Documents to Establish a Joint Venture (France)

This practice note is reproduced from Practical Law with the permission of the publishers

In French corporate joint ventures, the articles of association and shareholders' agreement are the key documents that cover, between them, the constitutional aspects of the joint venture company (JVC) and how its day-to-day operations are managed and processed.

This Note provides an overview of these key documents. It covers the provisions commonly included in each document (or both) and highlights relevant drafting considerations, as well as remedies for breach and execution formalities.

Corporate joint ventures in France typically take the form of a simplified company limited by shares (société par actions simplifiée) (SAS). For an introduction to the SAS, see Practice Note, Main Characteristics of an SAS (France). This Note is drafted on the basis that an SAS has been adopted as the joint venture vehicle. In the case of a contractual joint venture, the basic objectives of the formal agreement between the parties will be similar to that of the shareholders' agreement with differences reflecting the absence of a separate legal vehicle and the fact that the joint venture may relate to a project of finite duration. For more information on the options for structuring a joint venture, see Practice Note, Joint Ventures: Choice of Structure (France).

What Key Documents Establish a French Corporate Joint Venture?

To establish a JVC in France, among other things, the shareholders must draw up articles of association (statuts), which set out the company's basic management and administrative structure (see Articles of Association). In addition, it is common for the shareholders (and sometimes the JVC) to enter into a shareholders' agreement (see Shareholders' Agreement). These documents cover constitutional aspects of the JVC and set out how its day-to-day operations should be managed, including:

• The scope and purpose of the joint venture.
• How the joint venture is to be managed.
• The division of power between the parties and the extent of their influence over the management of the joint venture.
• The capitalisation and financing of the company, including the respective contributions of the parties to the venture.
• The terms on which any party can transfer its shares in the JVC to a third party.
• How to deal with disputes and deadlock between the parties.
• The circumstances in which the joint venture will terminate, including the mechanics and implications of termination. For more information see Practice note, Joint Ventures: Deadlock and Termination (France).

Other documents required to establish a corporate joint venture may include any of the following, depending on the particular circumstances:

• A management agreement.
• Business and asset transfer agreements.

• Distribution and marketing agreements.
• Contracts for the supply of goods and services.
• Service and secondment agreements.
• Loan note instruments.

Articles of Association

The articles of association are the rules that govern the JVC. They must contain, among other things, the following mandatory provisions:

• The company's form.
• The company's object.
• The share capital and the par value of the shares. Although an SAS has no minimum share capital requirement, it must have capital divided into shares and the amount of its share capital must be set out in the articles of association (Article L.210-2, Commercial Code).

If a management committee is appointed to run the company, the articles of association may also determine, for example:

• The minimum and maximum number of members of the management committee.
• The appointment requirements for officers.
• The distribution of powers among officers.
• The decision making procedure, including provisions for the authorisation and management of conflicts of interest.

In addition, the articles of association can contain a wide range of provisions that place further constraints and obligations on the joint venture parties. Common provisions address:

• Object and scope of the venture.
• Capitalisation and funding (initial and ongoing).
• Share capital composition including separate classes of shares (actions de préférence) and their respective rights and how to vary those rights.
• The distribution policy (including the dividend policy).
• Procedures for, and limitations on, the issue and transfer of shares (including pre-emption rights and restrictions on transfer).
• The composition of the board and the rights of joint venture participants to appoint, suspend, and remove company officers.

• Management arrangements and key provisions of the service agreements with board members, including indemnification and insurance provisions.
• Which directors' resolutions require shareholder approval, or which may be vetoed by the shareholders in a general meeting. This is in addition to certain company decisions that, by law, must be made by shareholder resolution (for example, capital increases or a merger decision).
• Which shareholders' resolutions require a qualified majority, or which may be vetoed by the shareholders in general meeting (see Practice Note, Shareholders' Rights and Responsibilities: Overview (France): Voting Thresholds).
• Notice periods, quora, and other procedural requirements for shareholder and board meetings.
• Deadlock and termination (including compulsory transfer events and escalation and dispute resolution procedures) (see Practice Note, Joint Ventures: Deadlock and Termination (France)).
• Minority protection clauses, if applicable (for example, veto rights, tag along rights, and so on)(see Practice Note, Joint Ventures: Control and Minority Protection (France)).
• Borrowing powers and certain other restricted matters.
• Dealing with deadlocks that may arise between the JV parties and how to resolve them.
• Restrictive covenants on the company and the joint venture parties.
• How the parties can amend the articles.
• How the parties can terminate, dissolve, and liquidate the JVC.

