The bylaws of a SAS (“société par actions simplifiée”) may provide for a prior approval clause.
A prior approval clause (“clause d’agrément”) is a clause which subjects the transfer of shares by a shareholder to the prior approval of the shareholders’ assembly or another corporate body.
In the event that the bylaws do not contain a prior approval clause, the sale of shares of the company will be free (subject to pre-emption and/or tag-along rights, if any).
If the bylaws contain a prior approval clause, the bylaws must specify whether this clause applies:
- only in the event of sale of shares to third parties, or also in the event of sale of shares to other shareholders
- only to the sale of shares, or also to the sale of other securities (such as warrants giving right to shares, convertible bonds, bonds, etc.)
- only in the event of sale of shares or securities, or also in the event of any kind of transfer of such shares or securities or rights attached thereto (donation, transfer of bare-ownership or usufruct, transfer of preferential subscription rights which attach to shares, etc.)
The transfer of shares of a specified category or those held by certain shareholders may be excluded from the prior approval clause and therefore remain free.
In a SAS, the prior approval of a potential purchaser may be granted by the president of the company, its director general, the shareholders’ assembly or even a third party. In all events, the person(s) or corporate body competent to grant such approval must be specified in the bylaws.
A prior approval clause must be drafted with great caution as, once included in the bylaws, it may no longer be modified unless all shareholders of the company unanimously consent to such a modification. Similarly, a prior approval clause may not be included in the original bylaws unless all shareholders accept to include such clause.
A prior approval clause (“clause d’agrément”) is a clause which subjects the transfer of shares by a shareholder to the prior approval of the shareholders’ assembly or another corporate body.
The purpose of a prior approval clause, which must be included in the bylaws of the company, is to enable interested parties to control the composition of the shareholders of the company.
The prior approval clause may apply in the event of sale of shares to third parties, as well as in the event of sale of shares between shareholders.
A shareholder may not be prohibited from selling its stake in a company. Consequently, in the event that the third party purchaser is not approved pursuant to the prior approval clause, the shares of the selling shareholder must be purchased either by the remaining shareholders or by a third party (approved in accordance with the prior approval clause), or by the company itself in view of a share capital reduction. In such cases, the purchase price for the shares will be determined by a third party independent expert if the parties fail to agree on its amount.
The conditions of validity and enforceability of the prior approval clause differ, depending on whether it relates to a SAS (“société par actions simplifiée”), SARL (“société à responsabilité limitée”) or SA (“société anonyme”).
Prior approval clause and transfer of shares among shareholders
A prior approval clause (“clause d’agrément”) which applies not only to transfers of shares to third parties but also to existing shareholders enables interested parties to control the evolution of the distribution of share capital among shareholders and therefore the importance of each of them within the company.
In the event that no such control is necessary, the prior approval clause may apply only to transfers of shares to third parties (who, at the time of such transfer, are not shareholders of the company).
Regarding French SAS (“société par actions simplifiée”), the inclusion or modification of a prior approval clause in the original bylaws requires the unanimous consent of all shareholders (art. L. 227-19 of the French Commercial Code).
Breach of a prior approval clause stipulated in the bylaws
A prior approval clause (“clause d’agrément”) is a clause which subjects the transfer of shares by a shareholder to the prior approval of the shareholders’ assembly or another corporate body.
The breach of a prior approval clause contained in the bylaws of a company renders the transfer of shares effected in such breach null and void. By contrast, a breach of a prior approval clause contained in a shareholders’ agreement may only give right to damages for breach of a contractual obligation.
The seller may also incur responsibility for breach of a statutory provision.
Share capital reduction following a refusal to approve a potential purchaser of shares
In the event that the approval of a potential purchaser of shares is refused, the shares of the selling shareholder must be purchased either by the remaining shareholders or a third party (approved in accordance with the provisions of the prior approval clause), or by the company itself in view of a share capital reduction.
In the event of a share capital reduction, the reduction will be taxed as a distribution of revenues to the seller.
It is therefore recommended to provide in the bylaws that such share capital reduction will require the prior consent of the seller. Such consent is in all events required as regards share capital reductions of French sociétés anonymes (article L. 228-24 of the French commercial code).
Determination of the share purchase price by an independent expert upon refusal to approve the potential purchaser
In the event that the prior approval of a potential purchaser of shares is refused, the shares of the selling shareholder must be purchased by the remaining shareholders or a third party (approved in accordance with the prior approval clause) or by the company itself in view of a share capital reduction.
In such cases, and if the parties fail to agree on the purchase price, the purchase price for the shares will be determined by a third-party expert in compliance with the provisions of article 1843-3 of the French civil code.
The expert is appointed either by the parties or, if the parties fail to agree, by the president of the competent commercial court in summary proceedings. The decision of the president of the commercial court is not subject to appeal.
According to French case-law, and subject to manifest error, the expert has all freedom to determine the purchase price by applying criteria which he/she considers valid and legitimate. A court may not subsequently substitute its opinion to that of the expert to modify the price determined by the expert.
The expert’s responsibility may however be engaged if he/she has negligently or purposefully determined a lower price.
The expert has no authority to determine the payment modalities of the purchase price, which must be paid in accordance with the modalities set forth by the prior approval clause. Any additional payment delays requested by the purchaser will require the consent of the seller.
Right, for the selling shareholder, to withdraw from the sale of its shares
In the event that the potential purchaser of shares is not approved, the selling shareholder may be authorized to withdraw from the sale.
Such “right to withdraw” (“droit de repentir”) is not mandatory and may be freely determined and organised in the bylaws. A right to withdraw may apply, for example, only in the event that the price offered for the purchase of the shares of the selling shareholder (by the remaining shareholders or a third party approved in accordance with the prior approval clause or the company in view of a share capital reduction) is too low.
The combination of a prior approval clause with other clauses relating to the management of shareholders
In the event that the bylaws of a company (or a shareholders’ agreement) contain a prior approval clause (“clause d’agrément”) and a pre-emption clause, the prior approval of the potential purchaser should occur after the exercise of the pre-emption right.
The combination of a prior approval clause and a pre-emption right may prove technically tricky. These clauses must be drafted with caution to ensure that the processes which they provide for are compatible with each other.
The combination of a pre-emption right and a prior approval clause restricts considerably the right, for a shareholder, to sell its shares.
The process set forth in relation to a prior approval clause must also be adjusted to take into account the exercise of other rights, such as a tag-along right and/or a drag-along right.
