Buy-back of SARL shares by the company itself

A disagreement develops between two partners (associés) of a family SARL (French limited liability company). One wants to continue the development of the business, the other blocks every decision and refuses to sell his or her shares (parts sociales) to an outside third party. No buyer comes forward, the other partners do not have the personal cash to buy, and the company finds itself paralysed. In this situation, the buy-back of the shares by the company itself, by way of a capital reduction, becomes a lever for breaking the deadlock. This analysis sets out the prohibition principle that frames this mechanism, the capital reduction procedure on which its validity depends, and its practical use as a tool for removing a blocking partner.

The principle: a SARL cannot freely buy its own shares

Contrary to a widespread belief, a SARL cannot buy back a partner's shares in order to hold them in portfolio as a société anonyme would do with its treasury shares. Article L223-34 of the French Commercial Code lays down a prohibition in principle: the purchase by a SARL of its own shares is prohibited.

This prohibition protects two interests. First, that of the creditors, because the share capital constitutes their general security: allowing a company to buy its own shares would amount to indirectly returning funds to the shareholders to the detriment of third parties. Second, that of the remaining partners, to prevent treasury share manoeuvres that would distort the distribution of powers.

The exception is found in the same article. The meeting that decides on a capital reduction not motivated by losses may authorise the buy-back of a specified number of shares with a view to cancelling them. In other words, the buy-back of shares by the company is lawful only on one condition: the shares bought back must immediately disappear by cancellation, with a corresponding reduction of capital. The SARL never holds its own shares, it removes them from legal existence.

The difference from other forms of company

The regime differs markedly from that of companies limited by shares, where the buy-back of own shares is regulated but authorised within certain limits, in particular for allocation to employees or to regulate the share price. In a SARL, no treasury share portfolio is possible: it is capital reduction or nothing.

In civil companies (sociétés civiles), the French Civil Code expressly authorises a comparable mechanism. Article 1862 of the French Civil Code provides that the company may also buy back the shares with a view to cancelling them where a partner wishes to transfer and no purchaser is approved. Article 1867 of the French Civil Code confirms, in the context of pledges, that if no partner exercises this option, the company may buy back the shares itself, with a view to cancelling them. The logic is identical in both regimes: buy-back by the company exists only when tied to a cancellation.

Why a share buy-back serves as a tool for a partner's exit

The buy-back of SARL shares by the company itself is not a common estate management arrangement. It is above all an exit solution when the conventional routes fail.

Three routes normally exist for organising a partner's exit from a SARL. Transfer to a fellow partner, which assumes that the latter has the funds. Transfer to a third party, which assumes approval by the other partners and above all the existence of an interested buyer. And, in civil companies or where the articles of association so provide, withdrawal. All these routes assume that a solvent buyer agrees to take over the shares.

Buy-back by the company circumvents this difficulty. The company itself uses its cash or reserves to buy back the departing partner's shares, then cancels them. No third party needs to be found, no fellow partner needs to draw on his or her personal assets. This is particularly useful in two cases:

• a minority partner wishes to withdraw from an unlisted company, whose shares are by nature illiquid, without finding a buyer
• a lasting disagreement divides the partners and one of them, without holding the blocking minority on all decisions, hinders the running of the company

The departing partner recovers the value of his or her shares, the remaining partners see their percentage holding mechanically increase because the capital is reduced, and the company returns to calmer operation.

The blocking partner scenario

The blocking partner is one who, by voting or by inaction, prevents the adoption of necessary decisions. In a SARL, decisions amending the articles of association require a qualified majority (two thirds of the shares for companies formed after the Law of 2 August 2005). A partner holding more than one third of the capital can therefore block any change to the articles: capital increase, transformation, transfer of the registered office outside the département, change of corporate object. The distinction between a blocking minority and abuse of minority, and the appointment of an ad hoc agent (mandataire ad hoc) to unblock a decision, are covered in our dedicated article.

Faced with this deadlock, outright expulsion does not exist as of right in a SARL: no legal provision allows a partner to be expelled except by a specific clause in the articles of association, which is rarely drafted. The buy-back of the partner's shares by the company, if accepted by the blocking partner, offers a negotiated exit that avoids the long and uncertain litigation of dissolution for disagreement. The solutions available in the case of expulsion and disagreement between partners of a SARL or SAS (French simplified joint stock company) are covered separately in our article on this question.

The capital reduction procedure, a condition of validity of the buy-back

The buy-back is valid only if it forms part of a capital reduction that has been properly decided. The procedure determines the validity of the transaction, and a defect of form exposes it to annulment.

