Controlling regulated agreements in a French SARL

In SARLs, certain agreements concluded between the company and its managers or shareholders must be subject to specific control, intended to guarantee transparency of operations and prevent conflicts of interest. These agreements are called “conventions réglementées” (regulated agreements). This control varies according to whether the company does or does not have a statutory auditor (commissaire aux comptes).

1. What agreements are regulated agreements (“conventions réglementées”)?

Regulated agreements in an SARL are contracts concluded between the company and its managers or shareholders (or related entities) that must be submitted to shareholder approval to avoid conflicts of interest and ensure transparency. However, everyday transactions that fall within the company’s ordinary operations and are carried out under normal market conditions are exempt from this strict approval procedure.

a) Main categories of regulated agreements in a SARL

In practice, regulated agreements cover four main categories.

• Agreements with managers or shareholders

The most common case concerns contracts concluded, directly or indirectly, between the SARL and one of its managers or one of its shareholders.

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

Examples: a service contract signed between the company and its manager, or a lease agreement under which the SARL rents offices belonging to a shareholder.

These contracts are not banned, but they must be checked to ensure they do not unfairly advantage the individual over the company.

• Agreements with companies having overlapping officers or partners

Conflicts of interest can also arise when the same person holds positions in both the SARL and another company. For this reason, the law covers contracts concluded between the SARL and another entity in which one of the following roles is held simultaneously by someone who is also a manager or shareholder of the SARL:

• unlimitedly liable partner (for example, in a société en nom collectif (general partnership) or in a civil company),
• manager (gérant),
• director (administrateur),
• chief executive officer (directeur général),
• member of the management board (directoire) or supervisory board (conseil de surveillance).

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

Example: the manager of an SARL is also director of a civil company, and a business contract is signed between the SARL and that civil company.

• Environmental undertakings

French law also includes a specific rule for environmental responsibility. An SARL may decide to assume, in the event of default by a related company, all or part of the obligations to prevent or repair industrial or mining damage to the environment. Because these commitments can weigh heavily on the company’s finances, they must be controlled by the shareholders.

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 accepts responsibility for restoring a polluted site that is operated by another company in the group.

• Loans to businesses

Finally, SARLs may grant loans to certain businesses with which they maintain economic links — but these loans must be approved by the shareholders. Eligible borrowers are:

• micro-enterprises,
• small and medium-sized enterprises (SMEs),
• intermediate-sized enterprises.

The classification of these businesses is defined by Article 3 of Decree no. 2008-1354 of 18 December 2008.

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).

b) Exceptions: ordinary operations on normal terms

The law does not intend to paralyze routine business life. Article L. 223-20 of the French Commercial Code provides that day-to-day transactions are exempt from shareholder approval if two conditions are met:

1. they relate to ordinary operations of the company, and
2. they are concluded under normal market conditions.

For example, if a shareholder buys a product from the company at the same price as other customers, or if the SARL pays a rent in line with market values, there is no need for special approval.

Legal basis: Article L. 223-20 of the French Commercial Code; Article L. 511-6, 3 bis of the French Monetary and Financial Code.

This exception avoids excessive red tape while ensuring that potentially abusive agreements are still subject to control.

c) Clarifications on the scope of regulated agreements

The scope of Article L. 223-19 has been clarified by parliamentary responses and case law:

• Relatives excluded unless acting as intermediaries. Paragraph 1 applies only to managers and shareholders, not automatically to their spouses, parents, or children — unless it can be proven that they acted as intermediaries (Response Lorenzini: National Assembly, 25 August 1986, no. 5761).
• Only agreements with “companies” covered. Paragraph 5 refers only to agreements with another company. It does not apply to contracts with associations or other legal entities (for example, those governed by the Law of 1901).
• Employees titled “director” not covered. A person called “chief executive officer” under an employment contract is not considered a corporate officer for the purposes of Article L. 223-19, since they remain subordinate to the manager (Court of Appeal of Paris, 22 January 1993, D. 1993 IR p. 124).
• Loans still under control. Even loans not expressly falling within Article L. 223-19 may still require approval under the French Monetary and Financial Code. The Senate clarified that Articles L. 233-19 and L. 223-20 apply automatically to loans granted by SARLs, even if the borrower is not a manager, shareholder, or company with shared officers (Senate Report no. 370, Law no. 2015-990 of 6 August 2015).

2. How are regulated agreements (“conventions réglementées”) controlled in a SARL?

The process is designed to give shareholders full information and control. It varies depending on whether the SARL has or has not appointed statutory auditors.

a) SARL without statutory auditor: Special report on regulated agreements prepared by the gérant of the SARL

If the SARL does not have a statutory auditor, the manager is responsible for preparing a detailed report for each regulated agreement.

Legal basis: Articles L. 223-19, paragraph 1 and R. 223-17 of the French Commercial Code

If the agreement is entered into with a manager (“gérant”) of the SARL who is not a shareholder, the agreement must be subject to the prior approval of the shareholders, whereas in all other cases the approval is a posteriori.

Legal basis: Article L. 223-19, paragraph 2 of the French Commercial Code

b) SARL with statutory auditor: Special report on regulated agreements prepared by the statutory auditor of the SARL

If the SARL has appointed a statutory auditor however the latter is entrusted only with a mission of simplified audit, the auditor is formally exempted from preparing the special report on regulated agreements provided for by Article L. 223-19 of the French Commercial Code.

