Senior Counsel
Analysis & trends
Reform of the system of nullities in French company law
With a view to promoting the attractiveness of French law for the financing and operation of companies, the legislator passed an important law on June 13, 2024. Rather well received in practice, the law proposed new facilities for capital increases and remote corporate decision-making, and paved the way for the development of shares with multiple voting rights for companies wishing to list their shares. More unnoticed, however, was the provision empowering the government – once again – to legislate by ordinance on the question of nullities in company law.
It would be an understatement to say, however, that the practical implications of this issue are considerable, hence the major interest of the proposed ordinance, which was finally published on March 13[1] , at the very end of the 9-month period allowed by the legislator’s authorization. This interest is further heightened by the terms of the text, the preparation of which seems to have taken place in a relatively restricted circle, and in a political context hardly conducive to slow maturation. One might therefore have feared that the result would not be very satisfactory, fears which have fortunately been belied by a reading of the ordinance.
In fact, and let’s be clear from the outset, it seems to effectively remedy most of the shortcomings that plagued the system of nullities in company law. In terms of form, it was marked by a tangle of overlapping and sometimes contradictory provisions from the Civil Code and the Commercial Code, in a mess amplified by erratic case law. In terms of substance, the situation was fraught with uncertainty, due both to the difficulty of identifying the causes of nullity and to the fact that the effects of nullity were particularly difficult to control.
While not all these problems have been eliminated by the new text, it is nonetheless likely to greatly improve the state of the law in this area, by both clarifying it and making it more secure. This observation applies both to the nullity of companies as a whole (I) and, above all, to the nullity of their decisions (II).
1. Nullity of companies and contributions
Although this issue is not subject to equivalent litigation, the authors of the ordinance chose to include it within the scope of their review.
Until now, two nullity regimes coexisted depending on whether the company was civil or commercial, to which had to be added the consideration of the provisions of Directive (EU) 2017/1132 of June 14, 2017 on certain aspects of company law, and applicable to limited liability companies only. The result was a particularly illegible system, leading to distinctions whose justification was more than uncertain. Fortunately, the ordinance clarifies this situation by unifying the causes of nullity for all companies, irrespective of their corporate form, and grouping them under a single provision.
Under the terms of the latter, in this case article 1844-10 of the French Civil Code, “the nullity of the company can only result from the incapacity of all the founders or from the violation of provisions setting a minimum number of two partners or shareholders“.
On the one hand, the ordinance finally brings French legislation into line with EU law, even though the ECJ had ruled in 1990 in its famous Marleasing ruling that the grounds for nullity of companies subject to the aforementioned directive were exhaustively listed therein, so that Member States’ provisions could not provide for additional grounds. It should be noted that the text goes further than was required in this respect, since it makes all companies – and not just joint-stock companies – subject to the terms of the new Article 1844-10.
On the other hand, the ordinance substantially simplifies these grounds for nullity. Firstly, the nullity of contributions, which had previously been classified as a cause of nullity, is now apprehended separately from the nullity of the company, in it is based on the causes of nullity of corporate decisions. Secondly, the unlawfulness of the corporate purpose is no longer a ground for nullity of the company, nor are grounds for nullity of contracts in general. Finally, it should be noted that fraud and fictitiousness are still not mentioned in the texts, even though case law still occasionally sees them as grounds for nullity, so it is not certain that such position will be abandoned in the future.
2. Nullity of corporate decisions
This is the heart of the current reform, and the changes made appear far more substantial, at least on three fundamental points.
Turning first to the grounds for nullity, it should be remembered that the system in place envisaged only the violation of legal provisions, and was unsatisfactory in many respects, making byzantine distinctions. On the one hand, in the case of commercial companies, a distinction was made according to whether or not the decisions in question modified the articles of association, with the former being annulled only if the violated provision expressly provided for nullity. As for the latter, it set a criterion for locating the imperative provisions whose violation could lead to the pronouncement of nullity, by requiring that they appear in Book II of the Commercial Code. In the case of civil companies, on the other hand, decisions could only be declared null and void in the event of violation of a mandatory provision of company law contained in the Civil Code.
On this point, the ordinance has usefully unified the causes of nullity in a single article 1844-10 paragraph 3 of the French Civil Code, and stipulates that, in addition – tomorrow as in the past – to the causes of nullity of contracts in general, these are to be found solely in the violation of a “mandatory provision of company law“. It will be up to the judge to define the precise contours of (i) mandatory provisions and (ii) the notion of company law provisions, but this does not appear to be an insurmountable task.
Moreover, in the absence of legislation, case law had accepted, in its famous Larzul ruling, that a corporate decision taken in violation of a clause in the articles of association could be annulled, but only in the – rare – cases where the clause constituted a conventional arrangement of a mandatory provision. The ordinance cuts to the heart of the matter here, in a way that is undoubtedly debatable in that it makes a new distinction according to corporate form. On the one hand, as a matter of principle, the text seems to abruptly rule out any nullity on the grounds of breach of the articles of association, which would call into question the Larzul case law. On the other hand, as far as SAS companies alone are concerned, this possibility would be allowed, provided that the articles of association themselves specify the stipulations whose violation would give rise to such a sanction, hence a new trade-off to be made in the future for SAS directors and shareholders. In this respect, it should be noted that any action for nullity would have to comply with the new legal framework established by the ordinance, particularly as regards the judge’s powers.
Secondly, with regard to nullity actions, the judge’s power has been significantly increased compared to existing law. Until now, the latter envisaged mandatory nullities and optional nullities, without the distinction always being very clear, to which was added the vagaries of case law, which sometimes seemed to require additional elements to allow the action, such as a grievance on the part of the plaintiff.
In this respect, the new law is clearer and more certain. On the one hand, the ordinance retains the principle that nullity is optional, leaving it up to the judge to decide whether or not to declare nullity. On the other hand, this power is considerably circumscribed, since the judge will have to apply a “triple test“, since nullity can only be declared if three cumulative criteria are met: (i) the existence of a grievance invoked by the plaintiff, (ii) the existence of an influence of the irregularity on the meaning of the decision, and (iii) the absence of excessive consequences for the company’s interests, according to a proportionality control.
This should significantly reduce the risk of company decisions being declared null and void, which will be welcomed in practice, even if it should be noted that a certain number of such decisions are expressly exempt from the “triple test”, and should therefore be declared null and void by the courts on the sole grounds of their irregularity. This trend is further accentuated by the reduction in the limitation period for nullity actions, from three to two years, while the shorter periods specifically provided for capital increases and mergers remain essentially unchanged.
Finally, with regard to the effects of nullities, always feared in practice because of their poorly controlled and potentially devastating nature, the ordinance also makes a welcome contribution. Indeed, in the absence of relevant provisions, the risk of “cascading nullity” of a series of corporate decisions was previously obvious. Henceforth, the judge will be able to defer the effects of the nullity in time by a control of proportionality, with regard to their manifestly excessive character for the company’s interest, so that its retroactivity will be limited, and the number of annulled decisions possibly reduced. In addition, the rule that irregularities in the appointment and composition of a corporate body do not in themselves invalidate subsequent decisions has been established as a general principle, unless otherwise stipulated.
It is clear, therefore, that the new text is bound to have a major impact on nullities in French company law, potentially making litigation more limited and less uncertain. Finally, it should be pointed out that these changes will come into force on October 1, 2025, which means that companies incorporated and corporate decisions taken before this date should remain subject to the pre-Ordinance rules.