Exclusion Of Shareholders: The French Supreme Court Endorses A By-Laws Provision That Excludes The Vote Of The Excluded Shareholder

Author:Ms Emilie Yildiz
Profession:Soulier Avocats

There are many legal cases and court decisions concerning the exclusion of shareholders because disputes between shareholders are frequent and the exclusion sensitive to implement practice.

While judges ensure strict compliance with the terms and conditions that govern the exclusion of shareholders, some legal tricks do enable to circumvent the inflexibility of the rules of law.

This is the case in a decision handed down on October 24, 2018 by the Cour de Cassation (French Supreme Court) in which it approved a by-laws provision that deprived the shareholder whose exclusion was contemplated of his right to participate in the decision and to cast a vote on the exclusion resolution.

The basis principle: The shareholder's right to remain within the company

The principle is that any shareholder has the right to remain within the company in which he/she holds shares. In other words, he/she may not be excluded nor forced to sell his/her shares against his/her will. This principle is, however, tempered by the possibility to exclude a shareholder by applying the rules set forth by law or in the by-laws.

Indeed, French law foresees cases in which a shareholder can be excluded, such exclusion resulting in the compulsory sale of his/her shares.

As such, the exclusion can be provided for by law: Nullity of the company or nullity of acts/agreements based on the lack of consent or legal incapacity of the shareholder.

On the other hand, the exclusion can also be provided for in the by-laws insofar as the French Commercial Code leaves open the possibility to include in the by-laws of a company a provision allowing for the exclusion of shareholders.

The exclusion of a shareholder is regulated

While the Commercial Chamber of the Cour de Cassation has admitted the principle that a shareholder can be excluded, it has, however, made this right to exclude a shareholder conditional upon compliance with a number of rules that it has set.

First, the terms and conditions governing the exclusion must be set forth in the by-laws and specify the corporate body that has authority to decide the exclusion, the procedure to be followed, as well as the grounds that can justify the exclusions, it being specified that such grounds must be objective and in the interests of the company1, such as the loss of a required capacity or the breach by the relevant shareholder of his/her obligations.

Second, the relevant by-laws provision must have been unanimously adopted by the...

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