Minority shareholder deprived of dividends: when the majority shareholders’ strategy may become abusive

(CA Versailles, 6 December 2022, No. 21/00916)

Retaining profits within the company is not necessarily unlawful

Under French company law, majority shareholders enjoy broad managerial discretion regarding the allocation of profits. A company may therefore legitimately decide to retain all or part of its earnings as reserves rather than distribute dividends. Such a strategy may pursue legitimate economic objectives: future investments, group development, strengthening cash flow, anticipating financial risks or financing new projects. French courts regularly reiterate that shareholders do not have any automatic right to receive dividends each year.

A reserve policy may nevertheless become abusive

The situation becomes more sensitive when this policy of retaining earnings continues over several financial years without any genuinely identifiable economic justification. In this context, a minority shareholder may consider that the decisions taken no longer serve the company’s interests but primarily those of the majority shareholders. Under French law, abuse of majority may be established where a decision is contrary to the company’s interests and adopted solely to favor majority shareholders to the detriment of minority shareholders. The boundary between legitimate financial prudence and abusive strategy therefore becomes particularly delicate to assess.

Judges now examine the company’s economic reality

In its decision of 6 December 2022, the Versailles Court of Appeal expressly recalled that the systematic retention of profits cannot be used as a mere blocking mechanism permanently depriving a minority shareholder of any return on their shares. Courts now conduct a highly concrete analysis of the company’s financial situation: cash flow levels, accumulated reserves, existing debts, genuine investment needs, economic or regulatory risks, self-financing capacity and the group’s overall strategy. Where a company already possesses substantial financial resources yet continues to retain all of its profits over several years, the reserve policy may be considered artificial, excessive or contrary to the company’s interests.

Intra-group financial flows may be subject to judicial scrutiny

Judicial review becomes even more significant where profits retained within the company are indirectly used to finance other group entities through cash pooling agreements, intra-group loans or centralized treasury mechanisms. Even where such operations remain legally permissible, courts may verify whether they primarily benefit majority shareholders controlling the holding company or other group entities while the minority shareholder remains deprived of any distribution. Judges therefore examine whether the group structure allows majority shareholders to benefit indirectly from the profits while minority shareholders remain excluded from any profitability.

The prolonged absence of dividends may give rise to compensation

The Versailles Court of Appeal also confirmed that a minority shareholder may suffer genuine harm where no dividends are distributed over a long period despite significant profits and a healthy financial situation. Courts now accept that this prolonged deprivation of income or return on capital may justify the award of damages, particularly where majority shareholders indirectly benefit from the profits through other companies within the group. The dispute therefore extends beyond a simple governance issue and becomes a genuine compensation matter.

A prudent policy nevertheless remains acceptable in certain contexts

Courts nevertheless recall that a prudent financial policy may remain perfectly legitimate depending on the sector of activity or the economic context. Certain companies operate in particularly sensitive environments where retaining reserves is necessary: economic crises, health risks, regulatory constraints, future financing needs or significant market instability. Courts therefore reject any automatic approach and always conduct a contextualized analysis of the company’s actual economic situation.

The issues often become international and tax-related

In international groups, this type of dispute frequently goes beyond ordinary company law. Behind a reserve policy may arise issues relating to foreign holding companies, international treasury agreements, intra-group financial flows and cross-border taxation. Under French law, damages awarded for abuse of majority are not automatically treated as dividends and may fall under a different tax regime. Issues relating to tax residence, withholding tax, income qualification or double taxation may therefore directly influence litigation strategy and the overall economic cost of the dispute.

A strategic analysis of the group is often essential

Behind a simple absence of dividends may in reality lie much broader issues: control of capital, group governance, valuation of shareholdings, intra-group financing, international tax optimization or protection of minority shareholders. These disputes therefore require a global approach combining legal, economic, accounting and tax analysis in order to identify potential liabilities, cross-border risks and defense strategies adapted to the structure of the group concerned.