27 Jun Abuse of majority
Commercial Company; minority shareholder; abuse of majority for failure to distribute dividends; limitation period.
A shareholder domiciled in the European Union is a minority shareholder of a joint stock company (Société par Actions Simplifiée – SAS) under French law. The majority shareholders were refusing to distribute dividends and were allocating the profit to the company’s reserves. The latter was part of a group, controlled by the same majority shareholders (who received dividends from the holding company).
Definition of abuse of majority:
The abuse of majority, according to the Court of Cassation, is characterised by decisions made by the majority shareholders in the general meetings, which conflict with the corporate purpose of the company, for their own advantage and to the detriment of the other shareholders (22/04/1976 n° 75-10735).
A decision conflicts with the corporate purpose of the company when it cannot be justified by a policy of prudence; it is not in accordance with the corporate purpose; it is not taken to finance an investment (Court of Cassation 17/06/2008 n ° 06-15.045). Clearly, such a decision does not reflect sound management of the company, breaks the equality of shareholders and is therefore constitutive of abuse of majority.
It is then necessary to have such decisions of systematically allocating profit to the reserves annulled when they cannot be justified, but also that the majority are condemned to pay the sums due to the minority (Court of Cassation 12/11/2015 n ° 14-23716).
The limitation period:
The annulment of a decision taken at the general meeting is governed by a limitation period of 3 years (Article L.235-9 of the French Commercial Code).
The limitation period differs when it comes to an action for compensation for damage caused by an abuse of majority and is 5 years (Article 2224 Civil Code).
The perpetrators of the abuse of majority may be jointly and severally ordered to pay damages to the minority (Caen Court of Appeal 9/03/2017 n° 15/00994) and the amount of damages may be equivalent to the amount of dividends not received (Court of Cassation 12/11/2015 n ° 14-23716).
Assignment of shares:
Faced with such a blockage on the part of the majority shareholders, the shareholder may wish to sell their shares. In a SAS, the terms of assignment of shares are usually defined in the articles of association of the company.
What about taxation?
The minority shareholder will be taxed on the capital gain in the event of a sale of their shares, and/or on the dividends if the company decides to distribute, and/or on the damages they would obtain from a court. For this, it is necessary to refer to the Tax Convention between France and this foreign country.
Example of Spanish law:
Spanish law, in recent years, has put in place an alternative in favour of a minority shareholder. It is possible for them to withdraw from the company when there is no distribution of dividend, under certain conditions.