Short answer. Two equal shareholders who no longer get on can neither remove one another, nor decide anything, nor compel anything: every decision needs the other agreement, and deadlock becomes the weapon of whoever has least to lose. French law offers ways out, in an order that has to be respected. Contractual ways out first: an exit clause, a reciprocal buy or sell clause, mediation, where the articles or a shareholders agreement provide for them. Judicial ways out next: appointment of a provisional administrator or of an ad hoc agent where the company is paralysed, judicial removal of the manager for legitimate cause (article L. 223-25 of the Commercial Code), a management audit (article L. 223-37), a finding of abuse of equality against the shareholder who blocks, and, as a last resort, judicial dissolution for disagreement paralysing the company (article 1844-7, 5, of the Civil Code), which the court grants only to the party who did not cause the deadlock. In almost every file, the real outcome is one shareholder buying out the other, at a price the litigation strategy determines.
Fifty fifty is the commonest split between two founders, and the most dangerous. It works for as long as they agree and becomes unmanageable the day they do not: the meeting cannot approve the accounts, the manager can be neither removed nor confirmed, no financing decision goes through, and the company wears out while the shareholders exhaust themselves. This article sets out what is possible, in what order, on what timetable and with what results, for the shareholder who wants out, for the one who wants to stay, and for the one who simply wants the business to carry on. The page on shareholder dispute work describes the cases the firm handles.
1. Why fifty fifty blocks everything
In a SARL, ordinary decisions are taken by a majority of the shares and decisions amending the articles by a reinforced majority; in a SAS, the articles set the rules freely. At fifty fifty no majority exists: approval of the accounts, allocation of profit, removal or appointment of the manager, a capital increase, a sale of the business, all require both to agree. The shareholder who manages keeps the powers of day to day management and can, within the corporate purpose, bind the company alone; the shareholder who does not manage can only refuse collective decisions and call for information. The balance of power is therefore not equal: the one who runs the company holds the company, the one who does not holds the meeting. The first step in any file is to work out which side the client is on, and what the other can do to him.
The articles of association and the shareholders agreement, where one exists, are the second reading. Many fifty fifty companies were set up on standard form articles, with no deadlock breaking clause; others contain exclusion clauses, tag along clauses, pre emption rights, reciprocal buy or sell clauses, or a mandatory mediation clause that has to be exhausted before any action. An agreement signed ten years earlier and forgotten may contain the solution, or the obstacle.
2. Contractual ways out: what the articles and the agreement allow
The most effective clause in a fifty fifty deadlock is the alternative offer clause, known as the Texan or shotgun clause: the shareholder who wants to break the deadlock offers the other a price for the whole of the shares, and the other chooses whether to buy or to sell at that price. It forces each side to name an honest price and ends the conflict in a few weeks. Exclusion clauses, valid in a SAS under article L. 227-16 of the Commercial Code, allow a shareholder to be compelled to transfer his shares in the cases and by the procedure the articles lay down, with suspension of his non pecuniary rights; they can be adopted or amended only on the conditions set by the articles, which at fifty fifty means both must agree. Tag along, pre emption and approval clauses organise a sale to a third party. A mediation or conciliation clause, finally, makes any court action brought without complying with it inadmissible.
Where these clauses exist, they apply, and the strategy is to trigger them in proper form. Where they do not, negotiation remains possible but has lost its framework: it is litigation, or the credible threat of it, that gives each side a reason to settle. In both cases the firm starts with a valuation of the company and of the shares, because every route ends in a price.
3. Removing the manager: impossible in a meeting, possible in court
A non managing shareholder cannot remove the manager of a fifty fifty SARL: article L. 223-25 of the Commercial Code requires a decision of the shareholders by a majority, which the manager blocks with his own shares. The same article nonetheless provides that the manager may be removed by the courts for legitimate cause, on the application of any shareholder. Legitimate cause means a management fault, a breach of the articles or of the law, or conduct that compromises the corporate interest: diverting clients to a competing company, taking remuneration without a collective decision, refusing to produce the accounts, blocking a vital decision. The commercial court may order removal and, on an interim basis, appoint an administrator. Symmetrically, a manager removed without proper cause by a collective decision may obtain damages; at fifty fifty that is rare, but it arises where the articles provide for a different majority or where one shareholder has transferred a single share.
