CAN WE COMPLETELY AND DEFINITIVELY REMOVE THE VOTING RIGHTS ATTACHED TO CERTAIN SHARES? UPDATE AFTER THE SO CALLED « PACTE LAW »
French Company law, behind an apparent simplicity, is very technical since the rules can considerably vary from one type of company to another depending on its corporate form and since legal provisions sometimes contradict each other. The issue as to the possibility of removing the voting rights is a good illustration thereof.
The question arises differently in simplified joint stock companies (sociétés par actions simplifiées so called “SAS”) and in other joint stock companies such as joint stock companies (sociétés anonymes so called “SA”) and limited partnerships by shares (sociétés en commandite par actions so called “SCA”). It also arises differently depending on whether the shares of these companies are listed (admitted to trading on a regulated market or on a multilateral trading system) or not, being here reminded that the shares of the SAS cannot be listed.
1. In SAS
Since the PACTE Law of May 22, 2019, which brought major changes to French company law and in particular modernized the preferred share regime, the voting right attached to shares issued by an SAS can be suppressed using the preferred share mechanism (L. 228-11 of the Commercial Code).
Indeed, the French Supreme Court (Cour de cassation, Chambre commerciale, 9 February 1999 - n° 96-17.661, Cass. com., 23 Oct. 2007, n° 06-16.537, P+B+R+I , d'Hem v/ Lacquay: Juris-Data n° 2007-041010), making an extensive reading of article 1844, paragraph 1 of the Civil Code which states "Every shareholder has the right to participate in collective decisions", and going beyond the literal meaning of the text, considers that “each shareholder has the right to participate in collective decisions and to vote and that the Articles of Association may not derogate from these provisions unless provided for by law”.
Since the reform of 22 May 2019, Article L. 228-11 of the Commercial Code now provides without ambiguity for the possibility of completely and definitively abolishing the voting rights attached to shares.
Prior to the Law of 22 May 2019, Article L. 228-11 of the Commercial Code contained a double contradiction, since:
- the first subparagraph contained in itself a first contradiction by indicating that preferred shares without voting rights could be created, temporarily or permanently, but in compliance with Articles L. 225-122 to L. 225-125 of the Commercial Code. And these texts impose restrictions that seem to prohibit this total abolition of the voting rights. Indeed, Article L. 225-122, I of the Commercial Code imposes a public order principle of proportionality, according to which the voting rights attached to the shares of capital or of enjoyment must be proportional to the proportion of capital which they represent and each share shall be entitled to at least one vote. This pleaded against the total abolition of the voting rights;
- at the same time, the second paragraph of Article L. 228-11 of the French Commercial Code stated, this time without restrictions, that the voting rights could be "adapted for a specified or determinable period", see “suspended for a fixed or determinable period of time or deleted”, implying that the right of deletion was absolute and autonomous. Finally, to complicate matters further, some have attempted to argue that these restrictions could not apply to SAS since Article L. 227-1 of the Commercial Code expressly states that these articles L. 225-122 to L. 225-125 are not applicable to SAS. This, however, was not admissible since Article L. 288-11 does apply and therefore make L. 225-122 to L. 225-125 applicable by reference.
The new Law of May 22, 2019 by deleting the reference to Articles L. 225-122 to L. 225-125 for companies whose shares are not admitted to trading on a regulated market or on a multilateral trading system, allowed the suppression of those contradictions. There remains a limitation for SAS though. Preferred shares without voting rights may not represent more than half of the share capital and any issue that has the effect of increasing the proportion above this limit may be canceled.
Because of Article 1844, paragraph 1 of the Civil Code which provides that "Every shareholder has the right to participate in collective decisions", if the voting rights may be abolished on the basis of Article L. 228-11, on the other hand, the right to participate in (be convened to) collective decisions cannot be abolished. (D. Martin, H. Le Nabasque, R. Mortier, C. Fallet et A. Pietrancosta, Les actions de préférence : Actes prat. ing. sociétaire 2012, dossier 6, n° 36).
Consequently, the holders of non-voting shares cannot, in our opinion, be deprived of the right to participate in (be convened to) the collective decisions recognized to any shareholder by article 1844, para. 1 of the Civil Code, this article being of public order (Article 1844-10, paragraph 2 of the Civil Code).
Finally, it is worth remembering that the suppression of the voting rights referred to in Article L. 228-11 can in no circumstance include that of voting at a special meeting of holders of preferred shares who are called upon to deliberate on any modification of the rights attached to the said shares, failing which such modifications would be null and void (article L. 225-99 of the French Commercial Code).
