Key points
- French law recognises no general right to exclude a shareholder: exclusion is only possible if it has been provided for contractually in advance or if specific legal conditions are met.
- The most effective solution remains an exclusion clause in the shareholders’ agreement or the articles of association, defining the triggering conduct and a procedure for buying back the shares at a set price.
- To be valid, the clause must specify the triggering conduct, provide for the buy-back mechanism (price, time limit, procedure) and be applied scrupulously; otherwise it may be challenged and annulled.
- Without an exclusion clause, a court cannot compel a shareholder to sell their shares: the options are limited to a claim for damages or, in the event of minority abuse, the sanctions for that abuse.
- Minority abuse can be sanctioned: the court can appoint an agent to vote in place of the blocking shareholder or order them to compensate the loss; this does not result in exclusion.
A minority shareholder whose conduct harms the company (repeated breaches of the shareholders’ agreement, direct competition, systematic blocking, disclosure of confidential information) can endanger the running and growth of the start-up. Excluding them is one of the most delicate questions in corporate law, because French law recognises no general right to exclude a shareholder.
Exclusion is possible, but only if it has been provided for contractually in advance or if specific legal conditions are met.
Exclusion provided for in the shareholders’ agreement or the articles of association
The most effective solution is the one provided for when the shareholders’ agreement or the articles of association were drafted. In an SAS (simplified joint-stock company), Article L. 227-16 of the French Commercial Code (Code de commerce) (in French) allows the articles of association to provide that a shareholder may be required to sell their shares. If the shareholders’ agreement contains an exclusion clause specifying the conduct that triggers it (breach of the agreement, competing activity, serious misconduct, bad leaver) and the procedure to follow (shareholders’ decision at a defined majority, notification, buy-back of the shares at a set price), it can be implemented if the conditions are met.
For this clause to be valid and enforceable, several conditions must be met: the triggering conduct must be precisely defined, the share buy-back mechanism must be provided for (price, time limit, procedure), and the exclusion procedure must have been followed scrupulously. A poorly drafted clause or an incorrectly followed procedure can be challenged and annulled by a court.
Removing a shareholder without an exclusion clause
Without an exclusion clause in the shareholders’ agreement or the articles of association, the options are more limited. General company law provides no mechanism for unilaterally excluding a shareholder. No legal provision allows a court to compel a shareholder to sell their shares to the other shareholders or to the company (French Supreme Court (Cour de cassation), commercial chamber, 12 March 1996, No. 93-17.813). Legal action alone therefore cannot remove the shareholder.
Exclusion based on breach of the shareholders’ agreement
Where the shareholder has breached an obligation under the shareholders’ agreement, the consequence is in principle a claim for damages, not automatic exclusion. If the agreement expressly provides that certain breaches lead to exclusion (and the forced buy-back of the shares at a set price), this clause can be activated. If the agreement does not provide for it, the breach only gives rise to compensation.
Sanctions for minority abuse
Minority abuse, where a minority shareholder systematically blocks decisions necessary in the company’s interest with the sole aim of favouring their own interests to the detriment of the others, can be sanctioned by the courts. The court can appoint an agent to vote in place of the minority shareholder (French Supreme Court (Cour de cassation), commercial chamber, 9 March 1993, No. 91-14.685) or order the minority shareholder to compensate the loss caused. This route does not lead to exclusion, but it can unblock situations of paralysis.
To anticipate these situations in your shareholders’ agreement or to handle an ongoing dispute, see our start-up lawyer page.
