Minority shareholder of a SARL: rights, deadlock and abuse of majority

Holding 30%, 40% or even 50% of the shares in a SARL (French private limited company) without steering its decisions leaves a shareholder in an uncomfortable position: he or she must accept management choices, sometimes sees profits systematically retained in reserves rather than distributed, and finds that there is no lever with which to change the company's course. The situation becomes explosive when two shareholders split the capital equally and stop agreeing: no decision can be passed any longer and the company freezes. This article sets out what the law actually grants to the minority shareholder of a SARL, when the conduct of the majority tips into abuse, and what legal solutions exist in the face of a 50/50 deadlock.

Minority shareholder of a SARL: what exactly are we talking about?

The SARL (société à responsabilité limitée) allocates power according to the number of shares (parts sociales) held. Each share carries one vote in principle, under the rule laid down in Article L223-28 of the French Commercial Code. A minority shareholder is therefore one who does not, alone, muster the majority required to have decisions adopted at a general meeting.

Minority in capital and minority in voting rights

Two things that are often confused must be distinguished. A minority in capital refers to the share of the share capital held (for example 35%). A minority in voting rights refers to the real ability to influence votes. In most SARLs the two coincide, one share carrying one vote. But arrangements exist: shares split between a usufructuary and a bare owner (démembrement), articles of association organising voting, commitments made in a shareholders' agreement. A shareholder may thus hold 45% of the capital and yet find that, in practice, he or she is unable to block anything if the others vote together.

This distinction drives strategy. A shareholder holding 34% already has real power: he or she can block extraordinary decisions, which require a two-thirds majority of the shares (Article L223-30 of the French Commercial Code for SARLs formed after the Act of 2 August 2005). This is known as a blocking minority. Falling below that threshold radically changes the balance of power.

The particular case of the two-shareholder 50/50 SARL

The configuration of a two-shareholder 50/50 SARL deserves separate treatment, because it produces a symmetrical minority: neither is the majority, and each is at the same time able to block everything. As long as the parties agree, this equal split reflects trust and balance. The day disagreement sets in, it becomes a mechanism of total paralysis. No ordinary decision, such as approval of the accounts or the distribution of dividends, can be adopted, since it requires a majority of the shares that neither holds. We come back to this in detail below, as this situation calls for specific remedies.

The fundamental rights of the minority shareholder

Whatever the size of the holding, the minority shareholder is not a spectator stripped of rights. The French Commercial Code recognises three sets of prerogatives that the manager (gérant), even when supported by the majority, cannot ignore.

The right to information

The shareholder of a SARL has a permanent right to information and a right to prior information before meetings. Before the annual meeting approving the accounts, Article L223-26 of the French Commercial Code requires that the following be provided to the shareholder: the annual accounts, the management report, the text of the proposed resolutions and, where applicable, the statutory auditor's report. This right is a matter of public policy (ordre public): any provision of the articles of association that obstructs it is deemed unwritten.

At any time, the shareholder may also inspect at the registered office the annual accounts, inventories, reports and minutes of meetings for the last three financial years. This permanent right is an underestimated tool of control: it is often by combing through minutes and agreements that the minority shareholder detects questionable management or abnormal remuneration of the manager.

The right to participate and vote

The shareholder has the right to take part in collective decisions and to cast a vote on them, a prerogative that case law regards as an essential attribute of shareholder status. The shareholder may ask questions, request explanations and have observations entered in the minutes. On extraordinary decisions, his or her vote counts doubly where he or she holds a blocking minority, since he or she can prevent any amendment of the articles of association, increase in capital or change of corporate purpose.

Twice per financial year, the shareholder may send the manager written questions on any fact liable to jeopardise the continuity of the business. The manager must answer, and the answer is sent to the statutory auditor where there is one.

