Joint Ventures: Control and Minority Protection (France)

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

The question of control can be complex. In a corporate joint venture, it is easy to assume that the party making the biggest investment will have the biggest say in the management of the venture. But surveys of joint ventures in Europe, America, and Japan have tended to show that success is more likely where there is a true balance of power rather than a strong and weak party.

Every joint venture starts as a blank sheet. The degree of autonomy of the joint venture from the joint venture parties and the level of control or influence enjoyed by each party will be different depending on the individual circumstances of the parties and the nature of the proposed venture.

The identity of the joint venture parties and the proposed business of the joint venture will determine to some extent the powers and controls that the parties are given, whatever the size of their contribution (if any). For example:

• In a 60:40 joint venture between competitors, both of which bring significant assets and expertise to the venture, the minority might expect shared management and extensive veto rights
• If one party is a customer of the other, it might expect less management control if the business of the venture is closer to the other's business
• On a 50:50 joint venture, one party may be given management control

Greater importance attaches to control and minority protection provisions in multi-party joint ventures and where there is a greater disparity between the size of each party's investment. It is important to remember that the major player or players will be equally keen to bolster their positions in the company. The success of the minority shareholder in entrenching its position will depend upon the relative bargaining powers of all parties.

This Note focuses on the minority shareholder's perspective. It is based on an original, jurisdiction-neutral Practice Note by Danielle Heath and Simon Howley, CMS Cameron McKenna Nabarro Olswang LLP: Practice Note, Control and Minority Protection (Joint Ventures): Cross-Border.

For more information on minority protections for shareholders in general, see Practice Note, Minority Shareholders' Rights and Remedies in a General Meeting (France).

Approach to Minority Protection

When considering minority protection, it is helpful to take a systematic approach following three steps:

Step One: Identify All Potential Areas of Conflict

A sensible starting point for the minority in approaching these issues is to identify all the matters that could arise in the management of the joint venture where the interests of the parties could diverge. For example:

• Business plan.
• Access to profits.
• Future investment requirements.
• Future finance (share issues or loans).
• Acquisitions or disposals.

• Change of business.
• Access to intellectual property and research and development.

Step Two: Divide the Areas into Three Categories

Having identified areas of potential conflict, the minority should then consider how important each issue is and what type of control it requires over decisions relating to these matters. These items may be divided into three categories:

• Matters over which the minority would require a veto.
• Matters over which the minority should have a positive right of action (for example, to appoint and remove a quota of directors).
• Matters on which a majority vote will be acceptable.

Step Three: Divide Board and Shareholder Powers

In a corporate joint venture there is then an additional question to answer: who should have control over each matter, the board or the shareholders? As is common to most countries, French law recognises a division between board and shareholder powers. For a selection of key materials relating to directors and shareholders in different types of French companies, see A Toolkit of Practical Law Materials Relating to Directors and Shareholders of Companies Incorporated in France.

The distinction between board and shareholder powers can be crucial. The directors of the joint venture company owe their duties and obligations to the joint venture company (and in some cases, for example the duty of loyalty, to the shareholders as a whole), rather than to the individual shareholder who appoints them. (For more information on directors' duties, see Practice Note, Directors' Duties: SA, SAS, and SARL (France).)

When managing a company, a director must always comply with the corporate interest of the company, which may be different from the interests of the shareholders or the group. Therefore, a director who benefits majority shareholders (or any shareholder) at the expense of the minority shareholders (or any other shareholder) or disregards the corporate interest of the company itself may be found liable for mismanagement of the company. Shareholders, on the other hand, may act in their own self-interest, subject to any obligation to act in good faith and statutory provisions or case law relating to abuse of their majority/minority position.

The joint venture documents can detail the division of power between management and shareholders. Alternatively, in a 50:50 venture, the structure may be such that the deadlock provisions will ensure that appropriate decisions are made at the shareholder party level. It is best practice even in a 50:50 venture to define the extent of each party's control because of the independence (at least as a matter of law) of the company's management.

Many clients will have a pre-existing policy on joint ventures covering the powers they would be prepared to concede to a minority shareholder and the powers they would expect to maintain if they were a minority shareholder in a joint venture.

Defining Powers of Directors and Shareholders

Whatever approach is used, ensuring that a joint venture party has appropriate control or protection depends on defining the powers of its appointed directors and its powers as a shareholder and ensuring that this is appropriately documented.

