Shareholders' agreement for a property SPV / club deal: blockage, exit and deadlock

A property club deal brings together several co-investors around a single asset, held in a dedicated vehicle: the project company, or special purpose vehicle (SPV). As long as the transaction proceeds as planned, governance remains theoretical. The problem arises on the day a shareholder refuses to meet a capital call, when two 50% blocks are opposed on the resale of the building, or when a co-developer wants to leave before delivery. Without a robust agreement, these situations paralyse the SPV and destroy the value of the asset. This guide analyses the clauses that make up an effective property SPV shareholders' agreement: the treatment of unpaid shareholder capital calls, deadlock-breaking mechanisms, forced exit and enforcement litigation.

The property SPV and the purpose of the shareholders' agreement

The vehicle for a property club deal takes two main forms in practice. The French property holding company (société civile immobilière, SCI), governed by Articles 1832 et seq. of the French Civil Code, suits asset-holding and letting transactions, with shareholder liability that is unlimited and proportionate to each shareholder's share of the capital (Article 1857 of the French Civil Code). The French simplified joint-stock company (société par actions simplifiée, SAS), governed by Articles L. 227-1 et seq. of the French Commercial Code, becomes necessary as soon as liability needs to be ring-fenced, institutional investors are to be admitted or a sophisticated governance structure is to be put in place, notably in co-development. Where the management of the SCI is entrusted to a company, the regime and liability of that manager are analysed in our article on the corporate manager of an SCI.

The choice of vehicle is not neutral for the drafting of the agreement. The SAS offers considerable freedom in its articles of association: inalienability clauses (Article L. 227-13), approval clauses (Article L. 227-14) and exclusion clauses (Article L. 227-16) can be included directly in the articles and take effect as corporate provisions enforceable against the company. The SCI, which is more rigid on some points, leads to most of the mechanisms being placed in the extra-statutory agreement, which has only contractual force between the signatories.

Articles and agreement: two levels, two regimes

Two instruments must be clearly distinguished. The articles of association govern the life of the company and, once published, are enforceable erga omnes. The shareholders' agreement is a contract subject to Article 1103 of the French Civil Code:

Contracts lawfully formed take the place of law for those who have made them.

This binding force applies only between the signatory parties. A third-party purchaser of shares who is not a party to the agreement is not bound by its stipulations unless it expressly adheres to it. Hence a drafting rule: any clause whose effectiveness depends on being enforceable against the company or future shareholders (inalienability, pre-emption, exclusion) should be duplicated in the articles where the corporate form allows, while behavioural undertakings (allocation of governance, non-competition undertakings, funding obligations) belong in the agreement.

Structuring capital calls and penalising non-payment

The default of a co-investor when a capital call is made is the most frequent and the most damaging risk in a club deal. The property transaction rests on a financing plan aligned with the timetable of the works or the acquisition. An unpaid shareholder capital call can trigger a default with the bank, block a drawdown or jeopardise an off-plan sale (VEFA, vente en l'état futur d'achèvement). The agreement must anticipate this scenario with a graduated mechanism.

Formalising the capital call mechanism

The agreement specifies who decides on the call (manager, chair, investment committee), on what notice, according to what allocation key (generally pro rata to holdings) and by what traceable means of notification. It sets a firm due date and an amount, or a method of calculation, for each tranche. The distinction between capital contributions, shareholder current accounts and additional funding commitments must be explicit, since each is subject to a different legal and tax regime.

Graduating the penalties for default

The penalty for failure to pay up must be proportionate and sufficiently dissuasive. Drafters combine several levers:

• late-payment interest running automatically from the due date, at an increased contractual rate
• a penalty clause within the meaning of Article 1231-5 of the French Civil Code, fixing the loss in advance, it being recalled that the court retains a power of moderation where the penalty is manifestly excessive
• suspension of the political and financial rights of the defaulting shareholder (voting rights, right to distributions) for as long as the sum remains due
• dilution of the defaulting shareholder in favour of those who make good its default, by the issue of new securities subscribed by the diligent shareholders
• compulsory buy-back of its securities, at a discounted price, a mechanism to be carefully coordinated with the prohibition of leonine clauses (clauses léonines)

The dilution clause requires a technically well-constructed capital increase, with advance waiver of the pre-emptive subscription right and delegation to the manager. The compulsory buy-back clause borrows the exclusion regime and runs into the question of price: an overly heavy punitive discount risks being recharacterised as a leonine clause prohibited by Article 1844-1 of the French Civil Code, which deems unwritten any stipulation exempting a shareholder from any contribution to losses. Security lies in a discount justified by the actual loss and not by pure confiscation.

