France: Assertion of constitutionality of statutory exclusion clauses

In a decision dated 9 December 2022^[1] the French Constitutional Council (Conseil constitutionnel) declared in conformity with the Constitution the provisions of the French Commercial Code according to which the shareholders of a simplified joint stock company under French law (société par actions simplifiée "SAS") may provide in the by-laws for the obligation of a shareholder to transfer his shares under the condi­tions they determine ("statutory exclusion clause"). More specifically, the French Constitutional Council ruled that there was no infringement of the right to property guaranteed by Article 17 of the Declaration of the Rights of Human and Citizen ("DRHC"). 

   

For the record, the French Constitutional Council had been seized^[2] of four priority questions of constitutio­nality (question prioritaire de constitutionnalité "QPC") questioning the conformity of Articles L. 227-16, para­graph 1 and L. 227-19, paragraph 2 of the French Commercial Code with the constitutionally guaranteed right to pro­perty^[3].
 
Article L. 227-16, paragraph 1 of the French Commercial Code establishes the principle of the statutory exclu­sion clause in an SAS and the free determination of its implementation in the by-laws. Article L. 227-19, para­graph 2 of the French Commercial Code, for its part, provides, since the entry into force of the Soilihi Law^[4], on 21 July 2019, that the statutory exclusion clause may only be adopted or amended by a collective decision of the shareholders taken under the conditions and in the form provided for by the by-laws. The objective of the Soilihi Law was to give more flexibility and freedom to SAS’ shareholders and to avoid certain blocking situa­tions when adopting or modifying a statutory exclusion clause. Prior to this law, the exclusion clause in the by-laws of an SAS could only be adopted or amended by unanimous agreement of the shareholders. In practice, the by-laws now usually provide that the exclusion clause may only be adopted or amended by the majority provided for extraordinary decisions, i.e. a qualified majority (e.g. three quarters of the shares making up the share capital) and more rarely unanimity.
 
It is important here to recall the constant case law of the French Court of Cassation according to which the shareholder whose exclusion is envisaged must be able to participate in the vote on the decision^[5]. Article 1844, paragraph 1 of the French Civil Code provides that "every shareholder has the right to participate in collective decisions". Thus, although the by-laws may freely organise the exclusion procedure, they may not provide that the shareholder concerned by the exclusion may not take part in the vote^[6], nor that his vote will not be taken into account for the calculation of votes^[7], nor even that he may not be present at the general meeting which is to decide on his exclusion.
 
The facts that led to the transmission of the QPC to the French Constitutional Council by the French Court of Cassation are as follows: an employee was a shareholder in a SAS ("the applicant"). The by-laws of this SAS made the status of shareholder conditional on the status of employee or corporate officer of the company. The by-laws therefore contained a statutory exclusion clause according to which the loss of the status of employee or corporate officer of the company was a reason for excluding the shareholder. As the applicant had been dismissed, the shareholders met and voted in favour of his exclusion, after having first amended the exclusion clause in the by-laws, which had previously provided that the shareholder concerned by the exclusion could not take part in the vote.
 
The applicant, who had therefore taken part in the vote concerning his exclusion, raised before the Paris Com­mercial Court the nullity of the amendment to the statutory exclusion clause as well as of the exclusion deci­sion. At the same time, he filed four QPCs and argued that Articles L. 227-16, paragraph 1 and L. 227-19, para­graph 2 of the French Commercial Code were not in conformity with the constitutionally guaranteed right to property. He considered that the fact that a shareholder could be forced to sell his shares under a statutory clause to which he had not consented constituted a violation of the right to property guaranteed by Article 17 of the DRHC, arguing in particular that this inviolable and sacred right can only be infringed in the event of a public necessity provided for by law (i.e. a reason of public interest) and after the granting of prior compensa­tion that is considered fair in view of the seriousness of the infringement.
 
The French Constitutional Council affirms that the statutory exclusion clauses and their adoption and modifi­cation modalities as provided for by the French Commercial Code do not disproportionately affect the constitu­tionally guaranteed right to property. To affirm this, the French Constitutional Council considers that:

• The purpose of the legal provisions in question is exclusively to allow an SAS to exclude a shareholder and not to deprive him of his property: exclusion is not expropriation!

• The provisions of the French Commercial Code pursue an objective of public interest, i.e. to allow any SAS to guarantee the cohesion of its shareholding and thus the continuation of its activity. Moreover, as the statu­tory exclusion clause can be adopted or modified without the unanimity of the shareholders being re­­quired^[8], any blocking situation that may result from the shareholder potentially concerned by the exclusion tends to be avoided. It is for this reason that the Soilihi law is applicable as of its entry into force to all statutory exclusion clauses that may have been adopted previously^[9]. The public interest is here confused with the company’s interest.

 

The French Constitutional Council goes further and recalls the necessary framework for the implementation of statutory exclusion clauses to avoid any disproportionate infringement of the right to property:

• The shares of the excluded shareholder must be repurchased by the company or the other shareholders at a "fair" price determined either in accordance with a method laid down in the by-laws, or by an agreement between the parties, or by an expert appointed under the conditions laid down in Article 1843-4 of the French Civil Code.
• The exclusion decision as well as the transfer price can be challenged before the judge by the excluded shareholder.

 

The legal and jurisprudential regime of statutory exclusion clauses having the effect of forcing a shareholder to transfer his shares under certain conditions precisely defined by the by-laws therefore presents all the guaran­tees required by constitutional law and does not constitute a disproportionate infringement of the right to pro­­perty.
 
In view of this decision, SASs whose by-laws provide for an exclusion clause are strongly advised to ensure that the above-mentioned validity conditions are met. Our team of lawyers is of course at your disposal to assist you in this process.