4. Information and the management audit
A shareholder shut out of management complains first of not knowing. He has a right to be sent the accounts, the reports and the minutes before each meeting, and a right to put written questions. Where those rights are not enough, article L. 223-37 of the Commercial Code allows one or more shareholders representing at least one tenth of the capital to apply to the court for the appointment of an expert to report on one or more management operations. A management audit does not cover management as a whole but identified operations, which have to be specified: a contract with a company connected to the manager, remuneration, a disposal of assets, suspicious expenditure. The report, whose fees may be charged to the company, becomes the centrepiece of what follows: removal, liability of the manager, misuse of corporate assets. At fifty fifty, the non managing shareholder always meets the one tenth condition.
5. Abuse of equality: blocking is not an absolute right
A shareholder holding 50 per cent who systematically refuses decisions the company needs, not in the corporate interest but to harm his co-shareholder or to force him to sell, commits an abuse of equality. The case law, built by analogy with abuse of minority, requires two elements: conduct contrary to the general interest of the company, in that it prevents an essential transaction, and the sole purpose of favouring his own interests to the detriment of the other shareholder. Refusing to approve the accounts, to vote a capital increase indispensable to the survival of the company, or to renew a vital contract, without any reason drawn from the corporate interest, can make it out. The sanction is twofold: damages, and the appointment of an ad hoc agent to vote in place of the defaulting shareholder in favour of decisions consistent with the corporate interest. The judge does not substitute himself for the shareholder, but he appoints someone who will. The file requires proof that the blocked decision was essential and that the refusal had no motive other than obstruction, which is prepared through regular convening notices, precise agendas and minutes that record the refusals and the reasons given.
6. The provisional administrator: the company under supervision
Where the conflict paralyses the company and puts it at risk, the president of the commercial court, on an urgent application by a shareholder, may appoint a provisional administrator, who takes the place of the corporate organs for the duration of his mandate. The case law treats this as an exceptional measure, subject to two conditions: circumstances making normal functioning impossible, and an imminent peril threatening the company. Disagreement, however deep, is not enough; the company must be unable to function, accounts unapproved for two financial years, a manager who has resigned with no replacement, vital decisions blocked, and must be at risk of dying of it. The provisional administrator manages, convenes meetings, attempts conciliation and reports to the court; his mandate is not to resolve the conflict but to preserve the business while it is resolved. His cost, borne by the company, and his tenure, often extended, mean the measure rarely benefits the shareholders; it is above all the threat that brings them back to the table.
The ad hoc agent, a lighter instrument, is appointed for a defined task: to convene a meeting, to vote on behalf of a defaulting shareholder, to represent the company in litigation against one of them. He is often the right tool where the deadlock concerns one identified decision rather than management as a whole.
7. Dissolution for disagreement: the weapon of last resort
Article 1844-7, 5, of the Civil Code provides for early dissolution of the company, ordered by the court on the application of a shareholder, for just cause, notably where a shareholder fails to perform his obligations or where disagreement between shareholders paralyses the functioning of the company. Two cumulative conditions: the disagreement, and paralysis of corporate functioning, which is not the same as an absence of dividends or a difference over strategy. A company that carries on, even badly, is not paralysed. And a settled rule of case law closes the route to the party who caused the deadlock: dissolution cannot be sought by the shareholder who provoked the disagreement. Whoever engineered the paralysis to force the other out cannot then rely on it.