For standard articles of association agreement, tailorable for French corporate joint ventures, see Standard Document, Bye-Laws: Majority and Minority Shareholder (Joint Ventures): Cross-Border.

Shareholders' Agreement

The shareholders' agreement sets out the contractual rights and obligations of the parties in relation to the joint venture. It ensures that the company and its business are established and run in accordance with the parties' objectives. It may contain a number of the provisions that are also commonly found in the articles of association. Typical provisions might include:

• Conditions and clauses relating to the calculation of the share price. These are commonly inserted in shareholders' agreements, as they are generally confidential.
• Voting agreements.
• Detail on specific contributions to be made by the parties (for example, intellectual property rights, know-how, secondment of staff, provision of premises).
• The procedure for the approval of the business plan and (annual) budgets.
• Which shareholders' or directors' resolutions require a qualified majority, or which may be vetoed by shareholders in general meeting.

• Accounting and audit provisions.
• Confidentiality obligations.

For a standard shareholders' agreement that can be tailored to a French joint venture, see Standard Document, Joint Venture Shareholders' Agreement: Majority and Minority Shareholder: Cross-Border.

It is quite normal for the shareholders' agreement to act as the master, or framework, agreement for the completion of the ancillary documents, for example:

• A management (or service) agreement. The management agreement typically holds arrangements in respect of the company officer remuneration, indemnification, insurance, and so forth.
• Contracts for the purchase of assets or businesses that may, for example, have been contributed by shareholders or that may be necessary for the JVC to operate its business.
• Intellectual property rights contracts or licences, for example where the parties make these available to the JVC for further joint commercialisation.
• Distribution and marketing agreements, for example where the parties would undertake these activities for and on behalf of the JVC.
• Services and secondment agreements, for example where the parties would be rendering these to the JVC or seconding their personnel to the JVC.

Drafting Considerations

There is some debate about exactly which provisions should appear in the shareholders' agreement and which should be in the articles (or both). There are a number of important differences between the documents that should be borne in mind when drafting, as follows.

Publicity Requirements

Articles of association, unlike a shareholders' agreement, must be registered with the clerk of the commercial court (Greffe du Tribunal de commerce) with jurisdiction over the company's place of incorporation. They are open to public inspection and available by online search for most courts. In contrast, a shareholders' agreement relating to an SAS is not subject to publicity or filing requirements and is therefore not open to public inspection.

The loss of privacy must be weighed against the advantage that third parties may be deemed to have notice of the articles. A shareholders' agreement will normally be a private document that does not need to be registered. It is good practice to include more confidential or business-sensitive arrangements between joint venture participants in the shareholders' agreement rather than the articles of association.

Compliance with Law

One should be mindful when drafting a shareholders' agreement that its provisions do not conflict with mandatory provisions of French company law, as this could render those provisions void or voidable and therefore unenforceable. For example, certain decisions (such as lock-up period clauses, change of control clauses, or other resolutions that increase the liability of shareholders) require shareholder unanimity and this cannot be amended in the articles of association.

For a quick overview of the key differences between the articles of association and shareholders' agreement, see box Key Differences: Shareholders' Agreement and Articles.

Form and Content

The shareholders' agreement is a simple contract between all or some of the shareholders and therefore can deal with all aspects of the relationship between the parties if required, including the personal rights and obligations of shareholders (for example, how they will exercise their voting rights).

The articles, however, can generally only take effect as a contract between the shareholders in their capacity as members and so cannot deal with matters which are personal to the members if this could be seen as fettering the company's statutory powers.

