Action ut singuli: the minority shareholder who holds a manager liable

In a property SPV or a club deal, the minority shareholder rarely discovers the management failing in real time. He or she discovers it when the asset can no longer be refinanced, when the sponsor announces an additional capital call, or when the quarterly reporting reveals management fees with no identifiable counterpart. At that point, two findings stand out: the manager is most often the majority shareholder or is aligned with the majority, so that no general meeting will vote to bring the corporate action; and the limitation period, which is short, has often started to run long before the shareholder becomes aware of anything. The ut singuli action is the instrument that allows a minority shareholder to bring, by substitution, the company's liability claim against the manager. This analysis sets out its admissibility conditions, the burden of proof, the procedural timetable and the interplay with the shareholders' agreement, from the standpoint of a minority investor.

What the ut singuli action allows, and what it does not

A corporate action brought by substitution

The ut singuli action is not a claim that belongs to the shareholder personally. It is the company's own action (action sociale), brought by a shareholder acting in place of the defaulting corporate bodies. The legal basis varies according to the corporate form of the vehicle:

• SARL (French limited liability company): Article L. 223-22, paragraph 3 of the French Commercial Code, which entitles shareholders to bring the corporate liability action against managers, individually or jointly.
• SA (French public limited company): Article L. 225-252 of the French Commercial Code, which covers directors and the chief executive officer.
• SAS (French simplified joint-stock company): through the cross-reference in Article L. 227-8 of the French Commercial Code, which applies to the president and officers of the SAS the liability rules governing the members of the board of directors and the management board of an SA, and therefore Articles L. 225-251 et seq.
• Société civile (French civil partnership), the dominant form for private-wealth property SPVs: Article 1843-5 of the French Civil Code.

The mechanism is the same in all four cases. The shareholder seeks compensation for the loss suffered by the company and, if the manager is held liable, damages are awarded to the company, not to the claimant. Article L. 225-252 is explicit: the claimants are entitled to seek compensation for the entire loss suffered by the company, to which, where applicable, the damages are awarded.

This mechanism governs the economic assessment. A minority shareholder holding a limited fraction of the capital who obtains a judgment against the manager receives nothing directly: he or she restores the company's net assets, of which only a pro rata share of the value will be recovered, and only on liquidation of the vehicle or on the sale of the shares. Yet the shareholder alone advances the costs of the proceedings: lawyers' fees, the deposit for an expert's appointment, and the costs of a bailiff's report. The ut singuli action is therefore rarely profitable when considered in isolation. Its value lies in its leverage: it reopens an exit negotiation, it prompts the directors' and officers' liability insurance policy to be called upon, and it weighs on the relationship between the sponsor and its own investors.

The loss compensated is the company's, never the shareholder's own

The dividing line most often missed in writs of summons is the one concerning the loss. The fall in value of the shares held by the shareholder is not a personal loss that can be compensated: it is merely the corollary of the loss suffered by the company. The consistent case law of the Commercial Chamber of the Cour de cassation refuses individual compensation under this head, precisely because it would lead to compensating the same damage twice and to breaking the equality between shareholders and the company's creditors.

A strict discipline of drafting follows. If the minority shareholder considers that he or she has suffered a loss of their own, for example a subscription induced by inaccurate financial information given at the fundraising, or the loss of a pre-emptive subscription right in a dilutive capital increase, the claim falls under a separate individual action, based on Article 1240 of the French Civil Code or on abuse of majority. The two actions may be combined in the same proceedings, but they require two separate demonstrations and two distinct heads of claim. Mixing them risks a partial finding of inadmissibility, or even the dismissal of the whole claim. The criteria for abuse of majority and the other remedies available to the minority shareholder are set out in our article on the rights of the minority shareholder of an SARL.

An important point for SPVs with outsourced governance: the requirement of a fault separable from the manager's duties, which conditions an action by a third party against a manager who is an individual, does not apply to the corporate action. A shareholder acting ut singuli exercises the company's action against its own agent: simple mismanagement is enough. This difference in standard is decisive when the choice lies between a corporate action and a personal action against the same manager.

Admissibility conditions: the obstacles to clear before issuing proceedings

Several objections to admissibility are systematically raised in defence. They are dealt with beforehand, at the stage of procedural strategy, and not in reply.

