Regulated and prohibited agreements in a French SARL

The société à responsabilité limitée (SARL), or French limited liability company, is one of the most frequently used legal forms in France for small and medium-sized businesses. Its popularity comes from its flexibility, its relatively simple functioning, and the limited liability protection it offers to shareholders. Yet, precisely because it is widely used by entrepreneurs, family-owned businesses, and closely held companies, French law has set up a strict framework to regulate the agreements that may be concluded between the company and its managers or shareholders. The aim is clear: to prevent conflicts of interest, protect the company’s interest (intérêt social), and guarantee transparency in corporate governance.

In this context, French law distinguishes between two categories of agreements:

1. Regulated agreements (conventions réglementées), which are permitted but only under strict conditions of approval by the shareholders.

2. Prohibited agreements (conventions interdites), which are absolutely forbidden and automatically void.

Understanding this dual framework is essential for both managers and shareholders of a French SARL. Entering into an agreement without respecting the legal procedures may expose managers to civil or even criminal liability, and it may also jeopardize the legal and financial security of the company.

This article sets out the full legal framework governing regulated and prohibited agreements in a French SARL, explaining in detail the rules, procedures, and practical consequences.

1. Regulated agreements in the SARL

The “regulated agreements”, called in French “conventions réglementées” are those which require the prior approval of the shareholders. They are not forbidden, however they are subject to shareholders’ control to ensure that the company’s interests remain protected.

1.1. The rationale behind regulated agreements

French law does not prohibit all agreements between the SARL and its managers or shareholders. After all, in closely held companies, it is quite common that the same individuals are both managers and suppliers, landlords, or contractors of the company. What the law seeks to avoid is the risk of self-dealing, where the manager or a major shareholder uses his or her position to conclude contracts favorable to themselves but detrimental to the company.

To deal with this risk, Article L. 223-19 of the French Commercial Code (Code de commerce) establishes a control procedure. Agreements falling within its scope are valid only if they are submitted to shareholder approval after a report has been drawn up either by the statutory auditor (if there is one) or, failing that, by the manager.

The objective is therefore twofold: to prevent abuses of power and to ensure that the company’s financial commitments are always made in the interest of the SARL itself and not in the interest of a single individual.

1.2. Categories of agreements subject to approval

The law identifies several categories of agreements that must be subject to shareholder approval.

a. Agreements between the SARL and its managers or shareholders

The most obvious case concerns agreements entered into directly or indirectly between the SARL and one of its managers (gérants) or one of its shareholders.

• Legal basis: Article L. 223-19, paragraph 1 of the French Commercial Code.

• Example: A service contract concluded between the SARL and its manager, or the lease of premises belonging to a shareholder to the company.

Such contracts may be legitimate, but they must be reviewed by the shareholders to ensure that the terms are fair and not abusive.

b. Agreements with companies having overlapping officers or partners

Another category concerns contracts concluded between the SARL and another company in which certain persons exercise functions in both structures. This includes:

• an unlimitedly liable partner (for example, a partner in a general partnership (société en nom collectif – SNC) or a civil company),

• a manager (gérant),

• a director (administrateur),

• a chief executive officer (directeur général),

• or a member of the management board (directoire) or supervisory board (conseil de surveillance) of another company,
  who is also a manager or shareholder of the SARL.

• Legal basis: Article L. 223-19, paragraph 5 of the French Commercial Code.

• Example: The manager of an SARL is also a director of a civil company, and the two companies enter into a commercial agreement.

This rule prevents situations where individuals might arrange contracts between companies in which they have dual interests.

c. Environmental undertakings

French law also extends shareholder control to certain environmental undertakings. An SARL may commit itself to cover, in case of default by a related company, obligations of prevention or repair of environmental damage, particularly industrial or mining damage.

• Legal basis: Article L. 233-5-1 of the French Commercial Code; Bulletin Officiel des Impôts no. 80498.

• Example: An SARL belonging to an industrial group agrees to be responsible for the environmental clean-up of a polluted site operated by another entity of the group.

d. Loans to certain businesses

The scope of regulated agreements also includes loans granted by SARLs to certain categories of businesses, namely:

• micro-enterprises,

• small and medium-sized enterprises (SMEs),

• and intermediate-sized enterprises,
  as defined by Article 3 of Decree no. 2008-1354 of 18 December 2008.

The justification for the loan must be based on existing economic ties between the companies.

• Legal basis: Article L. 511-6, 3 bis and Article R. 511-2-1-1 of the French Monetary and Financial Code (Code monétaire et financier).