Limitations in the Objects Clause of the Articles of Association

The limitations set out in the objects clause in the articles of association of the joint venture are not enforceable against third parties. Third parties are deemed unaware of those limits. However, if the third party was aware that the action of the company was outside the scope of its objects clause, it would be bound by the limitations.

A director or shareholders acting outside the scope of the objects clause can be found liable towards the company with regard to the ultra vires act.

Amendment of Documents

In an SAS, the articles of association establish the rules and procedures for their amendment. There are three types of decisions that can be made, with different sets of majorities:

• Decisions for which unanimity is mandatory and cannot be amended in the articles of association (such as, lock-up period clauses, change of control clauses, or other resolutions that increase the liability of shareholders).
• Decisions for which the required majority can be freely amended in the articles of association.
• Decisions where the articles of association are silent on the required majority, in which case a simple majority is required. This may be to the detriment of a minority shareholder who has insufficient shares to block such a resolution (although there are legal rules which allow some resolutions adopted by a majority to be declared null and void). For information on the ways in which minority shareholders can seek to protect their position through contractual provisions in the shareholders' agreement, see Practice note, Joint Ventures: Control and Minority Protection (France)

A shareholders' agreement can generally only be amended by the agreement of all the parties, whatever the size of their shareholding.

New Parties

New shareholders in the joint venture company are automatically bound by the articles when they acquire shares in the company. However, they are not automatically bound by the shareholders' agreement. Therefore, if the identity of the shareholders (or a section of them) will change frequently (a possibility in a multi-party venture), to avoid having to keep re-executing the agreement, or executing deeds of adherence to the agreement, any provisions which are not commercially sensitive (for example, share price formulae) and are not confidential between the shareholders (see Publicity Requirements), should be included in the articles of association instead.

The JVC as a Party

The articles of association determine the JVC's actions and bind the JVC, its members, and directors. However, in principle, any limitations on the powers of the chairperson (Président) or managing director (directeur général) that are set out in the articles of association are not binding on third parties. 

The JVC can also be a party to the shareholders' agreement, provided this is not detrimental to the company's interests and does not fetter its powers. The JVC must be a party to the shareholders' agreement for any provisions to be enforceable against the company. It is advisable to include the JVC as a party where the JVC has a high degree of autonomy from the joint venture parties. The JVC may be put under an obligation, for example, not to sell assets. Non-compete and confidentiality obligations are also common. In addition, the JVC is often a party to ensure it is under an obligation to refuse to register a transfer of shares that was not made in compliance with the provisions of the shareholders' agreement.

Remedies for Breach

The courts can declare a decision or an act that is breaching the articles of association of the JVC (including, if applicable, a shareholders' agreement, if and to the extent it is referred to expressly in the articles of association) null and void or grant damages, depending on the circumstances. However, nullity can only result from the violation of a mandatory provision of Book II of the Commercial Code or of French laws governing contracts.

A breach of the shareholders' agreement gives rise to contractual remedies. A claimant can, in principle, seek the specific performance (execution forcée) of the shareholders' agreement (except in situations where performance or enforcement is impossible, or when the cost of performance or enforcement for the breaching party would be greatly disproportionate to the benefit for the non-breaching party) or damages, unless otherwise agreed by the parties. No damages can be sought in the event of the termination of a shareholders' agreement entered into for an unlimited or undetermined duration, as, in this case, any party can terminate the shareholders' agreement at any time upon reasonable notice.

Conflict

It is important to avoid conflicts between the two documents. Generally, the articles of association prevail over any conflicting provisions in the shareholders' agreement. Furthermore, provisions that are in breach of mandatory company law can be deemed to be void or voidable.

Execution Formalities

For information on the execution formalities for the articles of association and executing contracts more generally (including the shareholders' agreement), see Practice Notes, How to Incorporate an SAS (France): Signing the Articles of Association and Executing Contracts in France.

Key Differences: Shareholders' Agreement and Articles