Dissolution destroys value: liquidation, cessation of business, redundancies, assets sold for scrap. It is rarely in a shareholder interest, and rarely ordered. Its real function is different: an admissible claim for dissolution creates the urgency that was missing and leads the other shareholder to buy or to sell. The court itself, before dissolving, may appoint an agent to attempt a rapprochement or to organise the transfer of one holding to the other.
8. The real outcome: the buyout, and its price
In almost every file, a fifty fifty conflict ends with one shareholder buying out the other, or with a sale of the company to a third party. The whole of the litigation strategy described above serves to determine who buys, who sells, and at what price. The price is negotiated on a valuation, which the firm has prepared by an accountant or an independent valuer, on the usual methods (earnings multiples, revalued net assets, cash flows) and taking account of the conflict discount, of the company dependence on one of the shareholders and of the warranties a buyer will demand. Failing agreement on price, article 1843-4 of the Civil Code allows, in the cases where the law or the articles provide for a transfer or a buyout, the price to be fixed by an expert appointed by the president of the court. The transfer itself comes with an agreement settling current accounts, the seller warranty, non competition, release of personal guarantees given to the banks, and the position of the departing manager.
In civil companies, a shareholder also has the right of withdrawal under article 1869 of the Civil Code, on the conditions set by the articles or, failing that, with the unanimous authorisation of the other shareholders or for just cause by court order, with reimbursement of the value of his rights; that option does not exist in commercial companies, where only a transfer allows an exit.
9. What the firm does, in what order, and how long it takes
The first week goes on reading the articles, the shareholders agreement and the accounts, on characterising the client position (managing or not, in fact controlling or not) and on putting the evidence in place: convening notices, written questions, formal demands, bailiff reports. The first month goes on opening a structured negotiation, with a valuation and an offer to buy or to sell, under the threat of the actions described. The following months, if negotiation fails, go on those actions themselves, in the order the file dictates: a management audit or an urgent application for the appointment of an agent, then removal or abuse of equality, dissolution kept in reserve. Most files resolve in six to twelve months through a transfer; those that run to judgment last two to three years. Throughout, the company has to keep operating, and the firm makes sure that day to day management, payments and banking relationships are not taken hostage. The transfer mechanics and the warranty a buyer of the shares should require are set out in our article on asset and liability warranties and on the mergers and acquisitions page.
Is your co-shareholder blocking decisions, or do you suspect management in his sole interest? Each side position hardens in the first few weeks, through what is written down and what is formally recorded. A first conversation will establish what your articles allow, what a court would grant, and at what price the exit is negotiated.
Frequently asked questions
Can the manager of a SARL be removed by a shareholder holding 50 per cent?
Not in a shareholders meeting, for want of a majority. But article L. 223-25 of the Commercial Code allows any shareholder to apply to the court for removal of the manager for legitimate cause: a management fault, a breach of the articles, conduct contrary to the corporate interest.
What is abuse of equality?
The systematic refusal, by a shareholder holding 50 per cent, of decisions essential to the company, contrary to the corporate interest and with the sole aim of harming or coercing his co-shareholder. It is sanctioned by damages and by the appointment of an ad hoc agent to vote in place of the defaulting shareholder.
When can a provisional administrator be obtained?
Where circumstances make normal functioning of the company impossible and an imminent peril threatens it: accounts unapproved, vital decisions blocked, a vacant management. Mere disagreement is not enough; the measure is exceptional and costly for the company.
Can dissolution of the company be sought for disagreement?
Yes, under article 1844-7, 5, of the Civil Code, if the disagreement paralyses the functioning of the company. The court refuses it to the shareholder who caused the deadlock, and rarely orders it; the claim serves above all to provoke a buyout of the shares.
How is the price of the shares fixed on a buyout between shareholders?
By negotiation on an independent valuation or, where the law or the articles provide for a transfer or a buyout and no agreement is reached, by an expert appointed by the president of the court under article 1843-4 of the Civil Code.
Article written by Herve Guyader, member of the Paris Bar, doctor of law. This content is general information and does not replace legal advice.