there is a net profit in the previous financial statements certified by the statutory auditors.
Financing and share interests
Shareholders of stock companies are freely entitled to pledge their shares (subject to specific provisions set forth in the bye-laws of the company); for SARLs, the prior approval of the other shareholders is always required.
For a shareholder of a stock company to pledge its shares, it has to do all of the following:
Execute a share pledge agreement with the beneficiary of the pledge.
Transfer them into a special account opened on its behalf.
Have the transfer recorded in the share transfers register and in the individual shareholder's account.
Execute a pledge declaration.
Obtain a certificate of the pledge from the account holder.
For a shareholder of an SARL to pledge its shares, it must in particular:
Enter into a share pledge agreement with the beneficiary of the pledge.
Have the pledge published at the clerk office of the relevant commercial court.
It is prohibited for a company (SA, SCA or SAS) to grant a financial advance, loan or security interest to finance the subscription or the purchase of its own shares by a third party (this does not apply to SARLs) (Commercial Code). In an SA, directors and managing directors who agree to grant such financial assistance are subject to criminal prosecution and a EUR150,000 fine.
Further, contracts signed in violation of this provision can be declared null and void by a court.
In addition, the directors must always act in the corporate interest of the company and cannot misuse its assets or credits.
Share transfers and exit
Shares are freely transferable, except for an SARL where the prior approval of the other shareholders is required by law to transfer shares to third parties.
It is possible to restrict the transfer of shares in the bye-laws of any company, by including:
A prior approval procedure for a share transfer.
A period when the company's shares cannot be transferred (which cannot exceed ten years) (inalienability period).
A pre-emption right to the other shareholders.
A shareholder can also be deterred from transferring its shares in order to benefit from a specific legal provision. For example, if a shareholder is granted free shares (actions gratuites) on the condition that he must keep them for a minimum period of two years.
A similar obligation is imposed on shares granted to employees in profit sharing plans, as these shares are not disposable for a period of five years.
For any increase of the company's share capital, shareholders are granted a preferred subscription right (droit préférentiel de souscription) on the newly issued shares in proportion to their shareholding. The GM can decide to disapply the preferred subscription right when the shareholders decide upon the capital increase. This must be approved by a specific resolution.
If a share issue is made with preferred subscription rights, shareholders can waive their individual right in favour of identified persons or without indicating a beneficiary. Such waiver has to be duly notified to the company. This preferred subscription right is freely negotiable and can be assigned by its holder.
Shareholders also have a preferred subscription right for any issue of securities giving rights over the capital, as the exercise of such securities may lead to a dilution of their shareholding.
The Commercial Code provides that shareholders of listed companies must disclose to the AMF and to the company the actual number of shares or voting rights they hold, when they cross the following thresholds of shareholding or voting rights in the company: 5%, 10%, 15%, 20%, 25%, 30%, one-third, 50%, two-thirds, 90% or 95%. The disclosure must be made within four days from the crossing of the threshold.
Transfers of a controlling interest in a company may be subject to mandatory merger control, and may have to be authorised by the French competition authority (Autorité de la Concurrence) (www.autoritedelaconcurrence.fr/user/standard.php?id_rub=79) or the European Commission, depending on the thresholds applicable.
The prior authorisation of the Minister of Economy is required for investments in sectors defined by the Monetary Code as sensitive (including gambling and research-development activities in weapons or nuclear industries). This authorisation is required for any operation which either:
Enables a non-EU investor to hold directly or indirectly one-third of the share capital of a French company carrying out such an activity.
For EU investors, leads to a change of control of that French entity.
In any other sector, investments by non-EU investors which would lead to a change of control of a French company need to be declared to the Ministry of Economy on completion.
In addition, prior approval may have to be obtained in some regulated activities. For instance, the authorisation of the Autorité de Contrôle Prudentiel (ACP) is required for any transaction which would result in the change of control or the crossing of certain thresholds in the share capital of French financial institutions, including insurance companies.