Shareholder status must exist on the day the proceedings are commenced and continue throughout them. An investor who sells its shares during the proceedings loses the right to act, because the action is attached to shareholder status and not to the claim for damages. For a club deal with a liquidity clause or a put option falling due, this point governs the order of operations: exercising the put first extinguishes the litigation lever. Conversely, it is accepted that the shareholder acts as the company's representative, so that the fact that the wrongful acts predate the shareholder's entry into the capital does not, in principle, deprive the shareholder of the right to act.

The absence of a shareholding threshold for the individual action is a defining feature. Unlike the management expert appointment, which requires a minimum shareholding, the ut singuli action is open to any shareholder, whatever the size of the holding. A threshold exists only for the joint action with a representation mandate organised by the implementing regulations. The holder of 2% of an SPV therefore has exactly the same right to act as the holder of 30%.

Joining the company to the proceedings is the requirement most often forgotten. The regulations require that the company be summoned to the proceedings through its legal representatives, on pain of inadmissibility of the action. The difficulty is practical: the legal representative is precisely the manager being sued. The company is then summoned in the person of the one being pursued, a situation which, in contentious cases, justifies an application for the appointment of an ad hoc agent (mandataire ad hoc) on the basis of Article 145 or of Articles 834 and 835 of the French Code of Civil Procedure.

The default of the corporate bodies does not have to be formally established: the ut singuli action is not subsidiary and is not subject to a prior formal notice to the legal representative to act. In practice, such a formal notice remains advisable. It fixes the date on which the facts came to light, it documents the inaction and it deprives the defendant of the argument that an attempt at an amicable settlement was neglected.

Proving the management failing: the centre of gravity of the case

A standard of diligence, not a review of the merits of the decision

The judge does not redo the investment. The judge does not penalise business risk, nor a decision that proved poor with hindsight. The judge penalises a decision taken without sufficient diligence, without prior information, in breach of a legal, statutory or contractual obligation, or in an interest foreign to that of the company. The benchmark is that of the prudent and informed manager placed in the same situation, assessed in abstracto but having regard to the vehicle's actual resources.

The burden of proof rests entirely on the claimant, in accordance with Article 9 of the French Code of Civil Procedure and Article 1353 of the French Civil Code. Three elements must be demonstrated independently: the fault, the company's loss, and the causal link between the two.

Wording of faults in a property SPV

The characterisation must be enforceable against the manager, dated and tied to an identified obligation. General formulations such as "mismanagement of the asset" are ineffective. In property investment vehicles, the complaints that succeed most often relate to failures of a documentary and chronological nature:

• having allowed the time limit to notify defects affecting a delivered building to expire, depriving the company of the benefit of the ten-year warranty or of the completion warranty (garantie de parfait achèvement);
• having failed to take out construction damage insurance (assurance dommages-ouvrage) before the start of the works, when the vehicle was acting as project owner;
• having allowed an action to recover sums from a defaulting tenant to become time-barred, or having failed to lodge the claim for rent in the tenant's insolvency proceedings within the statutory time limit;
• having replied late to a notice of termination with refusal of renewal, or having let the time limit for challenging it run, depriving the company of an eviction indemnity;
• having signed a lease amendment allowing a change of permitted use without any rental consideration, or having granted a rent-free period without the authorisation required by the shareholders' agreement;
• having breached the financial undertakings in the loan agreement, LTV or DSCR covenants, and thereby caused early repayment of the debt to fall due, or having failed to seek a waiver when the threshold was foreseeably going to be crossed;
• having neglected energy compliance works on a commercial or residential asset, compromising its future lettability and its resale value;
• having caused the company to bear management fees, structuring costs or re-invoicing in favour of an entity linked to the manager, without real consideration and without following the procedure for regulated agreements.

This last complaint deserves particular attention. In SPVs, the asset manager's remuneration is often paid to a company controlled by the manager. Failure to follow the procedure under Article L. 227-10 of the French Commercial Code for an SAS, or Article L. 223-19 for an SARL, does not automatically render the agreement void, but opens the way to a liability action for the harmful consequences borne by the company. This is a firmer evidential footing than assessing the merits of an investment decision.

