Skip to content 
Article by Anker Sorensen, Partner, De Gaulle Fleurance – Avocats et Notaires[1]
Shareholders’ agreements have become the norm in the business life of private companies with multiple shareholders.
They are legally binding contracts that complement the articles of association and usually outline a variety of key points at the creation of the company, with additions throughout its life cycle particularly when new shareholders join the equity. Hence these agreements may undergo several revisions over time and become complex and sizeable documents, which must be followed and applied to the letter of their terms, failing which a variety of sanctions may be applied.
Key objectives of these Agreements
In well-drafted shareholders’ agreements, the parties’ objectives are defined in the preamble and shed light on the reasons for them entering into that agreement with each other.
They usually address in much more detail than the articles, and without their content being known to third parties, the:
- Governance of the company, its management and conduct of the business, including in some instances veto rights on strategic decisions;
- Composition, evolution of, and access to the equity;
- Treatment of key persons (“hommes clé”), particularly when they leave the company. These provisions are generally referred to as “good” or “bad leaver clauses” and usually address the (i) severance pay, depending on the nature of the termination (whether at fault or not) and its quantum, according to the length of the term of office, and (ii) buy back conditions of the shares held by the departing shareholder;
- Other commitments between the parties, such as those relating to the liquidity of the capital, dividend distributions, the terms and conditions for setting the exit (drag and tag along) from the share capital, enhanced information to some shareholders, non-compete with the company’s business, temporary lock up[2] of all or part of the capital for example when shareholders grant each other cross-cutting call and put options over their shares, as is often the case in multistep acquisitions or joint ventures;
- List of decisions which can only be implemented by the company’s management or taken by the shareholders at general meetings, if they have first been approved by an ad hoc committee, often called the strategic committee;
- The duration of the agreement, which is usually aligned with the presence of certain shareholders but needs a term as it cannot be open ended (“à durée indéterminée”), failing which it may (under French and Luxembourg law) open the door to termination at any time, subject to a prior notice period the length of which generally depends on the duration of the relationship.
In both France and Luxembourg, shareholders and their advisors enjoy considerable contractual freedom in drafting the terms of the agreement.
A recent example of Harsh Consequences for Breach of a Shareholders’ Agreement: The Ruling of the Versailles Court of Appeal, handed down on 10 December 2024
- The key facts, procedural steps and previous decisions which led to the Ruling
Groupe Sebbin, a French “société par actions simplifiée”, active in the development, manufacturing and distribution of breast implants, decided to dismiss Mr VG[3] from his employment as head of quality, clinical studies and regulatory affairs, for serious misconduct and to also remove him from his duties as a “Directeur Général” (“DG”) respectively in October 2018 and January 2019.
The main reason for the dismissal and removal was the award by Mr VG of self-assigned remuneration in compensation for his work during his vacations, in breach of the provisions of the shareholders’ agreement, to which he was a party, and which was considered serious misconduct by the President of the Groupe Sebbin.
The agreement indeed stipulated that any significant change in remuneration could only be decided by the company’s management, subject to the prior approval of the majority of the members of the company’s Strategic Committee. It also contained a (i) 100K€ severance payment provision, in case of dismissal for reasons other than serious misconduct of the DG’s duties of which he was deprived, and (ii) bad leaver provisions, which contributed to reduce the purchase price at which Mr VG’s shares were acquired by the investors members of the Strategic Committee, following his removal from his DG position for serious misconduct, by 75% of the value at which he estimated them, i.e from 850K€[4] down to 210K€.
In April 2019, Mr VG took the dismissal case to the local Labor court, which considered that he had committed serious misconduct and dismissed his claim in a ruling dated 21 April 2021. The Labor section of the Versailles Court of Appeal thereafter confirmed this decision in a ruling dated 20 April 2023.
In May 2019, Mr VG took the removal from his management position case, including his request for payment of the 100K€ severance payment provided for in the shareholders’ agreement and the sale of his shares in the company without application of bad leaver conditions, to the Pontoise Commercial court. The latter dismissed all his claims[5] and sentenced him to bear a portion of Groupe Sebbin’s legal fees. He appealed the judgement and brought his case before the Commercial Chamber of the Versailles Court.
- The Ruling made by the Versailles Court of Appeal[6], main arguments and grounds
The Court, decided as follows on the 3 heads of claim made by Mr VG, former DG of Groupe Sebbin:
- The claim that the termination of his management position was abusive, premeditated, without respect for the adversarial process, vexatious and humiliating:
The Court ruled that the termination was not abusive, neither in breach of the duty to comply with the adversarial process (“respect du principe du contradictoire permettant au mandataire social de présenter ses observations”). It grounded its decision as follows:
- The company’s articles provide that the DG may be dismissed at any time by the shareholders gathered at a general meeting and that the latter do not have -as per the articles- to justify their decision, which implies according to established case law that the validity of the reasons for the dismissal does not have to be assessed.
