Protection mechanisms governing the transfer of social rights

A company is a contract between one or more people who wish to bring together contributions in order to generate profits from a commercial, artisanal, industrial or agricultural activity.

In the process of creating the company, it is necessary to constitute share capital. This capital corresponds to all the contributions made by the partners in different forms:

• In cash
• In kind
• In industry

Social capital will thus generate shares or actions, representing property titles within the company. This participation is calculated proportionally according to the contributions introduced into the total share capital. As a result, the shares and shares may vary depending on the share of the partners’ investment in the company. This mechanism gives the partner holding shares or shares rights within the company.

It is then necessary to remember that the terms “shares” and “shares” should not be confused. Their nature differs depending on the structure of the society. In fact, there are two forms of company:

• Partnerships (SNC / SCI / SARL / …)
• Capital companies (SA / SAS / SCA / …)

Shares correspond to contributions generated by so-called capital companies. Conversely, social shares are the contributions found in partnerships.

The transfer of shares or shares therefore corresponds to the transfer of property titles either to a co-partner or to a third party, natural or legal person. Thus, the transfer of shares or shares consists of a partner/shareholder (the transferor) transmitting to a purchaser (the transferee), all or part of the rights he holds in the share capital of the company. This transmission can take the form of a sale, a donation, an inheritance or an exchange.

It will therefore be interesting in this article to understand the different processes governing the transfer of social contributions. Initially, it will be necessary to address the transfer protocol to be put in place for transfer security (I), then, analyze the opportunities offered to partners to intervene in the decision to transfer contributions (II), and finally conclude with the legal obligations necessarily included in the transfer document (III).

The transfer protocol

The transfer of shares and shares is a usual act of economic life. They often represent very significant financial issues. This is why in recent decades, the legislator has intervened to protect transfer documents by inserting a security protocol. This protocol is generally composed of a promise of transfer (a) as well as a guarantee agreement (b).

The promise of transfer

The promise to transfer title, also called a protocol of agreement, is the materialization of the agreements which have just been reached between the transferor and the buyer. This is the most important legal act of recovery.

In drafting the protocol, a first element to take into account is the question of the identity of the parties and capacity. Indeed, the transferor must necessarily be an adult or be an emancipated minor in order to meet the condition of ability to hold rights and be able to exercise them. In addition, it is essential to note the consent of each party to the transfer. In accordance with common contract law, consent must be given fully informed and freely. Failing this, the absence or defect of consent may result in the transfer being null and void, under the terms of article 1131 of the civil code.

It is also necessary to take into account the issue of the matrimonial regime. When the shares or shares to be transferred are common property, the spouse must give consent to the transfer or acquisition by proving having been informed of the act of sale. You must know how to be attentive to the actions carried out by the spouse in the exercise of his or her function as shareholder or partner, mainly when a marriage contract has been concluded beforehand. The transfer of the contribution then becomes a joint decision.

The second point to consider is the purpose of the transfer. Like any contract, the parties must agree precisely on the subject of the transfer, namely transfer titles. These titles must be identified, named, and precisely calculated.

It is true that the price occupies a dominant place in the game of transfer negotiations. Pursuant to the provisions of article 1591 of the Civil Code, the price must be determined upon formation of the contract. In practice, the price is fixed as a flat rate and in two installments. The justification lies in the fact that either, at the date of the agreement, the accounting situation of the company is not known, therefore a provisional price is then determined based on the last balance sheet established and the final price will be fixed by reference to an intermediate situation specially established at the date of the transfer; or because the payment of the price is in installments and the contract provides for the payment of a price supplement calculated according to the evolution of certain parameters of the company’s development.

Annexed to the agreement protocol, there is a guarantee agreement making it possible to justify the liabilities and assets of the transfer of shares.

The guarantee agreement

Terminology “liability guarantee” is the one used in everyday language. A distinction should be made between the liability and asset guarantee and the liability and asset guarantee with price revision.

The guarantee agreement is not obligatory. It results from negotiation between the parties and can be adjusted on a case-by-case basis. The liability guarantee is a set of declarations made by the transferor to justify any deception in the economic reality of the transfer.

Concerning the asset guarantee, it is important to take into account in particular the question of receivables and stocks. For the assignee, it is a question of verifying that the receivables have indeed arisen, that they are due and liquid, or that they have been sufficiently provisioned. Regarding stocks, it is also possible to draw up an inventory and draw up a report signed by both parties.

In practice, assets often have a strategic financial interest for the company, the transferor must be able to certify being the owner. The existence of intellectual property rights is also important because it is necessary to ensure that the transferor is the owner of the securities transferred.

In the event of a simple liability guarantee clause, the guarantee only covers the liabilities (in practice, the guarantee agreement insures the liabilities and the assets). In this case, the transferor undertakes to settle the debts of the company, or some of them which existed at the time of the transfer. This will generally be the case for tax or social security liabilities notified following a tax audit or a URSSAF audit.

