Discord between the shareholders of a real-estate company (SCI): the solutions

October 13th 2017

(Cour de cassation (French Civil Supreme Court), 3rd Chamber, February 23, 2017

The discord between shareholders may result in an early dissolution

The discord between shareholders may constitute a potential major risk for the company, which may result in its operational standstill.

In such case, the French Civil Code (Article 1844-7 5°) provide that the Court may pronounce the early dissolution of the company.

In a case dated February 23, 2017, the Cour de cassation (the French Civil Supreme jurisdiction) recently reasserted the principle according to which in order for the company’s dissolution to be pronounced, the discord must result in its operational standstill.

In practice, this standstill is characterized, in particular, when the discord renders any collective decision impossible.

The company’s operational standstill

In the Cour de cassation case, the SCI’s operational standstill was established as follows:

  • the SCI was setup between two shareholders holding the same number of shares, one of whom was the manager;
  • the situation of discord, the origin of which dates back to the termination of the professional relations between both shareholders over a third party company, and had existed for four (4) years on the date of decision by the
    Tribunal de Grande Instance, which pronounced the company’s early termination;
  • the manager of the SCI had initiated court actions (civil and criminal) against his co-shareholder;
  • the manager had unilaterally signed a sale agreement for land belonging to the company, infringing the by-laws which stipulated that the sale of
    real-estate assets should first be authorized by all the shareholders;
  • the absence for several years of any ordinary collective decision deciding on the allocation of the company’s results.

On this basis, the Cour de cassation confirms that the Court of Appeal had legally justified its decision, by deducting that the discord between the shareholders caused an operational standstill for the SCI, on the grounds of the different reasons set forth above.

The solutions to prevent the standstill

A conflictual context between shareholders, whether they are majority, minority, operational or investing shareholders, makes it difficult to reach adequate solutions, as a balance has to be found between the consideration of the conflicting shareholders and the company’s interest.

The risk of the company’s operational standstill, enhanced in the presence of shareholders carrying the same number of voting rights, is rarely taken into consideration by the founding partners when they setup the company and most often the by-laws do not offer any viable solution.

In order to prevent the ultimate consequence of the company’s compulsory dissolution, a certain number of mechanisms may be used at each stage of a conflict, to implement solutions to demine the shareholders’ discord, amongst which:

  • Anticipation of the conflict by setting up exit and amicable resolution clauses for conflicts stipulated in a shareholders’ agreement.
  • A pedagogical approach for the parties to reach a conciliation and setup of the consequential legal operations (sale of shares and securities, capital reduction, etc.).
  • Setup of mediation solutions, led by an authorized third party.
  • Initiation of court proceedings before the relevant courts.

These solutions must be used appropriately in order to protect the relevant interests (conflicting shareholders, the company) given the specific nature of the discord.

Gérald Garcia