Directors

• Appointment and removal. What power does each party have to appoint and remove directors? What proportion of the board is appointed by the respective parties?
• Veto. What powers of veto do directors have and when do they apply? What happens when any veto is used?
• Quorum. Is there a requirement for directors appointed by all parties to be present for a quorum? Care is needed with the quorum provisions. For example, if one of the directors that a party wants to appoint to the board of the joint venture company is often abroad, it is important to ensure that notice must be given to directors who are abroad.
• Chair. Who appoints the chair? Is the chair to have a casting vote? Even where the chair does not have a casting vote, they often exercise considerable influence over meetings.

Shareholders

What rights will the parties have as shareholders? In a 50:50 joint venture, the rights of the shareholders are based on the division of control between the joint venture company board and the joint venture parties. The extent of shareholder rights is more of an issue if there is a minority shareholder.

Minority Shareholder Protections Provided by Law

Voting Majorities Required for Certain Corporate Actions

SA

In a public limited company (société anonyme) (SA), there are two types of shareholders' meeting: ordinary and extraordinary. Each type of meeting requires specific voting majorities:

• A simple majority of the votes cast is required for ordinary meetings (Article L.225-98 al. 3, Commercial Code (Code de commerce).
• A two-thirds majority of the votes cast is required for extraordinary meetings (Article L.225-96 al. 3, Commercial Code).

All decisions that increase the liability of shareholders must be made through unanimity (for example, increase of share par value or transformation into an SAS).

SAS

In a simplified company limited by shares (société par actions simplifiée) (SAS), the articles of association typically stipulate the voting majority required for different resolutions, depending on the nature of the resolution. However, certain decisions must be made through unanimity, namely the temporary non-transferability of shares, and any decision that expands the liability of shareholders, including (but not limited to) the increase of shares par value, or, in some cases, the transformation of the company.

In general, there is a great flexibility regarding voting requirements in an SAS, enabling the parties to agree adequate protection for minority shareholders. A minority shareholder can, for example, have extensive veto rights and even full management of the company.

In addition, the articles of association can devolve competence to the shareholders, the chairperson (except in relation to the appointment and revocation of the chair), the board of directors, or the majority shareholder, unless it is a decision that is reserved to shareholders by law. If a decision not reserved to the shareholders by law remains unaddressed in the articles of association, as a general principle under French law, a unanimous vote from the shareholders is always required to approve an amendment to the articles of association that would result in increasing the liability of the shareholders.

Quorum and Voting Requirements

Shareholders' Meetings

In an SA, the quorum needed for a shareholders' meeting depends on whether the shareholders' meeting is ordinary, extraordinary, or a special shareholders' meeting.

• For ordinary shareholders' meetings, one fifth of the voting rights shares must be present or represented (subject to the articles of association, which may stipulate a higher threshold). In the event of a second convening, there is no quorum requirement (Article L.225-98, Commercial Code).
• For extraordinary shareholders' meetings, one quarter of the voting rights shares must be present or represented. In the event of a second convening, the requirement is only one fifth (Article L.225-96, Commercial Code).
• For special meetings, one third of the voting rights shares must be present or represented. In the event of a second convening, the requirement is only one fifth (Article L.225-99, Commercial Code).

There is a distinction between a "first" convening of the meeting and a "second" convening of the meeting, which occurs if the first meeting did not have a sufficient quorum.

In an SAS, the required quorum for a shareholders' meeting is determined by the articles of association.

Directors' Meetings

In an SA, the board of directors' required quorum is half of its members, and the voting majority is a simple majority of members that are present or represented. The articles of association can increase the required majority but cannot decrease it. In the case of a two-tier SA (an SA with a supervisory board (conseil de surveillance) in addition to a directory board (directoire)), the articles of association determine the required quorum and majority of the management board.

In an SAS, the only legal requirement is the appointment of a president. However, the articles of association can provide for a collegiate corporate body of directors. If this is the case, there are no statutory requirements and the articles of association can freely stipulate quorum requirements and voting majorities within the corporate body.

Other Legal Protections

In addition to the legal protection offered through qualified majority or unanimous voting and quorum and voting requirements, French law provides for a number of other minority shareholder protection mechanisms.