It is also common for the seller to require a guarantee of the warranty. This situation is completely legitimate. Indeed, in the event of implementation of this guarantee, the buyer must therefore be able to protect himself in the event of the insolvency of the transferor, which will prevent him from having the guarantee executed. This again provides additional security for the assignee to be paid following the assignment.

Finally, it is important to specify that in order to promote tax optimization, it is recommended that the SARL be transformed into an SAS. Indeed, in the event of transfer of shares in an SARL, the purchaser pays registration fees on the amount of the purchase equal to 3%, with a reduction. Whereas for the transfer of SAS shares, the registration fees only amount to 0.1% of the sale price. It is therefore interesting to stipulate as a condition precedent to the acquisition, the transformation of the SARL Company into a joint stock company.

Ultimately, the issues relating to the transfer of social rights are multiple, and cannot all be framed by a transfer protocol, which is why statutory clauses can provide for the mechanism to be respected during a transfer.

Supervision of the transfer process

In principle, shares can be freely assigned, transmitted or pledged.

But as a guarantee, the transfer mechanism was governed by the Commercial Code and the Civil Code, which refer in part to the writing of the company’s statutes. The statutes of a company present the general rules of operation and closing. It is within its statutes that it is particularly advisable to provide for the process of transfer of shares and shares.

As a result, it is possible to find many ways to transfer the shares of a company, in particular by inserting clauses allowing the conditioning of the transfer. We are going to discover some of them.

The approval clause

In joint stock companies, the partners have the choice of whether or not to include an approval clause in the company’s statutes. Conversely, in partnerships or civil companies, the approval procedure is mandatory.

The transfer of shares can only take place if the transferee is approved by the partners of the company. To do this, the transferor must notify, by registered letter with acknowledgment of receipt or by bailiff’s deed, his proposed transfer to the partners.

The manager of the company must then convene all the partners to a general meeting. It is during this meeting that they vote on the approval of the transferee.

In the event of refusal, the partners generally have three months to propose a solution to the transferor such as submitting a new buyer or asking to buy back the shares themselves.

As an exception, within an SARL, shares are freely transferable between partners, between spouses and between descendants and ascendants (article L223-13 of the commercial code). Approval is in reality only required if the transferee is a third party, by a simple majority of votes representing at least half of the shares. (article L223-14 of the commercial code).

The pre-emption clause

The pre-emption clause is often considered to be very important for the sustainability of the company. This clause obliges the transferring partner to first offer to other partners to repurchase his shares before proposing the transfer to third parties.

This agreement prevents shares from being transferred to a third-party investor or competitor. The objective being that the company retains the same partners and limits the entry of external people into decision-making.

When transferring his shares, the partner must inform the others using the means provided for in the statutes or the pact. The latter can then use their pre-emption right on the basis of the number of shares and the price indicated in the notification. If several partners come forward for the buyout, it is usual for the shares to be shared in proportion to those they already hold respectively.

If the partners remain silent during this period, approval is then deemed given, notwithstanding their initial refusal. From then on, the transferor can turn to the third party of his choice

Generally speaking, the agreement of all the partners is necessary whether the buyer is a third party, a partner, a descendant, an ascendant or the spouse of the transferring partner.

The inalienability clause

The inalienability clause prohibits shareholders from selling their shares during a specific period. The maximum period applied is 10 years for SAS (article L.227-13 of the commercial code) or of a reasonable duration in other forms of company. This clause may appear in the shareholders’ agreement and only concern the partners who signed the agreement. This clause is conditional on the establishment of a serious and legitimate interest as specified article 900-1 of the civil code.

The objective of the inalienability clause is to keep the group initiating the entrepreneurial project intact, and to limit external influences, as is precisely the case with a pre-emption clause. In practice, it is established to insert these two types of clause into the contract since they allow for increased security.

The deed of transfer

The transfer contract must be drawn up either by authentic deed or by private deed. There must be as many copies as there are parties to the contract. And each copy must be signed by the parties.

The act must contain a certain number of mandatory information to be valid:

• The name of the parties (assignor and assignee);
• The designation and number of shares transferred;
• The identity of the company (company name, RCS registration number, address of its head office, etc.);
• The price of the transfer and the payment terms;
• The mention of the approval.

If one of these mentions is not included in the deed of transfer then the transfer is void according to the articles 1178 and following of the civil code. Nullity can be defined as the legal sanction for a breach of one of the conditions of validity of the contract. For example, a contract is void if the consent given by one of the parties has been vitiated by fraud. Nullity therefore consists of the retroactive annihilation of the contract: we act as if it had never existed.

In conclusion, the implementation of a transfer of social rights is a complex and rigorous mechanism that must be studied in advance. A multitude of processes have been developed to secure the transaction but above all to plan the formalities to be completed in order to avoid any conflict of interest or economic imbalance.

In this regard, the support of a legal expert is essential. The LEGAL PROTECH firm offers personalized advice in corporate law in this regard. Do not hesitate to consult us in order to develop, together, the plan adapted to your entrepreneurial situation.

By Marwan ESCOULAN
Corporate law lawyer at LEGAL PROTECH