The intuitu personae clause tested by a change of control or management of one of the contracting companies

Intuitu personae is a Latin locution meaning “in consideration of the person.”

In commercial law, the quality of the contracting party is often a determining factor in the signing of a contract.

A contract concluded intuitu personae may only be transferred or assigned to a third party with the agreement of the co-contractor. Since the contract is based on the person who enters into it, it will cease to be valid if that person changes.

The intuitu personae nature of certain contracts is presumed: this is the case for franchising contracts and commercial agent contracts.

However, when the contract is concluded intuitu personae, it is always advisable to insert a clause to this effect in order to determine its scope.

The intuitu personaese clause is often limited to stating that the contract has been concluded in consideration of the person of the other party, without going into further detail, and prohibiting the transfer of the contract to a third party without the authorization of the other party.

Does the intuitu personae clause apply in the event of a change of control or management of one of the contracting companies? In other words, is the intuitu personae attached to the legal entity, and therefore to the company, or to its partners or manager?

1. The principle of legal entity autonomy prevails in the absence of specific provisions

In a landmark ruling dated January 29, 2013, the Cour de cassation responded as follows:

“Due to the principle of the autonomy of legal entities, the latter remain unchanged in the event of the transfer of all the shares of a company or a change in its directors, and [en]the absence of any contractual stipulation authorizing early termination in such cases, the court of appeal, which thus found that it had not been established that the exclusive distribution agreement had been concluded in consideration of the person of the manager, rightly deduced, without setting aside the intuitu personae nature of the contract, that in the absence of a specific stipulation, the agreement was maintained despite the changes that had occurred”. (Cass., com., January 29, 2013, no. 11-23.676, Published in the bulletin)

In the event of a change of control or management of a contracting company, the Cour de cassation thus considers that the person of the contracting party does not change, and thus enshrines the principle of the autonomy of a legal entity whose identity is distinct from that of its partners or shareholders, or its manager.

A company whose control has been modified, for example through a transfer of shares, is still considered to be the same company.

She will continue to hold the contract.

An intuitu personae clause therefore does not necessarily cover a change of control or management.

On the other hand, the contract may validly provide that a change of control of the company, and/or a change of manager, constitutes grounds for termination of the contract.

In a nutshell:

• In view of the principle of the autonomy of legal entities, the termination of a contract before its expiry cannot be justified by the transfer of all the company’s shares, or by a change in its directors, in the absence of a specific stipulation in the contract authorizing this.

Particular care must therefore be taken when drafting intuitu personae clauses.

2. Drafting the intuitu personae clause

The intuitu personae clause must be proportionate and adapted to the intention of the parties, on the one hand, to avoid creating a significant imbalance and thus incurring nullity, and on the other hand, to avoid deadlock situations.

When drafting an intuitu personae clause, it will first be necessary to determine to which party or parties to the contract the clause applies.

In principle, the clause is bilateral.

If the parties opt for a unilateral clause, the clause will only be valid if there are valid grounds, as it may be considered to constitute a significant imbalance between the rights and obligations of the parties within the meaning of article L 442-1, 2° of the French Commercial Code (CA Paris, January 5, 2022, no. 20/00737).

The next step is to determine what is meant by a change of control.

• What kind of control are we talking about?

Is it a change of partner, manager, legal structure or preferred contact?

If the control is that of Article L 233-3 of the French Commercial Code, it is important to specify this expressly, to avoid any other interpretation.

• What kind of change are we talking about?

It is advisable to determine whether the change should be direct or indirect, and what type of operation it covers (restructuring, disposal involving a third party, a competitor, etc.).

If control refers to a change of partner or shareholder, it may also be appropriate to indicate whether or not this change must be significant, and to determine at what percentage of the transfer of shares the intuitu personae clause should be considered to be activated.

Finally, the consequences of non-compliance with the intuitu personae clause must be determined.

Does the absence of the co-contractor’s agreement to the change of control or management imply automatic termination of the contract, with or without notice, or renegotiation of the terms?

Contractual freedom in drafting this clause is very broad.

However, precision in its wording is essential given the stakes involved.

An intuitu persona clause can block, or at least make more difficult, a share transfer, a company merger-acquisition or a change of governance.

It can also be used to terminate an established commercial relationship, and as an entry point for renegotiating a contract.

In addition, this clause may be rejected or rendered ineffective if it is too broad.

The intuitu persona clause must therefore be drafted in a personalized and adapted manner, to ensure that it is comprehensive in scope and that it only imposes constraints that are strictly necessary and proportionate to the chosen objective.