- The registered letter convening the DG to the meeting and including the agenda thereof (his dismissal, which was the only topic) was sent 15 days ahead of the meeting but retrieved from the post office only 4 days before the meeting.
The Court further noted and ruled that:
- Even if the shareholders’ meeting only lasted 20 minutes, that was enough for the shareholders to decide on the only topic and resolution of the meeting.
- The minutes of the meeting, quoting the DG’s arguments, confirmed that he had been given the opportunity to comment on the compensation that he had unduly awarded himself.
- In relation to the premeditation argument, the President of a company cannot be blamed for anticipating a meeting and planning to rally the support of a majority of shareholders for the vote of the resolutions.
But regarding the vexatious nature of the dismissal, it overturned the decision of the lower court. The Court namely considered that informing the shareholders via a specific report, that the DG had been late in returning his laptop, telephone and company car, contrary to requests and commitments made during the shareholders’ meeting and reporting also that the condition of the company car and documents would be “verified”, was vexatious as it could cast doubt on the DG’s probity and damage his reputation.
The Court therefore allocated him 10K€, instead of the 50K€ he was claiming, in compensation for reputational damage.
- The claim that he was entitled to the 100K€ severance payment
The only issue subject to the Court’s analysis under this claim was whether the breach of the shareholders’ agreement, via the unapproved payment of the compensation which the DG allocated himself, was serious misconduct (as defined by the French Supreme Court[7]) or not, and justified the termination of his management position without any right to the severance payment.
The Court ruled that the elements of serious misconduct were established and upheld the judgment of the Pontoise court.
Interestingly, the Court did not consider:
- The DG’s argument that the disputed compensation had been submitted to the company’s CFO, appeared on his pay slip, was known by the company’s president, auditor and shareholders when the accounts were approved at the annual shareholders’ meeting. The Court here simply noted that the “complementary compensation fell under the provisions of the shareholders agreement[8]”. In that regard, it would have been useful to add, to disqualify the argument and for the relevance of the demonstration, that (a) under the shareholders’ agreement, the shareholders’ meeting was not the right forum to address the issue and approve said compensation, and (b) the procedure to be followed could not be covered by another approval process of the applicant’s choice.
- Other factual arguments produced as evidence in the proceedings[9] by the Sebbin Group but not included in the initial ground put forward to support the removal, precisely because they had not been presented to justify any misconduct on the part of the DG when it was submitted to the shareholders. On this point too, the Court diverged (rightfully in our opinion) from the judgement of the lower court, which took them into consideration to deliver its decision.
- The application of bad leaver provisions to the sale of his shares
The appellant argued that he was the “victim of a fraudulent scheme designed to prevent him from selling his shares at their value when he left the company” and that the shareholders’ agreement was therefore not applicable.
The Court quoted the terms of certain provisions of the agreement, notably those relating to the sale price “in the event of gross negligence, serious negligence or breach of the agreement”, which provide that “the sale price of the shares under option [to be purchased by the investors] will be equal to the weighted average of the prices at which they were acquired by the executive concerned”.
The Court did not consider the alternative methods of valuing his shares, put forward by the DG, because he was unable to demonstrate that they were in line with the stipulations of the shareholders’ agreement to which he was subject.
The Court therefore confirmed the judgement and the application of the specific provisions of the shareholders’ agreement to the DG and thereby the sale price of €210K for his shares in the company.
- The main takeaways
One of the useful takeaways from the Ruling is that the DG’s breach of the shareholders’ agreement was deemed serious misconduct. It was not stated, however, whether the intentional nature of the breach (the CEO did not argue to the contrary) had any weight in this qualification and that raises the question whether the Ruling would have been different had the breach been unintentional. We doubt it though.
Even if the further facts, set out below and revealed after the decision to remove the DG, were not considered in the assessment of misconduct, it remains that they nonetheless illustrated a consistent behavior incompatible with the probity and prudence expected of a senior executive:
- the DG had previously awarded himself a watch from a well-known Swiss brand worth €12.5K, as a bonus apparently paid by the company, and
- had also obtained a prestigious company car, worth over €100K from the Group’s German subsidiary, at a time when the latter’s accounts were giving cause for concern,
all this in agreement with the previous Chairman, including other bonuses and extra bonuses, and to have various personal expenses paid by the company[10].
The Ruling is also an obvious application of the principle that a contract (here the shareholders’ agreement) is binding on the parties[11], who have no choice but to regularly review it when in doubt about its scope and their obligations and strictly comply with it.
A further question (and the answer being a takeaway) is whether the Ruling is harsh? At first sight, this may be a somewhat superficial opinion based on the fact that the DG’s salary increase was recorded in the company’s accounts and submitted to the shareholders’ subsequent approval, although the increase was not subject to prior approval by the Strategic Committee as per the shareholders’ agreement.
In reality, though, taking into account the above-mentioned principle of the “binding force of contracts” (“la force obligatoire du contrat”) the answer is in truth not harsh, as it is the straightforward application of:
- an agreement freely entered into by the DG in his capacity as shareholder with the investors, and
- the American adage “you only get what you negotiate”.
