Judicial Review of Management in a French SARL

A strategic safeguard for minority shareholders

Introduction

In a French société à responsabilité limitée (SARL), managers enjoy wide powers to represent and administer the company. However, with such authority comes the risk of decisions being taken that may not align with the company’s best interests or that of all shareholders. To protect against potential mismanagement, French law has created a specific tool: judicial review of management (expertise de gestion).

This procedure, governed by Article L.223-37 of the Commercial Code, allows shareholders — particularly minority ones — to request a judicial investigation into specific management operations. It is not designed as a general audit of the company’s affairs, but rather as a targeted review of certain decisions that raise concerns. Importantly, this right enables minority shareholders to bypass the need for majority approval and obtain direct access to the courts.

The following analysis explains who may initiate such a procedure, the types of operations it can cover, the legal rules that apply, and the practical consequences of the expert’s report.

1. Who Can Request a Judicial Review of Management?

The law opens this right to several categories of applicants, with the primary focus on shareholders holding a significant minority interest.

a. Minority Shareholders

Any shareholder or group of shareholders who together represent at least 10% of the company’s share capital may file a request. The law is flexible on form: shareholders do not need to formally organize or create a voting bloc. They can act individually or collectively, and one shareholder alone is sufficient provided they meet the 10% threshold.

This was confirmed in case law, where the Court of Cassation admitted that an individual shareholder could act alone even in the context of joint ownership (indivision) if they personally hold the minimum required stake (Cass. com., 4 December 2007, no. 05-19.643 — initially concerning SAs, but later considered applicable to SARLs).

b. Other Applicants

Besides shareholders, the law also grants this power to:

• The public prosecutor, who may intervene to protect the general economic order;

• The Social and Economic Committee (CSE) in companies with at least 50 employees, ensuring that employee representatives have a means of monitoring management where workers’ interests may be at stake.

Although the legislation still refers to the former works council (comité d’entreprise), it is now accepted that the rule applies to the modern CSE (Comité Social et Économique).

2. Scope of the Expertise

The judicial review of management is not a broad inquiry into all company affairs. It must relate to specific operations carried out by the company’s managers. The goal is to examine particular transactions that might endanger the corporate interest or suggest improper conduct.

a. Targeted Nature

The review is strictly limited: it is neither a general audit nor a substitute for statutory audits by auditors. Instead, it is intended to clarify the lawfulness, appropriateness, or fairness of one or more decisions by management.

b. Examples from Case Law

The courts have provided numerous illustrations of situations where judicial review of management was deemed admissible:

• Unapproved bonuses granted by a manager: When a manager awarded himself or others a bonus without the approval of the shareholders’ meeting, the Court of Cassation recognized that the operation could be challenged through judicial review of management (Cass. com., 30 May 1989).

• Supply contracts with a majority shareholder-supplier: When the company entered into supply agreements with its majority shareholder, who was also its main supplier, the courts allowed judicial review of management on the grounds that the operation could affect the corporate interest (Cass. com., 9 February 1999). By contrast, where a decision has already been formally approved by the shareholders’ assembly, expertise may not be admissible since it no longer qualifies as a unilateral act of management.

• Use of company assets to benefit competing firms: In one case, managers made the company’s resources and clientele available to competitor companies they also controlled. The Court of Cassation ruled that expertise was admissible even though the agreements had been approved by the general assembly and the requesting shareholder had not challenged that decision (Cass. com., 5 May 2009).

• Shareholder current account agreements: More recently, the Court of Cassation admitted that even a current account agreement between a shareholder and the company could be subject to review through judicial review of management, highlighting that frequent practices of corporate life do not escape scrutiny (Cass. com., 21 April 2022).

These cases underline the flexibility and utility of the procedure: it can apply even in contexts where formal shareholder approval was given, if the underlying operation raises concerns about abuse or conflict of interest.

3. The Legal Framework

While SARLs have their own distinct legal regime, the rules on judicial review of management largely follow those applicable to sociétés anonymes (SAs). Nevertheless, there are three significant differences that distinguish the SARL framework.

a. Higher Shareholding Threshold

In SARLs, the minimum threshold is 10% of the share capital, whereas in SAs it is only 5%. The rationale is that the SARL, as a smaller and more closely held company, requires a higher stake to justify judicial intervention.

b. Direct Recourse to the Court

Unlike in SAs, shareholders of an SARL do not need to first submit their request to the company’s directors. They may apply directly to the president of the commercial court, streamlining access to the judge.

c. Limitations on Scope

In SARLs, expertise can only relate to the operations of the company itself, not those of its subsidiaries. By contrast, in SAs, judicial review of management may extend to controlled entities. This distinction reflects the legislator’s intent to keep the mechanism tightly focused in the SARL context.

4. Filing and Communication of the Expert Report

Once appointed, the expert carries out the investigation and prepares a report summarizing findings, observations, and potential irregularities.

a. Filing with the Court

The report must be formally deposited with the registry of the commercial court. This ensures traceability and judicial oversight.

b. Transmission to Interested Parties

The court clerk must then transmit the report to the following:

• The shareholder(s) who requested the expertise,

• The manager of the SARL,

• The public prosecutor,

• The Social and Economic Committee (CSE),

• The statutory auditor, if one has been appointed.

Legal basis: Articles L.223-37, paragraph 4 and R.223-30, paragraph 3

c. Integration with the Auditor’s Report

If the company has a statutory auditor, the expert’s report must be:

• Annexed to the auditor’s report for the next general meeting, and

• Given the same level of publicity.

This ensures that all shareholders are formally informed.

d. Risk of Limited Disclosure

However, if the company does not have a statutory auditor, there is no guarantee that all shareholders will learn of the report’s existence. In such cases, only the requesting shareholder, the public prosecutor, and the CSE are certain to receive it. This creates a risk that some shareholders may remain uninformed about critical findings.

5. Practical Implications and Strategic Use

The judicial review of management procedure is more than a technical safeguard: it is a strategic weapon for minority shareholders.

• It provides a direct route to judicial scrutiny, bypassing the majority rule that often protects managers.

• It can expose conflicts of interest or mismanagement, especially in closely held companies where majority shareholders are also managers.

• It creates a deterrent effect, reminding managers that their decisions may be independently reviewed if they deviate from the company’s interest.

At the same time, it must be used carefully. Courts remain vigilant against abusive or frivolous requests. Judges will only authorize expertise if the request is well-founded and focused on genuine management operations, not as a means of obstructing management.

Conclusion

Judicial review of management in SARLs is a powerful mechanism designed to strengthen accountability and protect minority interests. By enabling shareholders representing just 10% of the capital to seek judicial review of specific operations, French law provides a direct check on managerial power.

Case law shows that the courts interpret this right broadly, allowing scrutiny even where decisions were formally approved by the shareholders’ meeting. Yet, the mechanism remains strictly targeted: it is not a general audit, but a focused inquiry into particular acts of management that may jeopardize the corporate interest.

For shareholders, especially those in minority positions, this tool represents both a means of control and a leverage strategy in negotiations with majority owners or managers. For managers, it is a reminder of their duty of loyalty and prudence.