The right to dividends and pecuniary rights

The shareholder is entitled to receive a share of the profits in proportion to his or her holding, unless the articles of association provide for a different allocation. A caution, however: there is no vested right to payment of a dividend. A distribution requires distributable profit and a decision of the meeting. It is precisely on this ground that the most frequent disputes arise, when the majority chooses, year after year, to retain all of the profits in reserves without economic justification, durably depriving the minority shareholder of any return on the investment. Such conduct may, subject to conditions, amount to an abuse of majority.

On winding up, the shareholder is entitled to repayment of his or her contributions and to a share of any liquidation surplus (boni de liquidation). During the life of the company, by contrast, there is no automatic right of withdrawal in an ordinary SARL: the shareholder can leave only by transferring his or her shares, on the terms provided by the articles of association and by law.

The thresholds that trigger enhanced rights

Beyond the rights attached to every share, the law confers additional prerogatives on minority shareholders who reach certain thresholds. The most important is that of one tenth of the share capital.

One or more shareholders representing at least one tenth of the share capital may apply to the court for the appointment of one or more experts to report on one or more management operations (Article L223-37 of the French Commercial Code). This management expert appraisal is a formidable weapon: it allows a suspect transaction to be examined by an independent third party, for example a contract concluded with a company controlled by the manager, unusually high remuneration, or a disposal of an asset at a doubtful price. The expert's report is then communicated and may found a liability claim.

The same shareholders, together holding one tenth of the shares, may also request that a meeting be convened, or that items and draft resolutions be added to the agenda. The minority shareholder is therefore not condemned to wait for the manager's goodwill before bringing a matter before the shareholders as a body.

Finally, any shareholder may bring, individually or jointly with others, the corporate liability action against the manager (ut singuli action), to obtain compensation for the loss suffered by the company itself. Compensation then goes to the company, but the action makes it possible to sanction a management fault that the majority refuses to pursue. The management faults that are sanctioned and the procedure for the ut singuli action are detailed in our article on the liability of a company officer for management fault.

Abuse of majority: when the rule of numbers becomes a fault

Holding the majority does not authorise crushing the minority. The Cour de cassation frames the exercise of voting rights through the notion of abuse of majority (abus de majorité), established by a landmark decision of the early 1960s and consistently applied since.

The two cumulative criteria

A collective decision constitutes an abuse of majority where two conditions are met simultaneously:

• the decision is contrary to the general interest of the company;
• it was taken for the sole purpose of favouring the members of the majority to the detriment of the minority.

Both criteria must be established together. A decision that is unfavourable to the minority shareholder but consistent with the corporate interest is not abusive: the majority is entitled to impose strategic choices that the minority shareholder disapproves of. Conversely, a decision that deliberately breaches equality between shareholders without serving the interest of the company crosses the line.

Concrete illustrations

The systematic retention of profits in reserves is the textbook case. A SARL that hoards its results over several financial years, with no investment project or identified cash requirement, while paying the majority manager a comfortable remuneration, may see that policy characterised as abusive: the minority shareholder never receives a dividend while the majority shareholder is remunerated through another channel.

Another example is a capital increase decided not to finance a real need of the company, but to dilute a minority shareholder who is unable to follow, so as to push him or her below a blocking threshold. The breach of equality is manifest.

Consider also the majority manager of a family SARL who has a commercial lease voted in favour of another company that he or she controls, at a rent well below market: the transaction impoverishes the SARL for the personal benefit of the majority shareholder. The minority shareholder then has several levers that can be combined: a management expert appraisal to document the transaction, followed by an action for annulment and for liability.

How the minority shareholder acts

A minority shareholder who is the victim of an abuse of majority may ask the court to annul the contested decision and to award damages for the loss suffered. The burden of proof lies on the shareholder: he or she must demonstrate, with supporting documents, the twofold condition of conflict with the corporate interest and intentional breach of equality. Hence the value of having first gathered the evidence through exercise of the right to information and, if necessary, through a management expert appraisal.