The decision of the extraordinary general meeting

The capital reduction amends the articles of association. It therefore falls to the extraordinary general meeting, ruling by the majority required for amendment of the articles. The meeting must rule on the principle of the reduction and its amount, and authorise the manager to buy back a specified number of shares with a view to cancelling them, in accordance with Article L223-34 of the French Commercial Code.

The resolution must state that the reduction is not motivated by losses. This point is decisive: a reduction motivated by losses can never serve as a basis for a share buy-back, since it returns nothing to the partners, it clears the accounts.

The involvement of the statutory auditor

Where the SARL has a statutory auditor (commissaire aux comptes), the reduction proposal is communicated to the auditor before the meeting. The auditor gives an opinion on the reasons for and terms of the reduction. This step secures the transaction by confirming that it does not infringe equality between partners and that it rests on a sound financial basis.

The creditors' right of opposition

Because a capital reduction not motivated by losses reduces the creditors' security, they have a right of opposition. The reduction proposal is filed with the commercial court registry (greffe) and published, which starts the statutory opposition period for the benefit of creditors whose claims pre-date it.

Until this period has expired and any oppositions have been dealt with, the reduction operations cannot begin. The court seised of an opposition may either reject it, order repayment of the claims, or require guarantees to be provided. This phase therefore requires that the buy-back price not be paid to the departing partner before the right of opposition has been cleared, failing which the whole transaction is weakened.

Cancellation of the shares and updating of the articles

Once the price has been paid, the shares bought back are cancelled. The share capital is reduced by the nominal amount of the shares cancelled. The articles of association are amended to reflect the new capital and the new distribution among partners. Filing with the registry and an amending entry in the Trade and Companies Register (registre du commerce et des sociétés) complete the transaction, with publication in a legal notices journal.

The substantive conditions to be met

Beyond the formal steps, several substantive conditions determine the lawfulness of the buy-back of shares by the company.

The reduction must not be motivated by losses, a condition already stressed, and it constitutes the legal foundation required by Article L223-34.

The principle of equality between partners must be respected. A capital reduction aimed only at a named partner, without objective justification, may be challenged as breaching equality. In practice, where the objective is indeed the exit of a specific partner, the transaction is accepted provided that it results from an agreement between the parties and does not harm the other partners. The drafting of the resolution must clearly identify that the buy-back targets the shares of the departing partner with his or her consent.

The capital cannot be reduced below the applicable minimum. The SARL has no longer been subject to a legal minimum capital since the Law of 1 August 2003, the capital being freely set by the articles of association, including at a symbolic one euro. A reduction must nevertheless not result in a capital that is incompatible with the articles of association or in a situation where shareholders' equity falls below half of the capital, which would trigger the procedure under Article L223-42 of the French Commercial Code. The amount of a SARL's capital and the obligations attached to it are explained in our article on the minimum capital of a SARL.

Setting the price of the shares bought back

The buy-back price often crystallises the disagreement, especially in a context of discord. The value of the shares of an unlisted SARL is far from obvious: it depends on the valuation of the business, any real estate assets, profitability and prospects.

In principle, the price results from an agreement between the company and the transferring partner. Failing agreement, recourse to the expert under Article 1843-4 of the French Civil Code is required. This article allows an expert to be appointed, at the request of the more diligent party or by the president of the court ruling under the accelerated procedure on the merits (procédure accélérée au fond), to determine the value of the shares. The expert's valuation is then binding on the parties.

In a SARL holding real estate, the valuation requires sound property expertise: the value of buildings carried in the balance sheet at historical cost may be very far from their real market value. Underestimating this gap leads to underpaying the departing partner and feeds the litigation.

Tax treatment of the buy-back

For the partner who transfers shares to the company, the gain realised falls in principle under the regime for capital gains on disposals of company shares. Since 2018, these gains realised by private individuals have been subject to the single flat-rate levy (prélèvement forfaitaire unique) at an overall rate of 30% (12.8% income tax and 17.2% social contributions), unless the progressive scale is elected. The exact regime depends on the transferor's situation, the date the shares were acquired and the nature of the company.

This characterisation is not always automatic and securing the tax position of the transaction justifies a prior review, in particular to choose between treatment as a capital gain and possible requalification. A case-by-case analysis with a tax adviser is indispensable before any commitment.

Buy-back as the resolution of a disagreement between partners

The buy-back of SARL shares by the company is of most value when it avoids the most destructive outcome: dissolution.