Loss and causation: the most fragile part

The most frequent pitfall is a poorly articulated loss of chance. Where the fault has deprived the company of an action, a warranty or a refinancing, the loss is not the nominal value of the right lost but the reasonable probability of obtaining it, assessed as at the date of the fault. A quantified demonstration, supported by a private or court-appointed expert report, is essential. It is unrealistic to hope that the judge will carry out this assessment alone on the basis of the financial statements.

Causation suffers from a difficulty specific to single-asset vehicles: the market. The defendant will argue that the fall in value results from rising interest rates, shrinking transaction volumes or the structural vacancy of a segment, and not from its management. The part of the damage attributable to the breach must therefore be isolated, which requires a documented counterfactual scenario.

The procedural timetable and limitation as a decision framework

Identifying the applicable regime

The time limit depends on the corporate form of the vehicle, a point too often treated as incidental:

• SARL: three years, Article L. 223-23 of the French Commercial Code;
• SA and SAS: three years, Article L. 225-254 of the French Commercial Code, applicable to the SAS through the cross-reference in Article L. 227-8;
• société civile: five years, under the general rule in Article 2224 of the French Civil Code.

A single sponsor operating SPVs as SCIs and holding vehicles as SASs therefore exposes its investors to two different timetables for comparable facts. The two-year difference is not marginal when the fault comes to light during a refinancing audit.

The starting point: damaging event or its discovery

Article L. 225-254 fixes the start of the period from the damaging event or, if it was concealed, from its discovery. Article L. 223-23 uses the same wording for the SARL. Concealment requires active conduct or a clearly established withholding of information, not merely the minority shareholder's ignorance. Patchy reporting, accounts approved without a detailed annex on regulated agreements, and failure to provide the management contracts despite a written request are elements capable of establishing concealment and of postponing the starting point.

A direct operational consequence follows: written requests for information addressed to the manager must be formalised, dated and kept. They serve twice over, as evidence of the default and as a time marker for the starting point.

Where the damaging event amounts to a crime, the period is extended to ten years by the same provisions. The scenario is not theoretical in structures where funds have been misappropriated to the detriment of the vehicle.

Suspension and interruption: using Article 145 of the Code of Civil Procedure without losing the time limit

The asymmetry of information often makes it necessary to go through a fact-finding measure before any trial. Article 145 of the French Code of Civil Procedure allows the appointment of an expert or a bailiff (commissaire de justice) to be obtained, on application or in summary proceedings (référé), for the purpose of obtaining the accounting records, the management contracts, the exchanges with the lender or the technical reports on the asset. The use of the ex parte application to gather evidence before business litigation is covered separately in our dedicated article.

Two rules govern the interplay with limitation. Article 2241 of the French Civil Code provides that a claim brought before a court, even in summary proceedings, interrupts the limitation period. Article 2239 of the French Civil Code provides that limitation is suspended when the judge grants an application for a fact-finding measure made before any trial, the period starting to run again, for a duration that may not be less than six months, from the day the measure was carried out.

The minority shareholder's decision sequence is therefore built backwards from the limitation deadline, and not as the facts are discovered. Three milestones structure the timetable: the written request for information and the reply to it, the in futurum fact-finding measure and the filing of the report, and the writ of summons on the merits. Commencing the fact-finding measure a few weeks before the end of the three-year period exposes the shareholder to a debate on the exact date of the damaging event, which it is preferable not to have to conduct.

The management expert appointment, provided for by Article L. 225-231 of the French Commercial Code for the SA and by Article L. 223-37 for the SARL, is an alternative route, subject to a shareholding threshold and to a prior written question to the manager. Its applicability to the SAS has given rise to academic debate. For that reason, summary proceedings under Article 145 remain the safest tool in vehicles set up as an SAS or a société civile.

Interplay with the shareholders' agreement and governance clauses

What the agreement cannot neutralise

The statutory provisions restrict contractual freedom on this precise point. Article L. 225-253 of the French Commercial Code deems unwritten any clause making the bringing of the corporate action subject to a prior opinion or to authorisation by the general meeting, or containing an advance waiver of the right to bring that action, and states that no decision of the general meeting may have the effect of extinguishing a liability action against managers. Article L. 223-22, paragraphs 4 and 5 of the French Commercial Code and Article 1843-5 of the French Civil Code lay down the same rule for the SARL and the société civile.

