How does a French share transfer approval clause work?

Approval is the first lock on the capital: it lets shareholders choose whom they are in business with. Badly drafted or badly operated, the clause produces the opposite effect: transfers blocked with no way out, procedures mishandled into tacit approval, nullities discovered years later on the occasion of a sale.

1. Where to place the clause: articles or shareholders’ agreement

An approval clause in the articles binds all shareholders, present and future, and its breach is sanctioned by nullity of the transfer in the cases provided by law. An approval clause in a shareholders’ agreement binds its signatories only and its breach is in principle resolved in contractual liability. The choice is not neutral: the strongest protection sits in the articles, discretion sits in the agreement, and the two can be combined, the approval mechanism in the articles, its practical arrangements in the agreement.

For a shareholding that genuinely wants to control its capital, the approval clause belongs in the articles; the agreement supplements it but does not replace it.

2. SAS: contractual freedom, nullity as sanction

In the SAS, the articles may make any transfer of shares subject to the prior approval of the company (article L. 227-14 of the French Commercial Code). The freedom is wide: competent body, majority, transfers covered, including between shareholders, procedure and consequences of a refusal are all for the articles to determine. The counterpart of that freedom is rigour: any transfer made in breach of the articles is null (article L. 227-15), and the procedure followed must be exactly the one the articles describe.

In a SAS the quality of the clause is everything: the full procedure, notice, body, period, effect of silence, fate of the seller upon refusal, must be written out, because no statutory default regime will fill the gaps.

3. SARL: statutory approval of third parties

In the SARL, approval of transfers to third parties is statutory: units may only be transferred to third parties with the consent of a majority of the shareholders representing at least half of the units, unless the articles require a stronger majority (article L. 223-14 of the French Commercial Code). The statute organises the procedure: notification of the proposed transfer to the company and to each shareholder, approval deemed given failing a response within the statutory period and, upon refusal, an obligation for the shareholders to buy or procure the purchase of the units, the price being determined, failing agreement, under article 1843-4 of the French Civil Code. Transfers between shareholders are free unless the articles restrict them, in which case the procedure of article L. 223-14 applies, with a lower majority or shorter periods if the articles so provide (article L. 223-16); transfers to spouses, ascendants and descendants, and transmissions on death or on the liquidation of a matrimonial community of property, are free unless the articles require approval, in which case the clause may provide neither longer periods nor a stronger majority than those of article L. 223-14 (article L. 223-13).

In a SARL the trap is procedural: response periods run against the company, and overrunning them amounts to approval; the timetable of every notification must be tracked to the day.

4. Unlisted SA: a statutorily regulated clause

In an SA whose securities are not listed, the articles may stipulate an approval clause (article L. 228-23 of the French Commercial Code), whose procedure is set by statute: a request for approval notified to the company, approval resulting from acceptance or from three months’ silence and, upon refusal, an obligation to procure the purchase of the securities within three months, by a shareholder, a third party or the company itself with a view to a capital reduction, the price being fixed, failing agreement, under article 1843-4 of the French Civil Code; failing a purchase within the period, approval is deemed given (article L. 228-24). The seller may renounce the transfer at any time. Breach of the clause is sanctioned by nullity of the transfer (article L. 228-23).

In an SA, a refusal triggers a buy-out mechanism on strict deadlines: before refusing, the company must know who will buy and at what price, otherwise the refusal turns into forced approval.

5. The procedure: notice, periods, silence

Whatever the corporate form, the procedure follows the same pattern: notification of the proposed transfer with the identity of the transferee, the number of securities and the price; decision of the competent body within the allotted period; failing a response within the period, approval deemed given. The content of the notice is substantive: an incomplete notice does not start the periods running and weakens everything that follows. The decision itself does not in principle have to state reasons.

On the seller’s side, the notice must be complete and bear a certain date; on the company’s side, every request received must immediately trigger a reverse timetable, because silence always works against it.

6. Refusal and what follows

A refusal does not trap the seller: depending on the regime, the company or the shareholders must buy or procure the purchase of the securities within a set period, at an agreed price or at a price fixed by an expert under article 1843-4 of the French Civil Code, the expert being bound to apply the valuation rules set by the articles or by any agreement between the parties where they exist. In the SARL as in the SA, the seller retains the right to renounce the transfer in view of the price offered.

Writing a valuation method into the articles or the shareholders’ agreement, binding on the expert, is the best way to control the price of a buy-out upon refusal, rather than undergoing an unframed expert determination.

7. Interplay with pre-emption and the shareholders’ agreement

Approval and pre-emption often coexist: pre-emption designates who may buy first, approval decides whether the third party may enter. Their interplay must be written out, order of exercise, compatible periods, fate of securities not pre-empted, otherwise the two procedures neutralise each other. Likewise, an approval clause in the articles and one in the agreement must designate the same body and the same periods, or clearly divide the cases between them.

Before any transfer, the seller should reconstruct the full chain of required consents, articles then agreement, and run through it in order, because one missing link is enough to invalidate or block the transaction.

Frequently asked questions

This information is general and does not constitute legal advice. Every transaction calls for its own analysis.