The alternative to dissolution for disagreement

Article 1844-7 of the French Civil Code provides for the early dissolution of the company, ordered by the court for just cause, in particular where a disagreement between partners paralyses the running of the company. But this dissolution requires a clearly established paralysis and remains a brutal weapon: it ends the business, destroys its value, and harms all the partners, including those who wished to continue.

Buy-back by the company makes it possible to achieve the desired result, the end of the conflict, without sacrificing the business. The partner at the origin of the deadlock leaves with the value of his or her shares, and the company continues. It is a value-preserving solution, whereas dissolution is a liquidation solution.

Interplay with negotiation

In practice, buy-back by the company is rarely a matter of pure confrontation. It is the product of a negotiation in which the departing partner accepts a price, and the remaining partners agree to use the company's cash. This negotiation is often facilitated by the prospect, for the blocking partner, of long and costly litigation if he or she refuses any amicable exit.

The exit protocol must be carefully drafted: conditions precedent linked to clearing the creditors' right of opposition, a schedule for payment of the price, guarantees, a non-compete clause if the partner carried on an operational role, and waiver of any claim linked to his or her status as a partner. Coordination between the protocol and the capital reduction procedure is the core of securing the transaction.

Conclusion

The buy-back of SARL shares by the company itself is neither a free tool nor an ordinary arrangement. It is an exceptional transaction, tolerated by Article L223-34 of the French Commercial Code only within a capital reduction not motivated by losses, with immediate cancellation of the shares. Its real value lies in its function of resolving deadlocks: where no buyer comes forward and a disagreement paralyses the SARL, it offers an exit that preserves the business where dissolution would destroy it.

Two points concentrate the legal risk and deserve the greatest vigilance: complete clearing of the creditors' right of opposition before any payment of the price, and the setting of an enforceable value for the shares, if necessary by the expert under Article 1843-4 of the French Civil Code. Before convening any meeting, have an independent valuation of the shares prepared and have the timetable of the transaction secured by an adviser, aligning precisely the exit protocol and the steps of the capital reduction.

Frequently asked questions

Can a SARL buy back its own shares in order to keep them?

No. Article L223-34 of the French Commercial Code prohibits a SARL from buying its own shares in order to hold them in portfolio. A buy-back is lawful only within a capital reduction not motivated by losses, and the shares bought back must be cancelled immediately. Unlike a company limited by shares, a SARL can therefore never hold treasury shares.

What majority is needed to decide a capital reduction in a SARL?

A capital reduction amends the articles of association and falls to the extraordinary general meeting. For SARLs formed after the Law of 2 August 2005, the required majority is two thirds of the shares held by the partners present or represented. A partner holding more than one third of the capital therefore has a blocking minority on this decision, which explains the value of negotiating an amicable exit.

Does the buy-back of shares by the company allow a partner to be expelled by force?

No, not directly. In a SARL, there is no statutory expulsion of a partner except by a specific clause in the articles of association that is rarely provided for. Buy-back by the company requires the departing partner's agreement on the principle and on the price. It is a negotiated exit solution, not a unilateral expulsion mechanism.

How is the price of the shares bought back set in the event of disagreement?

The price results in principle from an agreement between the company and the transferring partner. Failing agreement, Article 1843-4 of the French Civil Code allows an expert to be appointed, in particular by the president of the court, to determine the value of the shares. The expert's valuation is then binding on the parties. In a SARL with real estate assets, a prior property valuation is indispensable to avoid undervaluation.

Can creditors oppose the buy-back of shares?

Yes. A capital reduction not motivated by losses reduces the creditors' security, and they have a right of opposition within the statutory period opened by publication of the transaction. No payment of the price should be made before this right has been cleared. The court seised of an opposition may reject it, order repayment of the claims or require guarantees.

Does a buy-back of shares by the company avoid dissolution for disagreement?

Yes, that is precisely one of its advantages. Article 1844-7 of the French Civil Code allows judicial dissolution for a disagreement paralysing the running of the company, but this outcome destroys the value of the business. Buy-back by the company removes the partner at the origin of the deadlock while allowing the company to continue its activity, which makes it a value-preserving solution.

What is the tax regime for the partner who sells shares to the company?

For a private individual, the gain falls in principle under the regime for capital gains on disposals of company shares, subject since 2018 to the single flat-rate levy of 30% (12.8% income tax and 17.2% social contributions), unless the progressive scale is elected. The characterisation depends on the transferor's situation and the nature of the transaction, so that a prior tax analysis is necessary before any commitment.