Any clause in the articles of association that has the effect of making the bringing of the corporate action subject to the prior opinion or authorisation of the meeting, or that would contain an advance waiver of the right to bring that action, is deemed unwritten.

Three consequences follow for the investor. A discharge (quitus) voted by the meeting has no exonerating effect. A clause in the agreement stating that the shareholders waive any action against the management is deprived of effect as regards the corporate action. A clause providing a liability warranty or an indemnity from the company in favour of the manager cannot prevent the action, even if it neutralises its effect in economic terms.

What the agreement must provide for in advance

The usefulness of the agreement shifts towards the advance constitution of evidence. The provisions that matter, from the standpoint of a minority shareholder contemplating the possibility of an action, are those that create dated and verifiable obligations:

• periodic reporting whose content is listed, and not left to the manager's discretion;
• an annual audit right exercisable by a third party appointed by the minority shareholders, at the company's expense beyond a threshold of established breach;
• a list of transactions subject to prior approval, including asset disposals, refinancings, off-balance-sheet commitments and any agreement with an entity linked to the sponsor;
• an undertaking to provide the directors' and officers' liability insurance policy and its endorsements;
• a clause suspending the liquidity mechanisms for as long as a corporate action is pending, so as to prevent a forced sale of the shares from depriving the claimant of standing to sue.

Each breach of these obligations becomes a dated wrongful act, directly enforceable, which moves the demonstration from the uncertain ground of the merits of a management decision to the binary ground of contractual non-performance.

Prior mediation, arbitration, confidentiality

Investor agreements almost systematically contain a clause providing for prior conciliation or mediation and, often, an arbitration clause. Their interplay with the ut singuli action calls for a case-by-case analysis. A mandatory amicable settlement clause constitutes a bar to admissibility where it is sufficiently precise, but its enforceability requires that the manager being sued be a party to the agreement in that capacity, and not only as a shareholder. Where the manager is a legal entity distinct from the signatories, the clause is frequently unenforceable against it. Checking this point before issuing proceedings avoids a purely procedural inadmissibility, all the more costly because it arises a few months before the limitation period expires.

Obstacles specific to investment vehicles

The opening of collective insolvency proceedings neutralises the action

Once safeguard, reorganisation or compulsory liquidation proceedings have been opened, actions aimed at restoring the company's assets fall to the court-appointed creditors' representative or to the liquidator, who acts in the collective interest of the creditors. In practice the minority shareholder loses control of the action. The mechanism in Article L. 651-2 of the French Commercial Code, concerning liability for insufficiency of assets, is reserved to the liquidator, the public prosecutor and, subsidiarily, the majority of the creditors appointed as supervisors where the liquidator fails to act after formal notice. The financial risks incurred by the manager in respect of liability for insufficiency of assets are detailed in our article on that action.

The standard of fault there is also more demanding: the same article expressly excludes the manager's liability in the event of simple negligence in the management of the company, whereas simple negligence is enough to found the ut singuli action. The action for insufficiency of assets is time-barred after three years from the judgment opening the proceedings.

The consequence is operational. Where the SPV's financial deterioration is already under way, waiting to act amounts to giving up. The opening of collective proceedings closes a route that offered a standard of fault more favourable to the claimant.

The D&O policy determines the economic value of the action

A manager who is an individual with no attachable assets makes the action symbolic. The preliminary question is therefore whether the directors' and officers' liability policy taken out by the vehicle or by the sponsor exists, and what its amount and exclusions are. Three points to examine: the triggering event or the claim as the trigger for cover, the exclusion clause for intentional or fraudulent misconduct, and, in policies of Anglo-Saxon inspiration, the clause excluding claims brought by one insured against another insured, the wording of which determines whether the corporate action brought by a shareholder is covered.

Deciding: bring proceedings, negotiate, or exit

The ut singuli action is an instrument of leverage as much as an instrument of redress. Its direct financial return is low for a minority shareholder: he or she alone funds a case whose proceeds go to the company. Its real value lies in three effects. It forces the sponsor to document its management before a judge, which no meeting requires of it. It brings in the insurer, who becomes a participant in the negotiation. It creates, for a manager in the process of raising a new vehicle, a reputational cost that a settlement allows to be eliminated.

