Change in France: shareholders’ agreements for the duration of the company

published on 21 June 2023 | reading time approx. 2 minutes

The duration of shareholders’ agreements is decisive for the stability of relations between shareholders in a joint-venture and therefore for the success of M&A transactions. However, French law is traditionally suspicious of very long-term contracts, which can be considered by courts as “perpetual engagements” and requalified as indetermined duration contracts, giving each party the ability to terminate them at any time. In this context, how long can a French shareholders agreement be valid? A remarkable decision by the French Cour de cassation has just shed new light to this question.

In a recent decision (Cass. 1re civ., January 25, 2023, n° 19-25.478), the French Cour de cassation validated a shareholders’ agreement with a duration of 58 years, stating clearly for the first time that the prohibition of perpetual engagements (a traditional French case law principle that was turned into article 1210 of the French civil code in 2016) does not prevent the parties from entering into a shareholders’ agreement for the duration of the company. It is so even if such duration means that the individuals will remain engaged until a very old age (between 79 and 96 years-old in the concerned case).

Up to now, the market practice in France generally limited the duration of shareholders’ agreements to 10 or 15 years (rarely going over 25 years). Indeed, according to French case law, if the duration of a contract is considered “excessive”, it is assimilated to a prohibited perpetual engagement and requalified as an indetermined duration contract, which means that it can be terminated by either party at any time. Because the appreciation of “excessive” is done in a case-by-case basis, it is very difficult to draw clear directives from such case law. Depending on the circumstances, 30 years has been considered a valid duration for the engagement in a cooperative company (Cass. 1ère civ. May 30, 1995, n° 93-11.837) while 36 years has been sanctioned also in a situation concerning a cooperative company (Cass. 1ère civ. January 18, 2000, n° 98-10.278). Only one isolate decision by the appeal court of Paris had previously accepted a shareholders’ agreement for the duration of the company, but the present case concerned parties that were corporations and not individuals (CA Paris, December 15, 2020, n° 20/00220).

With the decision of January 2023, we have now some welcome clear directives to validly set the duration of a French shareholders’ agreement:

The duration of the shareholders’ agreement must be defined expressly. A clause that provides that the shareholders’ agreement will last “as long as the parties remain shareholders of the company” is not considered as a defined term by French courts.
The duration may be set for the remaining duration of the company.
If an automatic renewal of the shareholders’ agreement is foreseen in case the shareholders decide to extend the duration of the company itself, the parties must be given the right to oppose to the automatic renewal of the shareholders’ agreement.

However, some questions remain open even after the decision of January 2023:

Can the duration of a shareholders’ agreement be set at any point up to the theoretical maximum corporate duration of 99 years defined by article 1838 of the French civil code independently from the actual remaining duration of the company?
Pending clear indication in this sense by the Cour de cassation and considering the potential consequences of a requalification, we recommend avoiding this possibility. In case the remaining duration of the company is considered not long enough, it would be preferrable to extend the duration of the company prior to the conclusion of the shareholders’ agreement.

Is there a risk that the courts still apply the prohibition of perpetual engagements to shareholders’ agreements under specific circumstances?
We recommend particular attention in cases where French courts have always been more inclined to qualify long duration agreements as perpetual engagements (especially if the parties are individuals):

the object of the shareholders’ agreement concerns the professional activity of one or more of the parties; and/or
the shareholders’ agreement does not provide any exit rights to the parties (and even more if it does provide on the other hand the usual preemption and approval rights).