Companies can buy back their own shares under restrictive conditions. Such a buy back is allowed for a capital reduction not caused by losses. The repurchased shares must be cancelled immediately. In some restricted cases, the company can buy back its own shares without cancelling them, if the repurchased shares are reallocated to managers or employees. The company can also temporarily hold some of its own shares following a merger, spin-off or court decision.
Listed companies can acquire their own shares to improve the management of its equity or to enhance market liquidity.
In any case, the buy back of shares must not exceed 10% of the total shareholding over any 24 month period. In addition, political and financial rights attached to the shares are suspended for these shares for as long as they are owned by the company itself.
The most natural way for a shareholder to withdraw from the company is to transfer its shares, as there is no right of withdrawal for shareholders in an SA, SCA, SARL or SAS. However, there are certain circumstances where the company can buy back the shareholder's shares (see Question 38).
In SASs and SAs, a shareholder who wishes to sell its shares to a third party can compel the other shareholders or the company to buy back its shares if there is a provision in their bye-laws requiring the sale to be approved by the relevant corporate body and such approval is refused. In SARLs, a shareholder who wishes to sell its shares to a third party can compel the other shareholders or the company to buy back its shares in any case.
The other shareholders or the company must buy back the shares within three months from the date of refusal in SARLs and SAs, and within the period determined in the bye-laws in SASs.
If the parties cannot agree on the price, the purchase price paid to the seller by the other shareholders or the company is fixed by an expert. The expert must take into account any rules relating to the price in the bye-laws of the company.
In addition, a shareholders' general meeting of an SA can authorise the board of directors or the management board to buy back some shares in certain circumstances. The number of shares bought back must not exceed 5% or 10%, as the case may be.
The Commercial Code provides that companies with a variable capital (capital variable) entitle their shareholders to withdraw from the company when they consider it appropriate. In such a case, the valuation and repayment rules of the shares are specified in the bye-laws (in case of disagreement, an expert is appointed to assess the value of the shares). There have been ongoing discussions in the French Parliament to provide this right to all companies, but no reform has been undertaken yet.
The bye-laws of SA companies can provide for a compulsory redemption clause, by which a shareholder may be required to exit the company. Such a clause must be approved by all shareholders.
The bye-laws of SAS companies can provide that a shareholder be excluded from the company. The terms and conditions of the exclusion are freely organised in the bye-laws. However, where the bye-laws provide that exclusion is subject to the shareholders' approval, the bye-laws cannot provide that the excluded shareholder is not allowed to vote. Where the bye-laws are silent on the conditions to fix the purchase price, the price is fixed by an expert.
The sale of all or substantially all of the company's assets (which involves a change of the corporate purposes of the company) and any merger or demerger is subject to the prior approval of the GM of both companies involved.
The majority required is that to amend the bye-laws and depends on the company's form. If the operation involves SAs or SASs, some specific rules must be complied with. In particular, managers have to prepare a report on the contemplated operation, which has to be submitted to the shareholders with a draft of the merger agreement and a report by the auditors appointed for the operation.
If the merger or demerger leads to an increase in the shareholders' financial commitment, a unanimous vote from the GM is required. The same rules apply to a spin-off, in which case the contribution agreement has to be approved by the shareholders of both companies involved.
The conversion of a company into another form (including an SE) requires an amendment of the bye-laws and is therefore subject to the prior approval of the shareholders. The majority required is that for extraordinary shareholders' meetings. In addition, amendments of some provisions (pre-emption right and inalienability) may require a unanimous vote.
Shareholders have a specific information right in this case, since an auditor has to be appointed by the commercial court to prepare a report on the conversion of the company. The auditor is asked to give a valuation of the company's assets which must be made available to the shareholders at least eight days before the GM. The shareholders are entitled to give their opinion on the valuation.