Right to Information

In an SA, shareholders are provided with a wide range of information before a shareholders' meeting. They can also request that the directors answer any question or request they may have during shareholders' meetings, provided the questions are linked to the agenda and that they do not use this right abusively. Additional information made available to shareholders at least once a year includes, for example:

• The inventory of assets and liabilities.
• Annual accounts.
• Reports of the statutory auditors.

In an SAS, the legal right to information is less strong. However, the articles of association (statuts) may provide for a similar right to information to that in an SA.

Judicial Representative and Expert Management Appraisal

Holders of at least 5% of a company's shares can file a petition for the appointment of, either:

• In an SA, a judicial representative (mandataire de justice), who can in turn convene a general meeting of the company.
• In both an SA and an SAS, one or more experts responsible for submitting a report on one or more management transactions in the form of an expert management appraisal (expertise de gestion).

Protection Against Abuse of Majority

In principle, minority shareholders can seek the annulment of a decision taken by the majority shareholders in their own interest, and against the minority shareholders' interest, which is detrimental to the company's interests. Damages may also be awarded.

For more information on minority protections for shareholders, see Practice Note, Minority Shareholders' Rights and Remedies in a General Meeting (France).

Minority Protection in Joint Venture Documents

Provided the appropriate joint venture vehicle is chosen, it is possible for a minority shareholder to build additional protection into the joint venture documents in a number of ways by including certain provisions in the company's articles of association or a shareholders' agreement.

For example, legislation relating to the SA (see Practice Note, Main Characteristics of an SA (France)) is quite rigid. Any attempt to alter the voting requirements at general meetings will be regarded as invalid (whether in the articles of association or a shareholders' agreement). Conversely, the SAS (see Practice Note, Main Characteristics of an SAS (France)) is a much more flexible vehicle, and the majorities required for votes and quorum requirements can be fully determined without restriction.

Articles of Association

Class Rights

Two types of shares can be issued:

• Ordinary shares, which give the owner of the share the ordinary rights attached to a share (the right to vote at the shareholders' meeting commensurate to the proportion of shares owned, the right to earn a portion of the dividends, and the right to a proportion of the liquidation balance, as the case may be).
• Preference shares, which are shares issued with or without voting rights attached. They carry specific rights of any nature, which may be temporary or permanent.

Rights attached to preference shares must be clearly set out in the articles of association, where a distinction must be made between ordinary and preference shares. Aside from voting rights, the specific rights attached to preference shares can be of "any nature". In other words, there is a substantial amount of contractual freedom. Generally, double voting shares and shares giving a priority for dividends are the most used types of preference share.

Matters Reserved to Shareholders

Shareholder Meetings in an SA

In an SA there are two types of shareholders' meeting, the ordinary shareholders' meeting and the extraordinary shareholders' meeting.

The decisions that by law must be approved by the ordinary shareholders' meeting relate to the following issues:

• Approval of the annual accounts and consolidated accounts.
• Dividends.
• Appointment and removal of board members.
• Removal of members of the directorate.
• Appointment of statutory auditors.
• Approval of any regulated agreements (agreements between the company and its shareholders or managers).

Under French law, the following decisions must be approved by the extraordinary shareholders' meeting:

• Any modification of the articles of association, such as:

• extending or limiting the corporate purpose;
• change of corporate name;
• transfer of registered office;
• early winding-up of the company;
• extending the duration of the company;
• increase or decrease of the share capital;
• modification of the conditions for transfer or value of shares;
• modification of the rules relating to the board of directors (or management or supervisory board) if applicable);
• modification of profit sharing;

• Mergers, split-offs, and contributions;
• Issuance of bonds; and
• Creation or removal of a class of shares.

A minority shareholder may request that specific issues be reserved to the shareholders' approval, but this is mainly a subject for negotiations on a case by case basis.

The list of reserved matters is commonly provided for in the articles of association.

Shareholder Meetings in an SAS

In an SAS, the following matters must be approved by the shareholders' meeting:

• Changes to the SAS statutory share capital.
• Reorganisation of the company (that is, merger, demerger, and so on).
• Winding-up.
• Appointment of statutory auditors.
• Approval of annual accounts and distribution of income.
• Transformation of the company.
• Approval of any regulated agreements (agreements between the company and its shareholders or managers).

However, the articles of association can provide for additional decisions to be subject to the shareholders' decisions.