A symmetry that is often overlooked should be stressed: abuse of minority also exists. A minority shareholder who, by refusing, blocks a decision that is essential to the survival of the company, with the sole aim of causing harm or obtaining an advantage, commits a fault. The court may then appoint an agent to vote in his or her place in the interest of the company, or award damages. The power to block is therefore not absolute. The conditions of abuse of minority and the drafting of the agent's mission are examined in our article on obtaining an ad hoc agent.

The 50/50 deadlock

An equal split of the capital is the most perilous configuration in the law of limited liability companies. It deserves to be analysed in its own right.

Why 50/50 paralyses everything

Ordinary decisions of a SARL, such as approval of the accounts or allocation of the result, require in principle an absolute majority of the shares at the first consultation (Article L223-29 of the French Commercial Code). With two shareholders at 50/50, neither reaches that majority if the other opposes. Failing a majority at the first round, the law provides for a second consultation by majority of the votes cast, unless the articles of association provide otherwise, but with two voters in direct opposition the tie persists and the resolution is rejected.

In practical terms, the company can no longer approve its accounts, can no longer distribute dividends, and can no longer renew or dismiss a manager if the two shareholders neutralise each other. Dismissal of the manager itself requires a decision of shareholders representing more than half of the shares (Article L223-25 of the French Commercial Code), a majority that cannot be reached in a conflictual 50/50. The company becomes a frozen shell while the invoices keep arriving. On the dismissal procedure and the ways of challenging it, see our article on the dismissal of the manager of a SARL.

The legal mechanisms for resolving the crisis

In the face of this paralysis, several routes exist, from the least radical to the most final.

The appointment of a provisional administrator is the emergency measure. Where the normal functioning of the company is made impossible and an imminent peril threatens, a shareholder may apply to the president of the court, sitting in summary proceedings (référé), to have a third party appointed to manage the company provisionally and take day-to-day decisions. It is a temporary measure, intended to preserve the business while a substantive solution emerges, not to settle the dispute.

Judicial dissolution for just cause is the extreme outcome. Article 1844-7, 5° of the French Civil Code allows a shareholder to apply to the court for dissolution of the company where disagreement between shareholders paralyses its functioning. The court assesses strictly: it checks that the disagreement is real and that it actually prevents the company from functioning. This route carries a considerable cost, since it ends in the disappearance of the business. The applicant must also avoid being accused of being himself or herself the source of the paralysis, which could defeat the application.

Between these two extremes, negotiating an exit remains the most common and often the most sensible solution. Buy-out of one party's shares by the other, entry of a third party to break the equality, recourse to a mediator: these amicable outcomes avoid the destruction of value that prolonged litigation entails. It is still necessary for the articles of association or an agreement to have provided for the terms of valuation and transfer of the shares, failing which the negotiation risks bogging down in turn.

Prevention rather than endurance: articles of association and shareholders' agreement

The best protection of the minority shareholder is built before entry into the capital, not at the moment of conflict. Several legal tools make it possible to rebalance an unfavourable balance of power.

The articles of association may raise the majorities required for certain sensitive decisions, provide a right to information broader than the statutory minimum, or set up approval clauses (clauses d'agrément) governing the admission of new shareholders. They may also adjust the allocation of profits, within the permitted limits, to guarantee the minority shareholder a minimum return.

The shareholders' agreement, separate from the articles of association and confidential, offers additional flexibility. It is useful to include in it a tag-along clause, a buy-back clause in case of disagreement, a non-compete clause, or a clause organising arbitration of deadlocks. For a two-shareholder 50/50 SARL, a deadlock-resolution clause is strongly recommended: it provides in advance a mechanism, for example a cross-offer under which one party proposes a price and the other chooses to buy or sell at that price, which ensures that a deadlock will not condemn the business.

These documents must be drafted with precision, because an ambiguous clause turns against the person it was meant to protect. The valuation of the shares, in particular, must rest on a clearly defined method so that the exit does not turn into fresh litigation.