When a company is in a situation of cessation of payments, that is, unable to meet its current liabilities with its available assets, procedures can be implemented to try to redress the company (redressement judiciaire) or to liquidate it through a court liquidation (liquidation judiciaire).
In a judicial redress, shareholders' rights depend on the powers given by the court to the judicial administrator. Therefore, shareholders may or may not manage the redress process. However, they are not entitled to vote on the redress plan.
In a court liquidation, shareholders do not manage the liquidation process, as all powers are given to the judicial administrator, and are not entitled to vote on the liquidation plan. As the case may be, remaining assets will be distributed among shareholders once all creditors have been reimbursed.
Shareholders can collectively, at any time, decide on the winding-up of the company. This decision has to be taken according to the rules applicable to an amendment of the bye-laws. However, the winding-up must not harm minority shareholders' interests or be done with fraudulent intent. In such a case, shareholders can be liable for any damages caused to minority shareholders or third parties.
Shareholders can individually request the judicial winding-up of the company before the commercial court. The claimant must bring evidence of serious cause which justifies this decision. The non-performance of its duties by a shareholder or a serious dissension among shareholders may lead the court to wind-up the company, provided these events paralyse the running of the company's business.
There is no legal concept of a corporate group under French law. As such, the group is not considered a legal entity (personne morale).
However, various fields of French law (commercial law, labour law, anti-trust law and tax law) consider the control a company may have over one or several entities. Control is defined by the Commercial Code and includes, in particular, where a shareholder either:
Owns, directly or indirectly, more than 50% of the voting rights.
Has power to appoint or remove the majority of the members of the board of directors.
Further, French case law may take into account a group of companies in some specific situations. For example, the company's commitments to its group (for instance, under a cash-pooling agreement) may be considered valid, provided that a group interest (intérêt de groupe) can be evidenced through certain tests defined by French case law. Showing the existence of such a group interest needs to be reviewed on a case-by-case basis.
Except for misuse of majority, a holding company does not have to comply with any particular duties to its controlled company shareholders.
The majority shareholders (which control the group) must comply with the controlled company's particular interests in the group. On this basis, the shareholders of a controlled company can bring legal action against the controlling company, if the controlling company misused its rights derived from its majority position. For example, a cash management agreement among the companies in the group (convention de gestion de trésorerie) can be challenged if it appears that this agreement has been entered into without any consideration for the relevant subsidiary.
In addition, an agreement between an SA or an SCA and one of its shareholders holding more than 10% of the share capital is considered a regulated agreement (convention réglementée) (see Question 20) and therefore subject to the prior approval of the board of directors or supervisory board of the controlled company and ratification by the shareholders. However, under the Commercial Code, agreements between a holding company and its 100% owned subsidiary are not subject to the prior approval of the board of directors or ratification by the shareholders.
Reciprocal shareholding is strictly regulated for SAs, SCAs and SASs. Such companies cannot hold more than 10% of the share capital of a company which is one of its own shareholders. If this happens, companies have to regularise this situation within one year. If the companies fail to agree and do not comply with the 10% limitation, the company with the lowest shareholding in the other must withdraw its investment. Voting rights of the shares involved in the reciprocal shareholding are suspended.
Description. Legifrance is the official French government entity responsible for publishing legal texts online. It provides access, in French, to laws and decrees published in the Journal officiel, important court rulings, collective labour agreements, standards issued by European institutions, and international treaties and agreements to which France is a party.
Yvon Dréano, Partner
- Admitted to the Paris Bar, 1989.
- Licensed as Foreign Legal Consultant at the New York Bar, 1996.
- Institut d'Etudes Politiques of Paris (IEP), Economy and Finance section.
- Master's degree in Law at the University of la Sarre (Germany) and Rennes-I (France).
Areas of practice. Mergers and acquisitions; private equity; bankruptcy, insolvency and restructuring.
Languages. English, German, French
- IBA (International Bar Association).
- ABA (American Bar Association).
- NYSBA (New York State Bar Association).
- Association of the Bar of the City of New York.