Bridging by the diligent shareholders

In practice, the agreement frequently provides that the non-defaulting shareholders may, at their option, subscribe the missing share in order to preserve the bank timetable, leaving the question of dilution or reimbursement of the defaulting shareholder to be settled afterwards. This option prevents the default of a single party from bringing down the whole transaction, but it must be framed by a time limit and prior notice, failing which it will itself feed litigation between co-investors.

Anticipating deadlock: anti-deadlock clauses

A deadlock, or situation of blockage, occurs when the corporate bodies are no longer able to take a decision: two shareholders on equal footing who cannot agree on resale, refinancing or the appointment of a manager. In a long-lived property asset, this blockage freezes value and exposes the company to the risk of judicial dissolution for disagreement paralysing the functioning of the company. The anti-deadlock clause provides a contractual way out of the crisis before the court becomes involved. The solutions available in the event of disagreement, from exclusion to dissolution, are set out in our article on exclusion and disagreement between shareholders in SARLs and SASs.

Defining the deadlock event precisely

An effective anti-deadlock clause begins by defining the triggering event. The agreement must list the decisions on which failure to agree amounts to a deadlock: approval of the budget, a decision to sell the asset, refinancing, a distribution, a structural capital call. It sets the number of unsuccessful votes or the period of failed negotiations after which the mechanism is triggered. A vague definition deprives the clause of any effect, since the trigger cannot be objectively established.

The amicable escalation phase

Before any decisive mechanism, the agreement generally provides for an escalation: referral to the managers, then to more senior representatives (escalation clause), within a fixed time limit. This phase may be reinforced by a mandatory prior mediation or conciliation clause, non-compliance with which renders court action inadmissible according to the settled position of the case law on prior conciliation clauses. This amicable filter avoids activating radical mechanisms for a temporary disagreement.

Buy or sell: the shotgun clause

Where the amicable route fails, the so-called buy or sell or shotgun clause is the leading mechanism of the anti-deadlock clause. The principle is as follows: one shareholder (the initiator) notifies the other of a price per security. The recipient then has a symmetrical option, either to sell its own securities at that price or to buy those of the initiator at the same price. The ingenuity of the device lies in the fact that it encourages the initiator to propose a genuine price: if it proposes a price that is too low in order to buy out at a bargain, it risks being bought out itself at that low price.

This mechanism calls for several drafting precautions. The price must be expressed on a clear basis, value per security or enterprise value net of debt, since a property asset financed by a bank loan distorts any reasoning in terms of equity value if the debt is not neutralised. The time limits for exercising the option must be firm, the fate of the bank financing and security must be settled, and the clause must provide for the possible substitution of a third-party purchaser. The buy or sell clause works better between two shareholders than between several blocks, which explains why it is common in co-developments with two partners.

Variants providing for a negotiated exit

Other structures exist. The cooling-off clause allows a period of reflection before activation. The clause for a buy-out by the majority party by expert valuation, on the basis of Article 1843-4 of the French Civil Code, entrusts the setting of the price to a third-party valuer in the event of disagreement. The clause providing for the sale of the asset or of all the securities to a third party, with a mandate given to an investment bank, provides for a collective exit rather than an internal buy-out. Finally, the planned dissolution clause, a last resort, provides for an orderly liquidation of the SPV with the sale price of the building being shared out.

The choice between these mechanisms depends on the balance of power and the financial standing of the parties. The shotgun clause structurally favours the most liquid shareholder, who can always fund the buy-out, to the detriment of the one who lacks the cash to exercise the purchase option and is forced to sell. This asymmetry must be accepted or corrected, for example by reserving the clause for shareholders of comparable financial standing.

Organising the exit: transfers, pre-emption and forced exit

Beyond deadlock, the agreement governs ordinary and extraordinary transfers of securities. A club deal has an intended lifespan, tied to the investment horizon, and the agreement must provide both for the liquidity that is wanted and for the exit that is imposed.

Inalienability, pre-emption and approval

The inalienability clause locks in the shareholding during the sensitive phase of the transaction. In an SAS, Article L. 227-13 of the French Commercial Code allows statutory inalienability for a period not exceeding ten years. It prevents a co-investor from transferring its securities before the project is completed, preserving the stability of the shareholder group during construction or marketing.