Could the DG then have negotiated the agreement and the bad leaver provision differently at the onset? Nothing is less certain, insofar as the bad leaver clause in question, dealing with the sale of the shares and their valuation, reflects a widespread practice. And in the end, it is essentially a question of negotiation and the convincing ability of one or other party in the “horse trading game” and the investors’ need to retain the services of an experienced manager which would have allowed some flexibility if the negotiation had focused on this issue.
Finally, the DG’s legal action became irrelevant (apart from setting the quantum of his unsecured claim) from July 2023, when Groupe Sebbin filed for insolvency and was eventually placed into liquidation in March 2025 when it appeared that it failed to comply with its restructuring plan.
Paradoxically, the DG is probably the only shareholder in the company who was able to exit its share capital at the price at which he bought his shares, thereby avoiding a capital loss further to the company’s insolvency filing and eventual liquidation a few years after his exit.
- Recommendations: Common sense first and foremost
Always carefully review the shareholders’ agreement before taking a decision and enacting it outside the beaten track and, in case of doubt, reach out to the company’s secretary general, GC or to the “gardien du pacte”, who is often the company itself or its main lawyer.
The appointment of a “gardien du pacte” (literally meaning “custodian of the agreement”) is frequent in French shareholders’ agreements and taken to secure the application of the clauses relating to the transfer of shares. In his capacity as account keeper, which is usually one of his key functions, the custodian may for example refuse to register a share movement in breach of the agreement. Insofar as the transfer of ownership of shares and its opposability to third parties are carried out by book entry, the breach of an agreement can be rendered ineffective when the custodian legitimately refuses to satisfy it.
If trust and transparency no longer guide the relationship with the other shareholders and the company, or simply if it is not deemed useful to consult the other shareholders or the company on the scope of a provision of the agreement, then contact a professional in corporate and contract law to keep the question and answer confidential.
Generally, assume – as the Ruling illustrates – that any breach of the shareholders’ agreement will be sanctioned in accordance with its terms, with potentially highly negative consequences for the infringer. But also consider in case of true doubt, that under French and Luxembourg law which are rather similar, the provisions of a (i) contract entered into by mutual agreement (“de gré à gré”) will be interpreted against the creditor and in favor of the debtor[12] of the disputed obligation, and (b) “take it as is” subscription contract (“contrat d’adhésion”) will be interpreted against the person who proposed it[13].
[1] Anker Sorensen is qualified as an avocat at the Paris and Luxembourg bars. He is based in and working out of Luxembourg
[2] French and Luxembourg corporate law are very similar when it comes to the temporary lock up of shares in certain commercial companies (SAS and SA in Luxembourg and SAS in France) whose shares are not admitted to trading on a regulated market and breach of the lock up when provided in the articles. In this regard articles 430-1 and 500-9 of the Luxembourg Commercial Companies Act and L 227-13 of the French Commercial Code provide for a temporary lock up, which cannot statutorily exceed 10 years for a French SAS, and which are sanctioned by the nullity of the share transfer when carried out in breach of a valid lock up provision set out in the articles.
[3] His name is intentionally anonymized for the purpose of this article
[4] This amount was the DG’s estimation, which was not in line with the valuation method provided for in the shareholders’ agreement
[5] Second Chamber, handed down on 10 September, 2021, RG 2019F 00418
[6] Cour d’Appel de Versailles, Chambre commerciale 3-2, 10 décembre 2024, RG N°21/05807, partial overturning, also commented in BRDA, Bulletin Rapide 12/25, ed. F. Lefebvre, 15 June, N°5, « Un dirigeant doublement sanctionné pour manquement à un pacte conclu avec ses associés », and in Bulletin Joly, February 2025, Sociétés par actions, pages 22-24 by Prof. Bruno Dondero, « Révocation sans indemnité et avec bad leaver…mais vexatoire »
[7] Serious misconduct being defined as “that which makes it impossible for the employee to remain with the company”, or in French “la faute grave est celle qui rend impossible le maintien du salarié dans l’entreprise”
[8] “il n’en demeure pas moins que cette rémunération complémentaire entre dans le champ du pacte d’actionnaires »
[9] These arguments are set out below under the Takeaways section
[10] Pages 7 and 9 of the Pontoise judgement
[11] « Les contrats légalement formés tiennent lieu de loi à ceux qui les ont faits » as per Article 1103 of the French Civil code and likewise as per Article 1134 of the Luxembourg Civil code, drafted in almost identical terms: “Les conventions légalement formées tiennent lieu de loi à ceux qui les ont faites ».
[12] Article 1190 of the French Civil code and, in a similar but different wording, Article 1162 of the Luxembourg Civil code: « Dans le doute, la convention s’interprète contre celui qui a stipulé et en faveur de celui qui a contracté l’obligation »
[13] Article 1190 of the French Civil code