1.3. Exceptions for ordinary operations at normal conditions

Not all contracts need to undergo this heavy approval process. Article L. 223-20 of the French Commercial Code provides that agreements relating to current operations and concluded under normal conditions are exempt from shareholder control.

For instance, if a shareholder buys products from the company at the same price as other clients, or if the SARL pays market rent for premises leased from a shareholder, such agreements may be considered as ordinary and concluded at fair market value.

This exception prevents companies from being paralyzed by unnecessary formalities for everyday business transactions.

1.4. Clarifications provided by case law and doctrine

The scope of Article L. 223-19 has been refined by both legal doctrine and case law:

• Article L. 223-19, paragraph 1 applies strictly to managers and shareholders. It does not automatically extend to their spouses, parents, or children, unless these relatives act as intermediaries (Response Lorenzini: French National Assembly, 25 August 1986, no. 5761).

• Article L. 223-19, paragraph 5 applies only to agreements between the SARL and another company, not with other legal entities such as economic interest groupings (groupements d’intérêt économique – GIE) or associations governed by the Law of 1901.

• The Paris Court of Appeal has clarified that an employee holding the title of “chief executive officer” but working under an employment contract subordinated to the manager is not considered a corporate officer within the meaning of this provision (Court of Appeal of Paris, 22 January 1993, D. 1993 IR p. 124).

• Even loans that do not fall directly within the scope of Article L. 223-19 may still require shareholder approval under the combined effect of Article L. 511-6 of the French Monetary and Financial Code and Articles L. 233-19 and L. 223-20 of the French Commercial Code (Senate Report no. 370, Law no. 2015-990 of 6 August 2015).

1.5. The procedure for approval

The procedure for approving regulated agreements is carefully structured:

1. Prior information: The manager must inform the statutory auditor (if the company has one) of the proposed agreement.

2. Preparation of a report: The statutory auditor prepares a special report to the shareholders describing the agreement and its interest for the company. If the company has no statutory auditor, the manager must draw up this report.

3. Vote by the shareholders: The shareholders decide at an ordinary general meeting whether to approve the agreement. The interested manager or shareholder cannot take part in the vote.

4. Consequences of non-compliance: If the procedure is not respected, the agreement is still valid, however the manager will be responsible for indemnifying the company for the damage suffered as a result of the agreement.

This procedure ensures transparency and allows shareholders to protect the company’s interest.

2. Prohibited agreements in the SARL

While regulated agreements can be valid if properly approved, other agreements are deemed too dangerous for the corporate interest and are strictly prohibited.

2.1. Loans and advances to certain persons

Article L. 223-21 of the French Commercial Code expressly prohibits the SARL from granting loans, advances, or overdrafts to certain categories of individuals and entities. The rationale is to prevent managers and shareholders from using company funds for personal benefit.

The prohibition applies to:

• the managers of the company, even indirectly,

• shareholders who are natural persons, whether directly or through intermediaries,

• the spouses, ascendants, or descendants of these managers or shareholders.

Examples of prohibited agreements:

• A manager receiving a personal cash advance from the SARL to cover private expenses.

• A shareholder benefiting from an overdraft facility granted by the SARL.

2.2. Sanctions for prohibited agreements

The consequences of entering into prohibited agreements are severe:

• The agreement is struck with absolute nullity, which can be declared by the court.

• The managers involved may face civil and criminal sanctions.

• Anyone who has benefited from or facilitated the illegal agreement may be held jointly liable for the damage caused.

In other words, prohibited agreements are not just voidable; they are void by nature, and no subsequent shareholder approval can validate them.

3. Practical advice for managers and shareholders

Given the complexity and severity of these rules, SARL managers and shareholders should adopt preventive measures:

• Always seek legal advice before concluding any agreement between the company and one of its shareholders or managers.

• Ensure that all regulated agreements are accompanied by a written report and submitted to a proper shareholder vote.

• Avoid in all circumstances any form of loan, advance, or overdraft to related persons, even indirectly.

• Conduct a compliance audit of existing agreements to ensure they meet legal requirements.

By implementing these precautions, SARL managers and shareholders can avoid costly disputes and safeguard the company’s financial stability.

Conclusion: a framework that protects the company’s interest

The distinction between regulated agreements and prohibited agreements in a French SARL illustrates the legislator’s determination to protect the company’s interest against conflicts of interest.

• Regulated agreements are permitted, but only if shareholders are fully informed and approve them following a strict procedure.

• Prohibited agreements are absolutely void and expose managers and shareholders to civil and criminal liability.

For managers, respecting these rules is not optional. Any misstep may result in personal liability and jeopardize the company’s legal security. For shareholders, these mechanisms are essential safeguards to ensure that the SARL operates in a transparent and equitable manner.