In a French company, the majority decides, but it cannot decide everything. The courts sanction majority abuse, the abus de majorité, meaning a decision contrary to the company’s interest taken with the sole aim of favouring the majority shareholders at the expense of the minority, and, conversely, minority abuse, the abus de minorité, which consists in blocking a transaction essential to the company’s survival for purely selfish reasons. Between the two, the management audit, or expertise de gestion, allows a minority shareholder to shed light on a suspicious transaction before going to court. Used well, these three tools rebalance a power struggle. Used badly, they cost years of litigation for nothing.
Two brothers own a building materials trading company in the Drôme, one with 70%, the other with 30%. The first runs it, the second has drifted away from the business. For five years, the shareholders’ meeting has systematically allocated all profits to reserves, although cash exceeds 4 million euros. Over the same period, the majority chairman has doubled his own pay and the company rents, at a high price, a warehouse belonging to a property company, an SCI, of which he is the sole member. The minority brother wants to know whether he can act, and how. He can.
1. Majority abuse: two cumulative conditions
Since a landmark ruling of 1961 (Cass. com., 18 April 1961), majority abuse requires a decision contrary to the company’s interest and taken with the sole aim of favouring the members of the majority at the expense of the minority. Both conditions must be met. A clumsy decision, even one contrary to the company’s interest, is not abusive if it does not break equality between shareholders.
Systematically allocating profits to reserves is the textbook case. It is not abusive in itself: a company may need to invest or reduce its debt, but it becomes abusive when it serves no project and comes with benefits reserved to the majority, such as a sharp rise in the director’s pay or contracts with companies they control. That is exactly the combination found in the Drôme case.
The sanction is the nullity of the resolution (article 1844-10 of the French Civil Code) and an award of damages to the injured minority shareholder, payable by the majority shareholders who voted for the decision, and not by the company.
2. Minority abuse: the selfish blockade
Minority abuse, or equality abuse in a 50/50 company, is the conduct of a shareholder who opposes a transaction essential to the company with the sole aim of favouring his own interests at the expense of all the other shareholders. Typical examples are refusing a capital increase needed to meet minimum equity requirements, refusing an amendment to the articles of association necessary for survival, or refusing to extend the company’s term.
The sanction is trickier, since the judge cannot take the place of the company’s governing bodies or treat the vote as having been cast in a way it was not. The judge may, however, appoint a court-appointed proxy, a mandataire ad hoc, to represent the defaulting shareholder at a new meeting and vote on his behalf in favour of decisions that serve the company’s interest, without harming the minority shareholder’s legitimate interest (Cass. com., 9 March 1993, Flandin). Damages may be awarded on top.
3. The management audit: see before you act
A minority shareholder who suspects a transaction contrary to the company’s interest often lacks the documents to prove it. The management audit meets that need. In an SARL, one or more shareholders holding at least one tenth of the share capital may ask the court to appoint an expert to report on one or more management transactions (article L. 223-37 of the French Commercial Code). In an SA, the threshold is 5% of the capital (article L. 225-231), and the courts apply that provision to the SAS.
The audit covers specific transactions, not management in general, and the request must rest on presumptions of irregularity, of which the warehouse lease with the chairman’s SCI and his pay rise are good examples. The expert is appointed by the presiding judge of the court ruling in summary proceedings, his fees are borne by the company, and his report is sent to the shareholders, the public prosecutor and the statutory auditor.
Where the conditions for a management audit are not met, article 145 of the French Code of Civil Procedure makes it possible to obtain, before any lawsuit, an investigative measure to preserve or establish evidence of facts on which the outcome of a dispute may depend.
4. Related-party agreements, often an easier angle
The lease between the company and an SCI owned by its director is a related-party agreement, a convention réglementée. In an SARL, it must be submitted to the shareholders’ meeting for approval on a report by the manager or the statutory auditor (article L. 223-19); in an SAS, the chairman must present a report to the shareholders (article L. 227-10). An unapproved agreement that has harmful consequences for the company makes the director liable. This angle is often quicker to argue than majority abuse, because it rests on a formal procedure whose observance can be checked on the documents.
5. The strategy, step by step
In the Drôme case, the method was as follows: a request for information and disclosure of documents under the shareholder’s rights; an application for a management audit of the lease and the pay; a liability claim against the director for the unapproved related-party agreement; and, for the most recent meeting, an action to annul the resolution for majority abuse, together with a claim for damages against the majority brother, because each step supplies the evidence for the next and a minority shareholder who starts with the annulment action, without documents, almost always runs into the investment policy argument, which is easy to raise and hard to rebut without the detailed accounts, contracts and minutes that only the audit can produce.
Negotiation followed: the majority brother bought out the minority shareholder’s shares at a valuation set by an independent expert. That is the most common outcome, and often the best. The lawsuit serves to create the leverage that makes the buyout possible.
6. Prevention beats litigation
The articles of association and the shareholders’ agreement can organise in advance the exit of a dissenting shareholder: tag-along clause, buyback promise, deadlock resolution procedure, or even a forced buyout clause at a price set by an expert. A company with two equal shareholders and no exit clause is a company that will end up in court.
Getting help in a shareholder dispute in France
The firm acts for minority and majority shareholders, as claimant or defendant, and negotiates exits. See our page on shareholder disputes and our articles on the shareholders’ agreement and the removal of a company director. For an initial discussion: contact.
Further reading: Nullity reform in French company law: the six points that decide the fate of your corporate resolutions.
Frequently asked questions
What is majority abuse under French law?
A resolution passed at a shareholders’ meeting that is contrary to the company’s interest and adopted with the sole aim of favouring the majority at the expense of the minority. Both conditions must be met.
Is allocating profits to reserves a majority abuse?
Not in itself. It becomes one when it is systematic, meets no investment need and comes with benefits reserved to the majority, such as excessive pay or contracts with their own companies.
What can a French judge do about minority abuse?
The judge cannot vote in the shareholder’s place. The judge can appoint a mandataire ad hoc to vote on the shareholder’s behalf at a new meeting in the company’s interest, and award damages.
Who can request a management audit?
In an SARL, shareholders holding at least 10% of the share capital; in an SA or an SAS, those holding at least 5% of the capital. The request targets one or more specific management transactions.
Who pays for the management audit?
The court-appointed expert’s fees are in principle borne by the company, which makes it an accessible tool for a minority shareholder.
On the same subject: the shareholders’ agreement, clauses and sanctions, director liability in liquidation and company sales, letters of intent and earn-outs.