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E-library Corporate Law Pre-emption right and scope of application

Pre-emption right and scope of application

20 Feb 2013

Combination of a pre-emption clause and a prior approval clause

The existence of a pre-emption clause does not render the shares inalienable. Such clause does not furthermore render inexistent or inapplicable a prior approval clause if such clause is contained in the bylaws of the company.

The seller of shares may, and must, submit to the approval of the shareholders (or other competent body, as the case may be), the third party purchaser of shares.

The process which the seller must follow in connection with the sale of its shares (presentation of the third party purchaser for approval, notification to the remaining shareholders to exercise their pre-emption right, etc.), must be determined following an analysis of the provisions contained in the bylaws of the company and other applicable documents (such as a shareholders’ agreement, if any).

Such process may prove complicated or burdonesome if, in addition to the pre-emption right and obligation to present the purchaser to the prior approval of the remaining shareholders, the sale of shares also triggers other shareholders' rights such as a tag-along or an exit right.

Does a pre-emption clause apply in the event of sale of any kind of financial instruments and other rights held by a shareholder?

The scope of application of a pre-emption clause depends on its drafting. A pre-emption clause whose application has been restricted to “shares” will not apply to other securities (convertible bonds, warrants) or rights giving right to shares (such as preferential subscription rights).

Similarly, if the application of the pre-emption clause has been restricted to “transfers” or “sale transactions”, the clause will not apply in the event of future transfer of shares or securities which may result from, for instance, the pledge of such shares as collateral and their subsequent repossession or seizure.

A pre-emption clause included in the bylaws of a company will apply (unless otherwise specifically provided) to any and all shares held by a shareholder now and in the future, whereas a pre-emption clause stipulated in a contract (such as a shareholders’ agreement) will apply (unless otherwise provided) only to the shares existing at the date of signature of such agreement.

Does a pre-emption clause apply in the event of sale of shares which is subject to conditions?

According to French case law, the answer depends on the wording of the pre-emption clause. Thus, in a case where a shareholder had committed to sell its shares to a third party subject to certain conditions, French courts have ruled that the pre-emption clause should apply even if said conditions may not be completed and the contemplated sale may therefore not occur. Indeed, in this case, the pre-emption clause provided that the pre-emption right should apply in the event of any “contemplated” sale.

Is a pre-emption clause applicable in the event of a forced sale of shares in the framework of insolvency proceedings?

There is no explicit French legal provision which obliges a liquidator of a company or other authorities appointed in the framework of insolvency proceedings to comply with a pre-emption clause.

The French Cour de Cassation (Civil Supreme Court) has ruled that, in the event of the liquidiation (winding-up) of a shareholder (company B) who holds shares in a company A the transfer of which is subject to a pre-emption right by virtue of its bylaws, the judicial liquidator of company B must comply with such pre-emption rights.

The question remains however controversial in cases where the pre-emption right results from a shareholders’ agreement (and not the bylaws of a company).

Does a pre-emption right set forth in the bylaws of company A also apply in the event of sale of shares of company B, which is a shareholder of company A?

A company B holds an equity participation in company A. The bylaws of company A provide for a pre-emption right to the benefit of all shareholders, which applies in the event of « direct or indirect transfers » of shares of company A. Is this pre-emption right also applicable in the event of sale of shares of company B by its own shareholders? In other terms, should the change of ownership of the share capital of company B be considered as an “indirect transfer” for the purposes of the pre-emption clause included in the bylaws of company A?

The answer given by French case law is no. Only an exclusion clause which enables the shareholders of company A to exclude company B for change of control would enable the remaining shareholders of company A to purchase the shares held by company B.

Can a company grant a pre-emption right over its own shares?

A company is not the owner of its own shares. Such shares are the ownership of the company’s shareholders. A company may therefore not grant a pre-emption, or any other rights, over its own shares.

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