Conflicts with a french shareholder: how to escape a joint venture

Generally, French joint ventures with a foreign shareholder are secured with deadlock resolution mechanisms.

A number of methods are considered in order to break deadlocks of varying degrees, including:

• Providing for a chairman to have a second vote;
• Mandating a period and process for parties to seek resolution;
• Escalating the issue to senior officers of the parties for resolution;
• Providing for exit options with pricing mechanisms.

Ideally, the foreign shareholder will be provided with a sale option or the possibility to purchase the shares of the other party (at an agreed price or one fixed by a third party arbitrator appointed by the court).

One potential provision is the so-called “Russian Roulette” clause. This clause involves one party offering to either buy or sell their shares to or from the other at a specified price. The one who receives the offer then has the option to accept the offer or alternatively to require the initiating party to buy or sell its own shares on the same terms.

There may also be a provision allowing a party to sell to a third party subject with the consent of the remaining party of the joint venture. If the incoming partner has the same skills set as the departing shareholder, this can often provide a good solution for all parties concerned.

In the absence of specific provisions in a company’s bye-laws or a shareholders’ agreement, are any solutions available according to French law in the event of an unresolved dispute between shareholders resulting in a deadlock?

A radical option would be to file a petition for liquidation.

This is possible under French law in very limited circumstances, notably if the company is no more in a position to do business.

Another option is to consider selling the shareholding interest in the joint venture to the other shareholders.  However, if contractual mechanisms have not been agreed upfront, it will be impossible to force the other shareholder to buy the shares.

Consequently, a though negotiation will start. Exit options would probably result in a sale at a discount or symbolic price.

Alternatively, the shareholder will try to identify efficient levies for the negotiation. In one case scenario, majority shareholders may have committed a fault in the management (if member of a management committee) or when voting at shareholders’ meeting (minority shareholders may bring actions against majority shareholders who abuse their rights and cause a prejudice to the company or other shareholders).

If the joint venture is controlled by  foreign shareholders (holding sufficient majority at the shareholder’s meeting), the shareholders can still consider a few restructuring options (e.i. sale of the business to a newcomer, decrease of capital followed by an increase if the accounting situation allows it) to dilute the other shareholders or even evict them. Such options have to be carefully studied before being implemented as it may generate liabilities.