The pre-emption right gives the existing shareholders priority to buy the securities of a transferor, at the price and on the terms notified, before any third party. It is combined with an approval clause, which makes the admission of a new shareholder subject to the agreement of the others. These two clauses protect the intuitu personae specific to a club deal, where the quality and solvency of the partners determine the success of the transaction.

Tag-along and drag-along clauses

Two symmetrical mechanisms govern transfers to a third party. The tag-along clause allows a minority shareholder to join in a sale made by a majority shareholder, on the same terms, so as not to remain locked in alongside a new shareholder. The drag-along clause, conversely, obliges the minority shareholders to sell their securities when a third party offers to acquire 100% of the capital, so as not to allow a recalcitrant shareholder to cause an advantageous collective exit to fail. These clauses are particularly useful for organising the overall resale of the property asset through a sale of the SPV's securities rather than a sale of the building, which is often preferred for reasons of transfer costs. The choice between selling the building and selling the securities of the holding company is discussed in our article comparing asset deal and share deal in real estate.

Exclusion of the defaulting or culpable shareholder

The most radical forced exit is exclusion. In an SAS, Article L. 227-16 of the French Commercial Code allows the articles to provide that a shareholder may be required to transfer its shares on the terms they determine. Exclusion requires an objective, predefined ground (default on capital calls, serious breach, change of control), compliance with the adversarial principle, and a buy-back price that is determined or determinable. The question of the voting right of the shareholder facing exclusion at the time of the exclusion decision has given rise to extensive case law: prudence dictates not depriving the person concerned of its voting right without a solid basis in the articles, at the risk of weakening the decision.

In an SCI, in the absence of a statutory exclusion mechanism, the agreement relies on cross promises to sell granted by each shareholder, exercisable on the occurrence of a defined event. The right of withdrawal under Article 1869 of the French Civil Code also allows an SCI shareholder to withdraw on the terms laid down in the articles, which provides an exit route that must be framed to prevent it from destabilising the financing.

Setting the exit price without opening a new dispute

Any buy-back or exclusion clause fails if the price is not under control. The agreement must provide for a precise valuation method, based on the appraised value of the building less the debt and the costs of liquidation, or refer to the expert under Article 1843-4 of the French Civil Code in the event of disagreement. Recourse to this expert, whose mission and method of appointment must be carefully defined, secures the determination of the price while avoiding a valuation disagreement reopening the deadlock that the clause was meant to resolve.

Enforcement litigation on the shareholders' agreement

An agreement is worth only the sanctions that can be mobilised when a signatory fails to meet its undertakings. Enforcement litigation on a property SPV shareholders' agreement rests on the general law of contract and on specific procedural tools.

Specific performance and promises to sell

Article 1221 of the French Civil Code lays down the principle of specific performance of an obligation, unless performance is impossible or there is a manifest disproportion between its cost to the debtor and its benefit to the creditor. Where a shareholder has undertaken to transfer its securities by a unilateral promise to sell, Article 1124 of the French Civil Code, as rewritten by the 2016 reform, provides that revocation of the promise during the time allowed to the beneficiary to exercise the option does not prevent the promised contract from being formed. This development considerably strengthens the effectiveness of cross promises inserted in an agreement: the beneficiary can obtain compulsory completion of the transfer, and no longer merely damages.

Penalty clause, damages and summary proceedings

The penalty clause of Article 1231-5 of the French Civil Code fixes in advance the loss resulting from non-performance, which removes the need to prove its amount and makes it easier to obtain a rapid judgment. In urgent cases, the summary proceedings judge (juge des référés) may be seized to order protective measures, bring an end to a manifestly unlawful disturbance or award an interim payment where the obligation is not seriously contestable. The appointment of an interim administrator may be sought where the disagreement actually paralyses the functioning of the SPV and threatens the asset, but this measure remains subsidiary and requires proof of imminent peril.

Securing enforceability and performance

The effectiveness of the agreement depends on its enforceability. To increase the chances of specific performance, several techniques are combined: depositing share transfer forms signed in blank with an escrow agent, putting irrevocable promises in place, inserting the key clauses in the articles where the corporate form allows, and using a trusted third party responsible for objectively establishing that the mechanisms have been triggered. A jurisdiction clause and an arbitration clause, directing the dispute to a court or to arbitration suited to the confidentiality sought in a club deal, complete the arrangement.

