French Court of Cassation, 12 February 2025 (n° 23-16.290)

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Introduction

Two shareholders of a French limited liability company (SARL) signed a shareholders' agreement governed by French law. The first shareholder owned 60%of the shares (the “Majority Shareholder”) while the other one owned 40% of the shares (the “Minority Shareholder”). The shareholders' agreement contained an alternative offer clause (a “buy or sell clause”) allowing, in the event of a serious and persistent disagreement likely to paralyse the company, one of the shareholders to offer to sell its own shares to the other or, failing acceptance, to require the latter to sell him his shares on the same terms.

‍The Dispute

After several unsuccessful attempts to buy the Majority Shareholder's shares, the Minority Shareholder triggered the buy or sell clause. The Minority Shareholder offered to sell its own shares to the Majority Shareholder. In the absence of a response, the latter was supposed to sell him his own shares. As a result, the Minority Shareholder initiated legal proceedings in France to enforce the sale.

The Courts’ Decisions

Angers Court of Appeal

The Majority Shareholder objected to the sale, arguing, inter alia, that the clause did not specify the sale price leaving it to one party's discretion. The Court of Appeal rejected this objection, given that the implementation of the clause was subject to objective conditions: its reciprocal mechanism permitted to determine the price offered by the potential seller, which served as a reference price to determine the price at which the beneficiary of the offer would have to sell its shares if it refused the initial offer. The Court also noted that there was a serious shareholder disagreement and held that there was no obligation for the Minority Shareholder to provide the Majority Shareholder with accounting documents to assess the offer given that the buy or sell clause did not contain such a requirement.

Court of Cassation

Unwilling to accept this decision, the Majority Shareholder appealed to the Court of Cassation on three main grounds: the clause was null and void on the ground that the price could not be determined, there was no serious and persistent disagreement to justify triggering the clause, and there was a breach of the Minority Shareholder's general obligation of good faith due to the failure to provide the Majority Shareholder with accounting documents to assess the offer.

The Commercial Chamber of the Cour de cassation rejected the appeal, among others, on the following grounds.

First, in respect of the determination of the price, the Court stated that the mechanism introduced by the alternative offer clause did not leave the determination of the price to the will of a single party, so that the sale became complete as soon as the parties had fulfilled their undertakings under the shareholders' agreement. It thus validated the reasoning of the Court of Appeal. The price had not been unilaterally fixed, given that the contractual mechanism obliged the initiator of the procedure to commit, in the event of refusal by the other shareholder, to acquiring the latter's shares at a price derived from his own initial proposal.

Secondly, in respect of the conditions for triggering the clause, the Cour de cassation confirmed the assessment of the Court of Appeal, which had considered that the condition relating to the existence of "a serious and persistent disagreement between the two shareholders" was met in this case.

Thirdly, it confirms that the application of the alternative offer clause was not subject to any conditions relating to checks of any kind, and that the majority shareholder did not claim to have requested the managing partner to produce specific documents or to have been unable to obtain the required accounting documents.

Takeaways

“Buy or sell clauses” are lawful when they provide for an objective mechanism for determining the purchase price. A fixed sale price is not mandatory, provided that the agreement stipulates a sufficiently detailed method for determining that price, pursuant to Article 1591 of the French Civil Code. This prevents the price from being unilaterally fixed or changed later on.