Disputes between shareholders

The relationship between the shareholders (associés) of a company rests on a delicate balance between mutual trust and economic interests that sometimes diverge. When that balance breaks down, conflicts can quickly escalate into genuine legal battles, endangering the very future of the business. Disputes between shareholders are among the most complex issues in business law, requiring a strategic approach and a thorough knowledge of the protective mechanisms provided by law.

The sources of conflict between shareholders

Disagreements over the management of the company

Disagreements over the strategic direction of the business are one of the main causes of shareholder disputes. These conflicts may concern investment decisions, the choice of managers, the dividend policy or the terms of commercial development.

Abuse of voting rights may then become a tool used by the majority to impose its views to the detriment of the legitimate interests of the minority. This situation requires a precise legal analysis to determine whether the conditions for legal action are met.

Property and financial conflicts

Financial matters frequently generate tension between shareholders. The valuation of shares, the terms on which a shareholder leaves, the distribution of profits or decisions to increase capital can each become a source of discord.

Deadlock situations arise in particular where a shareholder wishes to sell its shares and the other shareholders challenge the sale price or abusively exercise their pre-emption right.

Breaches of legal and statutory obligations

Each shareholder is bound to comply with certain obligations towards the company and its fellow shareholders. A breach of these duties may be the basis of a dispute:

• Failure to comply with exclusivity or non-competition clauses
• Breach of the obligations of disclosure and transparency
• Diversion of business opportunities
• Misuse of company assets

The mechanisms protecting minority shareholders

The notion of abuse of majority

Abuse of majority (abus de majorité) is one of the essential foundations of the protection of minority shareholders. It is characterised by the adoption of decisions contrary to the corporate interest and motivated solely by the interest of the majority. The rights of the minority shareholder and the means of acting against abuse of majority in an SARL (French private limited company) are set out in our article on the minority shareholder of an SARL.

Case law has established strict criteria for characterising this abuse:

• The decision must be contrary to the corporate interest
• It must have been taken for the sole purpose of favouring the majority to the detriment of the minority
• The harm caused to the minority shareholders must be established

Action for annulment of abusive decisions

Where an abuse of voting rights is established, the injured shareholder may apply to the court for annulment of the disputed decision. This action must be brought within three years of the publication of the contested decision.

The judge has sovereign discretion to determine whether the conditions of the abuse are met. The judge may order various measures:

• Outright annulment of the decision
• Substitution of a decision consistent with the corporate interest
• An award of damages

Liability actions

Shareholders may bring claims for the liability of their fellow shareholders in the event of fault in the exercise of their rights. This liability may be based on:

• Breach of the articles of association or of the shareholders' agreement
• Breach of the duties of loyalty and good faith
• The commission of acts contrary to the corporate interest

Dispute resolution procedures

Mediation and conciliation

Before starting litigation, the possibilities of an amicable settlement of the dispute should be examined. Mediation has several advantages:

• Confidentiality of exchanges
• Preservation of business relationships
• Reduced cost and time
• Flexibility in seeking solutions

Mandatory prior mediation clauses may be inserted in the articles of association or the shareholders' agreement to require this step before any court action. The content and drafting of this instrument are covered separately in our guide to the shareholders' agreement.

Commercial arbitration

Arbitration is an effective alternative to conventional court litigation. The parties may agree to submit their disputes to one or more arbitrators who practise in business law.

This procedure offers several guarantees:

• Technical expertise of the arbitrators
• Speed of the procedure
• Absolute confidentiality
• Enforceability of the award

Court proceedings

Where amicable routes have failed, recourse to the courts becomes unavoidable. Disputes between shareholders generally fall within the jurisdiction of the commercial court (tribunal de commerce).

The proceedings may be long and complex, requiring a suitable legal strategy and careful preparation of the legal and factual arguments.

Leaving the company: solutions and obstacles

Voluntary withdrawal

Certain corporate forms allow a shareholder to withdraw from the company under certain conditions. This right of withdrawal may be provided for by the articles of association or by law. On the exit of a shareholder by way of capital reduction, see our analysis of the buy-back of SARL shares by the company itself.

The terms of exit must be clearly defined to avoid any later dispute:

• Conditions for exercising the right of withdrawal
• Methods of valuing the shares
• Time limits for payment of the buy-back price

Expulsion of a shareholder

In certain exceptional circumstances, a shareholder may be expelled from the company because of its conduct. This extreme measure requires:

• An express provision in the articles of association authorising expulsion
• The occurrence of serious facts justifying this sanction
• Compliance with adversarial procedure

Judicial winding-up

In the event of a serious and irremediable disagreement between shareholders, the court may order the winding-up of the company. This radical solution is considered only as a last resort where:

• The conflicts paralyse the functioning of the company
• The corporate purpose can no longer be achieved
• Continuing the business proves impossible

Preventing conflicts

Drafting suitable articles of association

Careful drafting of the articles of association is the first protection against future conflicts. The articles of association should provide for:

• The decision-making procedures and the quorums required
• The rights and obligations of each category of shareholder
• The dispute resolution procedures
• The conditions for the sale and transfer of shares

The shareholders' agreement

This contractual instrument makes it possible to organise relations between shareholders more flexibly than the articles of association. It may provide for:

• Reinforced approval clauses
• Negotiated exit mechanisms
• Non-competition undertakings
• Mandatory mediation procedures

Corporate governance

Putting in place clear and transparent governance helps to prevent conflicts:

• Precise definition of each person's role
• Establishment of supervisory bodies
• Procedures for regular information of shareholders
• A policy for managing conflicts of interest

Legal assistance

The role of the lawyer in business law

Faced with a dispute between shareholders, the involvement of a lawyer who practises business law is essential. The lawyer's experience makes it possible to:

• Analyse the legal situation precisely
• Assess the chances of success of the various possible actions
• Negotiate an amicable solution on the best terms
• Conduct the litigation where necessary

Litigation strategy

Each situation requires a specific approach, taking into account:

• The economic interests at stake
• The balance of power between the parties
• The future prospects of the company
• The costs and timescale of the proceedings

The lawyer assists the client in developing a coherent strategy aimed at protecting the client's interests while preserving, as far as possible, the future of the business.

Disputes between shareholders involve major stakes, both legally and economically. The complexity of these cases requires a comprehensive approach covering the legal, financial and human aspects of the conflict. Prevention remains the best protection, but when a conflict arises, only legal assistance allows rights and interests to be defended effectively. Faced with an abuse of voting rights or any other dispute with your fellow shareholders, do not hesitate to consult a business law professional who will be able to advise you and represent you in defending your legitimate interests.