The position taken is as follows: in an SPV or a club deal, the ut singuli action is conceived first as a lever for renegotiating the exit terms, and is pursued to judgment only where the fault is documentary, dated and quantifiable, and where the manager's solvency or the D&O policy secures enforcement of the judgment. In other cases, energy is better spent securing the asset and the liquidity of the shares.

A practical recommendation before any decision: as soon as the first warning sign appears, have a note prepared dating the facts, stating the limitation regime applicable to the corporate form of the vehicle, the date adopted as the damaging event and the defensible date of discovery. It is this note, and not the valuation of the loss, that determines the window for action actually available.

Frequently asked questions

Is a minimum percentage of the capital required to bring an ut singuli action? No. The individual action is open to any shareholder, with no threshold condition, whether on the basis of Article L. 223-22 of the French Commercial Code for the SARL, Article L. 225-252 for the SA, Article L. 227-8 for the SAS or Article 1843-5 of the French Civil Code for the société civile. A threshold exists only for the joint action with a representation mandate, organised by the implementing regulations, and for the management expert appointment under Articles L. 225-231 and L. 223-37 of the French Commercial Code. The holder of a minority stake therefore has the same right to act as the reference shareholder.

Do the damages obtained go to the claimant shareholder? No. The statutory provisions expressly state that damages are awarded to the company, the shareholder seeking compensation for the company's loss and not his or her own. The minority shareholder benefits only indirectly, through the restoration of the net assets and therefore of the value of the shares. Yet he or she alone bears the costs of the proceedings, subject to what is obtained under Article 700 of the French Code of Civil Procedure. This asymmetry must be factored into the initial assessment.

What is the limitation period for a liability action against a manager? Three years from the damaging event, or from its discovery if it was concealed, for the SARL (Article L. 223-23 of the French Commercial Code) and for the SA and the SAS (Article L. 225-254 of the same code, applicable to the SAS through the cross-reference in Article L. 227-8). The period is extended to ten years where the event amounts to a crime. For a société civile, the general rule in Article 2224 of the French Civil Code applies, that is five years. The corporate form of the vehicle must therefore be checked before any analysis of the window for action.

Does a discharge given by the general meeting protect the manager? No. Article L. 225-253 of the French Commercial Code, Article L. 223-22, paragraph 5 and Article 1843-5, paragraph 4 of the French Civil Code state that no decision of the meeting may have the effect of extinguishing a liability action against managers for fault committed in the performance of their mandate. The discharge has the effect only of approving the accounts. The same applies to a clause in the agreement by which the shareholders would waive in advance the right to act, which is likewise deemed unwritten.

Does an ut singuli action remain possible after collective insolvency proceedings have been opened? In practice no, as regards anything aimed at restoring the company's assets. Actions falling within the collective interest of the creditors are reserved to the court-appointed creditors' representative or the liquidator, and the liability action for insufficiency of assets under Article L. 651-2 of the French Commercial Code belongs to the liquidator, the public prosecutor and, subsidiarily, the creditors appointed as supervisors. This mechanism also excludes simple negligence by the manager, whereas simple negligence is enough to found the corporate action. The opening of collective proceedings therefore closes a route that was more favourable to the minority shareholder.

Can documents be obtained from the manager before bringing the action? Yes, through an in futurum fact-finding measure based on Article 145 of the French Code of Civil Procedure, which allows disclosure of accounting records, management contracts, bank exchanges or technical reports on the asset. This application, even in summary proceedings, interrupts limitation under Article 2241 of the French Civil Code, and the decision granting it suspends limitation until the measure has been carried out under Article 2239. The timetable must nevertheless be built backwards from the limitation deadline, and not as the facts are discovered.

Does selling the shares during the proceedings end the action? Yes. The right to act is attached to shareholder status, which must exist on the day the proceedings are commenced and continue thereafter. An investor who exercises its put or sells its holding loses standing to pursue the corporate action. In a club deal, the sequence between implementing a liquidity clause and commencing litigation must therefore be decided in advance, and ideally anticipated by a clause in the agreement suspending forced exit mechanisms for as long as a corporate action is pending.