Conclusion

The minority shareholder of a SARL is never disarmed, but his or her rights take effect only if they are known and exercised methodically. The permanent right to information, the management expert appraisal above one tenth of the capital, the liability action against the manager and the sanction of abuse of majority form a real arsenal, to be used with evidential rigour. The 50/50 situation remains the most dangerous, because it turns a balance into paralysis as soon as trust breaks down, and the judicial remedies, provisional administrator or dissolution, are either temporary or destructive.

The position is clear: litigation should be the last option, never the first. Effective protection is secured upstream, in the drafting of the articles of association and of a shareholders' agreement designed to anticipate disagreements. Before any entry into the capital of a SARL in a minority position, and all the more so in an equal-split structure, have the articles of association audited and a shareholders' agreement negotiated that expressly provides a mechanism for exit and for resolving deadlocks. It is the only way to turn a balance of power that is merely endured into a legally tenable position.

Frequently asked questions

Can a minority shareholder block a decision in a SARL?

It depends on the threshold held and the type of decision. Extraordinary decisions, such as an amendment of the articles of association or a capital increase, require a two-thirds majority of the shares for SARLs formed after the Act of 2 August 2005 (Article L223-30 of the French Commercial Code). A shareholder holding more than one third of the shares therefore has a blocking minority on those decisions. On the other hand, he or she cannot alone block ordinary decisions, which rest on an absolute majority of the shares.

What can be done in the event of deadlock in a two-shareholder 50/50 SARL?

Three main routes exist. The appointment of a provisional administrator in summary proceedings makes it possible to deal with the emergency where functioning is impossible and a peril threatens. Judicial dissolution for just cause, on the basis of Article 1844-7, 5° of the French Civil Code, sanctions disagreement that paralyses functioning, but brings about the disappearance of the company. The most frequent solution remains negotiating an exit, a buy-out of shares or the entry of a third party, ideally framed by a clause of the shareholders' agreement provided for in advance.

How can an abuse of majority be proved?

Two cumulative conditions must be demonstrated: that the decision is contrary to the general interest of the company, and that it was taken for the sole purpose of favouring the majority to the detriment of the minority. Proof rests on concrete elements: minutes, annual accounts, comparisons of remuneration or market prices. Prior exercise of the permanent right to information and, above one tenth of the capital, of a management expert appraisal (Article L223-37 of the French Commercial Code) serves to gather this evidence before bringing an action for annulment and for liability.

Is the systematic retention of profits in reserves an abuse of majority?

It can be, but not automatically. Building up reserves is a legitimate management choice when it meets an investment or cash requirement. It becomes abusive when it is systematic, lacks economic justification, and durably deprives the minority shareholder of any dividend while the majority is remunerated elsewhere, for example through the manager's remuneration. Whether it is abusive is assessed over several financial years and in light of the company's actual situation.

Does a minority shareholder have the right to inspect the accounts of the SARL?

Yes, and this right is protected. Before the annual meeting, Article L223-26 of the French Commercial Code requires the annual accounts, the management report and the draft resolutions to be provided. Outside meetings, the shareholder may inspect at the registered office the accounts, inventories, reports and minutes for the last three financial years. Any provision of the articles of association limiting this right to information is deemed unwritten.

Can a minority shareholder dismiss the manager of a SARL?

Not alone, if he or she does not hold the majority. Dismissal of the manager requires a decision of shareholders representing more than half of the shares (Article L223-25 of the French Commercial Code), unless the articles of association provide for a stronger majority. A minority shareholder may, however, apply for judicial dismissal of the manager for legitimate cause by bringing the matter before the court, which circumvents the majority requirement where faults are established.

Can a minority shareholder leave the SARL and recover the investment?

There is no automatic right of withdrawal in an ordinary SARL. Exit takes place through transfer of the shares, subject to the approval clauses of the articles of association and to the statutory procedure. The difficulty is finding a buyer and agreeing on the price, especially in a company in conflict. This is why a shareholders' agreement providing a buy-back clause and a valuation method is the best guarantee of being able to leave without deadlock.