Conclusion

A property SPV shareholders' agreement is not judged by the quality of its clauses when all is going well, but by its capacity to cut through on the day a partner defaults or a deadlock sets in. The three breaking points are always the same: the shareholder who does not follow a capital call, the two blocks that no longer agree, and the partner who wants to leave at the wrong time. For each there is a proven tool, provided it is drafted with precision: a graduated mechanism for penalising unpaid capital calls, a buy or sell clause calibrated on a value net of debt, and cross promises to transfer that can be enforced in kind. The most common weakness is not the absence of a clause but its imprecision: a poorly defined trigger, an undetermined price or a faulty fit between the agreement and the articles are enough to render the mechanism inoperative at the decisive moment.

Before signing, have the consistency between your articles, your agreement and your bank financing plan checked by an adviser who has concretely simulated each crisis scenario: a default on a capital call midway through the works, a deadlock on resale, a request for early exit. It is this stress-testing, and not the accumulation of clauses, that distinguishes an enforceable agreement from a document without effect.

Frequently asked questions

Is a buy or sell clause valid under French law?

Yes. The buy or sell or shotgun clause rests on cross unilateral promises to sell and to buy, valid on the basis of Articles 1124 and 1103 of the French Civil Code. Its validity requires a price that is determined or determinable and precise terms of exercise. The main risk is not nullity but practical ineffectiveness where the price is calculated on an ambiguous basis, in particular if the SPV's bank debt is not neutralised in the valuation.

What can be done about a capital call unpaid by a shareholder?

The agreement should provide for a graduated sanction: late-payment interest, a penalty clause under Article 1231-5 of the French Civil Code, suspension of voting and distribution rights, then dilution or compulsory buy-back of the securities. In the absence of a clause, the diligent shareholder must fall back on an action to enforce the obligation to pay up and on damages, a longer and less certain procedure. The option of bridging by the non-defaulting shareholders makes it possible to preserve the bank timetable while the dispute is resolved.

Does the shareholders' agreement take precedence over the articles of an SCI or an SAS?

No. In the event of a conflict, the articles, which are enforceable against third parties and the company, prevail over the agreement, which has only contractual force between the signatories under Article 1103 of the French Civil Code. A clause whose effectiveness depends on being enforceable against the company or new shareholders must therefore appear in the articles where the corporate form allows, notably in an SAS for inalienability (Article L. 227-13), approval (L. 227-14) and exclusion (L. 227-16).

Can a shareholder be excluded from a property SPV?

In an SAS, exclusion is possible if the articles provide for it, on the basis of Article L. 227-16 of the French Commercial Code, with an objective ground, compliance with the adversarial principle and a determinable buy-back price. In an SCI, in the absence of a statutory exclusion mechanism, forced exit is organised through cross promises to sell granted by each shareholder and exercisable on a defined event. In both cases, control of the buy-back price, possibly through the expert under Article 1843-4 of the French Civil Code, determines the effectiveness of the mechanism.

How should the buy-back price of securities be set in a forced exit?

The agreement should provide for a precise valuation method, generally based on the appraised value of the building less the debt and the costs of liquidation, or refer to a third-party valuer appointed under Article 1843-4 of the French Civil Code in the event of disagreement. An excessive punitive discount applied to the defaulting shareholder risks being recharacterised as a leonine clause, prohibited by Article 1844-1 of the French Civil Code. The discount must remain justified by an actual loss and not be confiscatory.

How can a deadlock between two co-investors on equal footing be resolved?

The agreement may provide for an amicable escalation, then an anti-deadlock clause of the buy or sell type, a buy-out by expert valuation, or the sale of the asset to a third party. In the absence of a clause, a lasting deadlock exposes the company to a claim for judicial dissolution for disagreement paralysing the functioning of the company, or to the appointment of an interim administrator in the event of imminent peril to the asset. Since these judicial solutions are slow and uncertain, contractual anticipation remains preferable.

Can specific performance be obtained of a transfer of securities provided for in the agreement?

Yes, where the transfer results from a unilateral promise to sell. Since the reform of contract law, Article 1124 of the French Civil Code provides that revocation of the promise during the option period does not prevent the promised contract from being formed, which allows the beneficiary to obtain compulsory completion. Article 1221 of the French Civil Code also enshrines the principle of performance in kind, unless performance is impossible or manifestly disproportionate. In practice, depositing share transfer forms in blank with an escrow agent reinforces this performance.