Certain decisions are, as a matter of French law, subject to a unanimous shareholders' decision. Statutory clauses providing for the temporary inalienability of shares or special rules in the event of a change of control of a shareholding entity may only be adopted, amended, or deleted by unanimity.

Unanimity is also required:

• In the case of a change of nationality of the company.
• For the adoption, modification, or deletion of a temporary inalienability clause (a period during which shares cannot be transferred).
• For any decision increasing the commitments of the shareholders, which in practice mainly correspond to the transformation of the company into a different form having for consequence an unlimited liability for the shareholders.

On the other hand, unanimity of the members is not required in the case of the adoption or amendment of an approval clause (Article L.227-19, al.1, Commercial Code), but it may still be imposed by the articles of association. Under Law 2019-744 of 19 July 2019 on the simplification, clarification and updating of company law, unanimity is no longer required in the event of the adoption or modification of a statutory exclusion clause unless unanimity is provided for in the articles of association.

Certain decisions are, pursuant to special legal provisions, subject to the unanimous consent of the shareholders, but with the possibility for the articles of association to derogate from them. This is the case for (among other things):

• The appointment of the liquidator after dissolution of the SAS.
• The approval of the annual accounts in the event of liquidation.

Finally, unanimity is required for the following specific transactions:

• Appointment of one or more contribution auditors in the event of a capital increase by contribution in kind, other than in case of court appointment.
• Capital increase by increasing the nominal amount of shares, unless the transaction is carried out by capitalisation of profits, reserves, or share premiums.
• A merger or demerger transaction having the effect of increasing the liabilities of the shareholders of one or more of the companies concerned.
• Decision to waive the obligation for the directors of companies involved in merger or division operations to draw up a written report on the proposed operation.
• Appointment of the independent expert responsible for valuing the shares that the company plans to buy back under a buyback programme, other than court ordered.

Same as with the quorum requirements, the articles of association can freely determine the majority applicable to each decision (simple majority or qualified majority). In this respect, it must be noted that the articles of association can be tailor-made to accommodate for the shareholders' structure of the company.

Tag-Along and Drag-Along Rights

Tag-along and drag-along clauses can be validly agreed upon under French law.

Enforcement of these types of clauses qualifying as a put option used to be problematic under French law, as, in most cases, only damages would be available in the event of a breach. Since 2016, as a result of the French reform of contract laws, the enforcement of tag along clauses has been strengthened (especially when they are coupled with a promise to purchase granted by the transferor to the minority shareholder) as the non-breaching party can petition the courts for specific performance.

This principle is however mitigated by the fact that specific performance cannot be granted in situations where it would create an undue burden on the breaching party, disproportionate to the benefit that would be gained by the non-breaching party, unless the parties have agreed otherwise.

Shareholders' Agreement

It is also possible to list the matters over which the parties are to have a right of veto in the shareholders' agreement. This means that the company cannot do any of the things listed without the consent of all parties (see Standard Document, Minority Shareholder Protection (Joint Ventures): Cross-Border). If the company is a party to the shareholders' agreement, care should be taken not to fetter its statutory powers, as this could render any such provision void.

Relationship Between Joint Venture Parties and the Company

A related question to control and the protection of minority rights is how to ensure that the joint venture parties (and other members of their corporate group) do not circumvent the agreed arrangements. The following are possible protections:

• Audits of any transactions between the joint venture parties and the joint venture (for example, if one of the joint venture parties supplies materials to or manages the joint venture).
• Non-compete clauses seeking to prohibit the joint venture parties from competing with the joint venture company during the life of the joint venture. The parties will need to consider compliance of any non-compete clauses with national or EU competition law, as applicable. For more information on the application of competition law to joint ventures, see Practice Note, Competition: Private Acquisitions (France) and UK Practice Note, Transactions and Practices: EU Joint Ventures.
• Non-solicitation clauses covering customers and employees. These will need to be reasonable in order to be enforceable.
• Confidentiality undertakings. The shareholders' agreement will usually require each party to keep information about the joint venture and each other confidential.
• Conflict provisions setting out how disputes between the joint venture company and a joint venture party are to be handled (for example, to avoid that party’s appointees to the board of directors being able to prevent the joint venture company from enforcing its rights). This is particularly important where a joint venture party enters into a commercial arrangement with the joint venture company. In practice, negotiation of these terms can be contentious, as the party concerned may well anticipate that the other party’s appointees will take unfair advantage.