2. In other unlisted joint-stock companies (whose shares are not admitted to trading on a regulated market or a multilateral trading facility)
2.1 In the context of preferred shares
The preferred shares of other unlisted joint-stock companies (SA and SCA) are subject to the same rules as those set out above.
2.2 Apart from preferred shares
Apart from the creation of preferred shares, a major difference exists between the SAS and the other joint-stock companies (SA and SCA) on the extent of the possibilities in terms of the management of the voting rights.
The Shares issued by SA and SCA are subject to:
- the principle of proportionality which is a provision of public order and under which, except in the cases provided for by law, the voting rights attached to such shares must therefore be proportional to the percentage of capital that the shares represent, each share giving entitlement to one vote at least (Article L. 225-122, I of the Commercial Code); SA and SCA cannot therefore remove the voting rights outside preferred shares;
- the principle of equal capping, according to which the articles of association may limit the number of votes that each shareholder has in the meetings, provided that this limitation is imposed on all shares without distinction of category, other than shares with preferential dividends without voting rights. (L. 225-126 of the Commercial Code). SA and SCA cannot, therefore limit the voting rights in a differentiated manner apart from preferred shares;
The interest of the SAS is to be able, even regardless of the preferred shares, to arrange the voting rights much more freely than the joint stock companies (SA) and limited partnerships by shares (SCA) since the articles governing the SAS excludes expressly the application of the above mentioned restrictive rules.
Thus, even without creating preferred shares, quorums and majorities can be freely organized in SAS (it can therefore freely restrict voting rights but for very limited instances where it is prohibited by law) and the SAS can freely decide which decisions shall belong to the shareholders (subject to few decisions which by law have to be made by shareholders). We shall not in this article examine all the aspects of that flexibility since the purpose of this article is to focus on voting rights suppression only.
Does this mean that the SAS can create non-voting shares apart from preferred shares? In view of what precedes and giving the fact that SAS allows for creativity, it would seem so. However, the possibility of depriving SAS shareholders of voting rights outside the framework of preferred shares is a matter of debate. Even though Article L. 225-122 is expressly rejected by Article L. 227-1 and the conditions for the adoption of collective decisions are freely determined by the articles of association (Article L. 227-9, paragraph 1), some argue that it is prohibited to deprive a shareholder of his voting rights based on Article 1844, para. 1 of the Civil Code according to which any shareholder has the right to participate in collective decisions, which the Court of Cassation, as already mentioned, has interpreted as including the "voting rights". Article 1844 further specify that the articles of association can derogate to such rule only in the cases provided for by law (Cass. com 23-10-2007 n ° 06-16.537: RJDA 1/08 n ° 50).
To conclude, the advantage of creating preferred shares is that this device allows ruling out today any question on the possibility in this context to remove the voting rights, especially in a general and definitive manner, provided though that non-voting shares do not represent more than 50% of the share capital.
3. In companies whose shares are admitted to trading on a regulated market or a multilateral trading facility
For these companies, the voting right may also be adjusted but in compliance with Articles L. 225-122 to L. 225-125 as it was the rule for all companies before May 2019. The contradictions that existed within the Article L. 228-11 of the French Commercial Code before the law of May 22, 2019 and which we have been reminding in section 1 hereof, therefore continue to exist for companies whose shares are admitted to trading on a regulated market or a system multilateral trading.
Thus, the development of voting rights in these companies must notably respect:
- the principle of proportionality which is of public order. Except in the cases provided for by law, the voting rights attached to such shares must be proportional to the percentage of capital that the shares represent, each share giving entitlement to one vote at least (Article L. 225-122, I of the Commercial code) ;
- the principle of equal capping pursuant to which the articles of association may restrict the number of votes that each shareholder may have in the meetings, provided that this limitation be imposed on all shares without class distinctions, other than non-voting shares with preferred dividend rights (Article L. 225-126 of the Commercial Code).
In addition, non-voting preferred shares in companies whose shares are admitted to trading on a regulated market may not represent more than one quarter of the share capital. Otherwise, the issue of these shares may be canceled.
Conclusion : Is a fool the one who only trusts a single article of the French Commercial Code, in this case article L. 228-11 of the French Commercial Code, and the letter of that text, since as we saw, French law is much more tricky and things are much more complex than it seems at first sight.
Dominique Dumas, Attorney at law, Partner, Dumas Structure, 13 ter Bd Berthier, 75017 Paris. Tel.: 01 58 44 92 74. E-mail: email@example.com
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