Key points
- A company may buy back its own shareholders’ shares in the cases strictly provided for and regulated by law.
- In an SAS (simplified joint-stock company, société par actions simplifiée), freedom prevails in share transfers, but the company’s buyback of its own shares remains regulated.
- Article L227-18 of the French Commercial Code (Code de commerce) provides that, where the company implements an approval, exclusion or change-of-control clause in its articles of association and the articles do not set out how the price is determined, the price is set by agreement between the parties.
- Failing agreement, the price is determined by an expert, under the conditions of Article 1843-4 of the French Civil Code (Code civil).
- A company that buys back its shares must resell them within six months or cancel them, and cancellation reduces the share capital.
Breaking a deadlock that drags on: can a company buy back its own shareholders’ shares?
Let us take a fictional example, from the music industry.
Five people had come together for a joint project. As in other fields, after a year the passion faded and one of them wants to leave the project … but does not want to sell his shares.
After months of discussion, nobody is willing to buy his shares at the exorbitant price he is asking.
The shareholders then had several options:
Option 1: exclude this uncooperative shareholder, if the articles of association contain an exclusion clause, at the risk of him challenging the grounds for the exclusion
Option 2: give in to this shareholder’s demands and buy from him, at a high price, shares worth very little
Option 3: commit the company so that the company itself buys back its own shares, under a clause in the articles of association that allows it.
Now, in an SAS, a corporate form frequently chosen by growth companies, freedom prevails in share transfers.
That said, the cases in which a company may buy back its own shares are strictly provided for and regulated by law. For the SAS, Article L227-18 of the Commercial Code provides that, if the articles of association do not specify how the transfer price of the shares is determined when the company implements an approval, exclusion or change-of-control clause (Articles L. 227-14, L. 227-16 and L. 227-17), the price is set by agreement between the parties. Failing agreement, the price is determined under the conditions laid down in Article 1843-4 of the Civil Code (in French), that is, by an expert appointed by the parties or, failing that, by the president of the court.
The provision adds an obligation: where the shares are bought back by the company, it must resell them within six months or cancel them.
In this example, the shareholders chose to have the uncooperative shareholder’s shares bought back by the company. They used the six-month period to resell those shares. They could also have cancelled the shares, but that cancellation would have reduced the share capital.
