LIGITATION
Sibylle Mareau
It is common for shareholder’s agreements to include provisions under which a shareholder, an employee or a non-employee corporate officer irrevocably undertakes, through a promise to sell, to transfer their shares. Such provisions often give rise to significant litigation, particularly in cases of forced enforcement of sale promises and disputes over the valuation of the shares to be transferred in the event of disagreement between the parties;
Below are several reminders and points of vigilance:
-Even when the transferor or transferee is a natural person, jurisdiction over disputes arising from the transfer of shares is specifically assigned to commercial courts.
-In cases where forced transfer is initiated against an employee on the grounds that the agreement included a promise to transfer shares in the event of termination of their employment contract for « gross or wilful misconduct », the enforcement of such transfer may be suspended if the employee challenges the grounds for their dismissal. Indeed, should the labour court rule thar gross or wilful misconduct was not established, the triggering event for exercising the promise will be deemed to have ceased to exist.
–Bad leaver clauses requiring the forced transfer of an employee’s shares at a discounted price or a significantly reduced value to their dismissal for gross or wilful misconduct are deemed null and void (Paris Court of Appeal, May 12, 2022) as they constitute an unlawful financial penalty.
-The valuation of shares by an expert, either designated by the parties or appointed by the President of the Commercial Court, must be established as of the date closest to the submission of the expert’s report (French Court of Cassation, Commercial Chamber, September 16, 2014).
-The expert may be appointed:
- Pursuant to article 1843-4 of the French Civil Code, which specifically governs the transfer of shares the expert is tasked with determining the value of the shares, with the discretion to select.
- Pursuant to article 1592 of the French Civil Code, which is part of the general framework of contract law, the expert’s mission is to determine the sale price of the shares, subject to the prior agreement of the parties both as to the principle of the expert’s appointment and the valuation method to be applied.
- Depending on the drafting of the relevant clauses, certain provisions may authorise the company to execute the necessary share transfer orders without the consent or cooperation of the shareholder whose shares are being repurchased. Such mechanisms may deprive the shareholder of a means to delay the transfer, even in the event of a dispute regarding the validity of the clause or the valuation of the shares.
Consequently, heightened vigilance is required (i) when drafting shareholder’s agreements, particularly with regard to the conditions governing the enforcement of promises to sell and/or the determination of share valuations or sale prices, and (ii) when initiating the enforcement of a promise to sell shares and engaging in the associated valuation processes, given the potential legal challenges that may then arise.