How to control the management of a SARL?

In a French limited liability company (SARL), the manager (gérant) plays a central role in day-to-day management and decision-making. However, the law provides shareholders with several tools to supervise, monitor, and, if necessary, challenge the manager’s actions. This control ensures a balance between managerial autonomy and shareholder protection, guaranteeing transparency and good governance. From the annual approval of accounts to the regulation of related-party agreements, shareholders hold decisive powers that can safeguard their investment and prevent mismanagement.

This guide explains in detail the different mechanisms available to shareholders to control the management of the SARL.

1. The central role of the annual general meeting in controlling the management of a SARL

The annual general meeting of shareholders is the primary instrument of control over the SARL’s management. It is convened each year to decide on the approval of the company’s annual financial statements. This meeting is not only a legal requirement but also a crucial moment of accountability for the manager(s).

a. Approval of annual accounts

During the meeting, shareholders receive and review the financial documents:

• the balance sheet,

• the income statement,

• the appendix (which provides explanations and complementary information).

These documents provide a snapshot of the company’s financial health and the outcome of the manager’s decisions during the previous financial year.

b. Shareholders’ right to explanations

At this meeting, shareholders are entitled to request explanations from the manager regarding management decisions, financial results, or significant operations carried out during the year. This right to information is a cornerstone of shareholder oversight.

c. Allocation of profits

Another important aspect is the allocation of results. Shareholders vote on whether profits should be:

• distributed as dividends,

• allocated to reserves,

• or carried forward to the next year.

This decision directly impacts the company’s financial stability and shareholders’ return on investment.

d. Approval of the manager’s management

Finally, shareholders decide whether to grant an approval (quitus) to the manager. This formal approval constitutes an acknowledgment that the manager’s work is acceptable. However, discharge does not protect the manager in cases of fraud or concealment. It merely provides reassurance that shareholders, with the available information, approve past management.

2. Control of regulated agreements

Beyond annual accounts, French law has established a system to prevent conflicts of interest between the company and its managers or major shareholders. These are called regulated agreements.

a. Definition of regulated agreements

A regulated agreement is a contract or transaction concluded between:

• the SARL and one of its managers or shareholders,

• the SARL and another company that shares one or more managers or shareholders,

• or, more broadly, agreements that are unusual or could generate conflicts of interest.

b. Approval procedure

To ensure transparency, such agreements must be subject to a specific procedure:

1. The manager (or statutory auditor, if one exists) prepares a special report describing the agreement and its conditions.

2. The shareholders’ meeting must then vote on the agreement. The interested shareholder is excluded from the vote.

c. Importance of transparency

This mechanism ensures that the company is not exploited for the personal benefit of a manager or shareholder. It guarantees that transactions with related parties are fair, justified, and in the company’s interest.

3. Right to a management audit (“expertise de gestion”)

French company law provides shareholders with a powerful minority right: the ability to request a management audit.

a. Conditions to request an audit

Shareholders holding at least 10% of the share capital may petition the court to appoint a management expert.

b. Role of the management expert

The expert is tasked with examining one or more specific operations suspected of being contrary to the company’s interests. For example:

• questionable transactions with third parties,

• management decisions that caused financial losses,

• unusual contracts benefiting a related company.

c. Protection for minority shareholders

This right allows minority shareholders to obtain independent and objective information about company management without waiting for the next general meeting. It serves as a safeguard against abuse of power by majority shareholders or managers.

4. Control by the statutory auditor of the management of the SARL

In larger SARLs, the law requires the appointment of a statutory auditor (commissaire aux comptes). Even when not mandatory, some companies voluntarily appoint one for greater transparency.

a. Role of the statutory auditor

The auditor independently verifies the accuracy of the company’s accounts and ensures they reflect its real financial situation. He or she also prepares a report for shareholders before the general meeting.

b. Safeguard against mismanagement

Through audits and controls, the statutory auditor provides shareholders with an additional layer of protection. If irregularities are detected, the auditor must report them, which can trigger shareholder action or even legal proceedings.

5. Control by the Social and Economic Committee (CSE)

In SARLs with at least 50 employees, a Social and Economic Committee (CSE) must be established. This body, although primarily representing employees, also plays a role in monitoring the company’s management.

a. Information and consultation rights

The CSE must be regularly informed about:

• the company’s economic and financial situation,

• major strategic decisions,

• social policies and employment matters.

b. Complementary role in governance

While the CSE does not replace shareholder control, it provides an additional perspective on company management, particularly in relation to workforce concerns. In some cases, it can alert shareholders to financial or managerial difficulties.

6. Practical consequences of shareholder control over the SARL management

The mechanisms described above are not purely theoretical; they have real consequences for managers and shareholders alike.

• For managers: They must conduct operations transparently, maintain accurate records, and prepare to justify their decisions before shareholders.

• For shareholders: They have the power to influence company strategy, challenge problematic management, and safeguard their financial interests.

• For minority shareholders: Rights such as the management audit are essential tools to avoid being sidelined by majority decision-making.

• For the company as a whole: These mechanisms strengthen governance, accountability, and trust, which are vital for long-term success.

Conclusion: shareholder oversight is key to good governance in a SARL

The manager of an SARL has broad powers to run the company. However, these powers are not unlimited. French law ensures that shareholders have multiple instruments—annual meetings, approval of regulated agreements, management audits, statutory audits, and the CSE—to monitor and, if necessary, challenge management decisions.

These oversight mechanisms are essential to maintain transparency, protect investments, and ensure that the company operates in the best interest of all stakeholders.