Abuse of minority rights

THE COURT OF CASSATION RECALLS THAT THE ABUSE OF MINORITY RIGHTS IS CHARACTERISED WHEN THE REFUSAL OF A MINORITY SHAREHOLDER TO MODIFY THE CORPORATE OBJECT OF A LIMITED LIABILITY COMPANY IS CONTRARY TO THE GENERAL INTEREST OF THE COMPANY.

Court of Cassation – Commercial Division – 13 March 2024 – RG n°22-13.764

The Court of Cassation recently applied the criteria for abuse of minority rights in a case where a minority shareholder in a company whose object was to operate a supermarket-type business under the name of a single group refused to amend the company’s object by deleting the reference to operating under a single name.

Abuse of minority rights is when one or more minority shareholders of a company prevent, by voting or abstaining, the adoption of a decision that requires a certain majority.

Criteria for abuse of minority :

• Behaviour contrary to the company’s interests, preventing the completion of a transaction on which the company’s survival depends
• Behaviour favouring minority shareholders to the detriment of other shareholders
• Action or omission that paralysed the contentious decision

Form of abuse of minority :

• Systematic opposition: vote or abstain
• By opposition for personal reasons
• Blocking: collusion between shareholders or minority shareholders to prevent the adoption of a resolution.

The case submitted to the Cour de cassation concerns a limited liability company (the “Company“), under a participative franchise, made up of two co-managers who together hold 74% of the capital and a company, which is a minority shareholder with 26%.

The Company’s corporate purpose is to operate a supermarket under the exclusive banner of a retail group, of which the minority shareholder is the subsidiary.

Article 15 of the Company’s Articles of Association states that any change to the company name by the Managing Partners is subject to the authorisation of shareholders representing more than three quarters (75%) of the shares.

The majority shareholders having terminated the franchise agreement and the supply agreement previously entered into between the Company and the distribution group, they are putting to the vote of the General Meeting a draft resolution to :

• To amend the corporate purpose by deleting the reference to operating under the exclusive banner of the distribution group;
• Reorganise the powers of managers to enable them to change the sign without having to be authorised to do so by at least three quarters of the shares.

The resolution was rejected following an unfavourable vote by the minority shareholder.

The majority shareholders then denounced an abuse of minority rights and requested the appointment of an ad hoc representative to vote in place of the minority shareholder.

In an attempt to avoid abuse, the minority partner claims :

A company’s purpose and interest are limited to the pursuit of the activity defined by its corporate object, so that a company’s interest cannot require it to change its object.

The Cour de cassation rejected this argument, pointing out that a minority shareholder’s refusal to amend the company’s objects may be contrary to the general interests of the company.

In view of the termination of the franchise and supply agreements, the Company’s corporate purpose requires it to operate a supermarket under a brand belonging to the distribution group to the exclusion of all others, This “is no longer in line with its business and prevents it from continuing to operate its supermarket business, including with another distributor”.

• That the amendment of Article 15 of the Company’s Articles of Association, relating to the powers of the Executive Chairmen, is not essential to the survival of the Company and does not require the appointment of an ad hoc agent.

The Court of Cassation rejected this argument, holding that the change in the Company’s corporate purpose meant that the minority shareholder’s holding of more than a quarter of its share capital meant that the limitation on the powers of the managing partners provided for in Article 15 no longer applied.

• That the Court of Appeal held that the minority partner had voted in her own selfish interest by opposing the resolution solely to preserve the participative franchise system, even though the termination of contracts was beyond the powers of the managers and was a matter for the general meeting.

The Court of Cassation upheld this reasoning, pointing out that the termination of franchise and supply contracts was a matter for the general meeting of shareholders and not for the managers.

Thus, in the decision under review, the Cour de cassation did not respond directly to the Court of Appeal’s argument on the personal and selfish interest of the minority shareholder.

Consequently, in the case in point, the Cour de cassation found that there had been an abuse of minority rights, considering only that the minority shareholder’s vote was contrary to the Company’s interests, as it affected the Company’s survival.