Legal basis: Article L. 821-57, resulting from Ordinance no. 2023-1142 of 6 December 2023

In all other cases, a special report on regulated agreements must be prepared by the statutory auditor and presented to the shareholders.  The control of regulated agreements does not take place before the conclusion of the agreement: it is carried out afterwards (a posteriori).

• Information of the statutory auditor of existing and new regulated agreements

Reference: Commercial Chamber of the French Court of Cassation, 7 July 2009, no. 08-16.790 (RIDA 11/09 no. 976)

For this purpose, the manager (“gérant”) of the SARL must:

1. notify the statutory auditor, within one month following the conclusion of any regulated agreement, that is, any agreement other than those concerning ordinary operations concluded under normal conditions.
2. inform him within one month following the end of the financial year of the continued performance, during that financial year, of agreements concluded previously.

Legal basis: Article R. 223-16 of the French Commercial Code

In addition, the company must notify the statutory auditor annually of all outstanding loans granted to companies with which it maintains economic links.

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

• Report of the statutory auditor

The statutory auditor prepares a special report, distinct from the general report, in accordance with Articles L. 223-19, paragraph 1 and R. 223-17 of the French Commercial Code. This report must contain the following elements:

• The list of agreements subject to approval;
• The name of the interested managers or shareholders;
• The nature and purpose of the agreements;
• The essential terms, in particular:
  • the prices or tariffs applied,
  • the discounts and commissions granted,
  • the payment deadlines,
  • the stipulated interest,
  • the securities given,
  • and any other useful indication for assessing the interest of the agreement;
• The importance of supplies or services provided;
• The amount of sums paid or received during the financial year in performance:
  • either of agreements concluded during that financial year,
  • or of agreements concluded previously and continued during the last financial year.

A distinct special report is required; these agreements may not appear in the general report of the statutory auditor.

• Absence of regulated agreements

Even when no agreement subject to control has been concluded or continued, the statutory auditor must prepare a special report mentioning this absence of such regulated agreements.

• Declaration on loans related to partner companies

Each year, the statutory auditor must certify by a declaration attached to the management report:

• The initial amount and the outstanding principal of each loan granted to companies maintaining economic links with the SARL;
• Compliance with the legal provisions governing these loans.

Legal basis: French Monetary and Financial Code, Article L. 511-6, 3 bis paragraph 2 and Article R. 511-2-1-3

If the SARL is exempted from preparing a management report, then no declaration is required, because this document follows the regime of the management report to which it is annexed.

3. Consultation of the shareholders on regulated agreements in the SARL

In a French limited liability company (SARL), regulated agreements cannot simply be concluded between a manager and the company without oversight. French law requires that shareholders be consulted in order to approve or disapprove these contracts. The legal basis for this procedure is Article L. 223-19, paragraph 1 of the French Commercial Code (Code de commerce), which makes consultation mandatory.

The report describing the agreement — whether prepared by the statutory auditor (commissaire aux comptes) or, if there is none, by the manager — must always be communicated to the shareholders. This can be done either in a formal meeting (assemblée générale) or through a written consultation.

a) How is the report of the statutory auditor or (if none) of the gérant is presented to the SARL shareholders?

The law gives two options for informing shareholders about regulated agreements:

• The report may be presented directly at a shareholders’ meeting, or

• It may be attached to the documents sent out for a written consultation.

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

Because the law expressly mentions written consultation, it is clear that approval of regulated agreements does not have to wait for the annual general meeting held to approve the financial accounts. That annual meeting must take place in assembly form (Article L. 223-27, paragraph 1 of the Commercial Code), but approval of agreements may be decided outside of it.

In practice, however, and because no specific deadline is imposed, most SARLs choose to deal with regulated agreements during the ordinary annual general meeting, alongside the approval of the accounts.

b) How do the SARL shareholders decide on the regulated agreements?

Once they have received the report, the shareholders must decide whether to approve or reject the agreements.

• a distinct vote on each regulated agreement

The approval or rejection by the shareholders of the regulated agreements requires a clear, distinct vote, on each of these agreements.

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

According to French case law, the approval of accounts does not equal approval of regulated agreements. The Court of Appeal of Paris confirmed that financial statements may reflect the effects of an agreement, but shareholders must still vote separately on the agreement itself (CA Paris, 3 July 1976, Revue des sociétés 1977, p. 465, note D. Schmidt).

• Quorum and majority rules

Because the approval of regulated agreements does not involve amending the articles of association, the decision follows the rules of ordinary collective decisions of shareholders, that is:

• At the first consultation: approval requires a majority of the share capital.
• At the second consultation: approval requires only a majority of the votes cast.

The articles of association may however provide stricter rules.

• Exclusion from the vote of the manager or shareholder involved in the agreement

The law provides an important safeguard. The manager or shareholder who is personally involved in the agreement cannot take part in the vote, and their shares are excluded from the calculation of the majority.

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

4. What happens if the shareholders refuse to approve the regulated agreements?

The approval by the shareholders of regulated agreements is not without consequence. However, the refusal of approval, whether it occurs prior or subsequent to the conclusion of the agreement, does not result in its automatic nullity. The agreement remains valid and continues to produce its effects, but this does not exonerate the manager or the shareholder concerned from their civil liability.

a) The regulated agreement remains valid

In the event of refusal of approval by the shareholders, the regulated agreement is not annulled by operation of law. It continues to produce its effects despite the absence of ratification or prior authorization.

Legal basis: Article L. 223-19, paragraph 4 of the French Commercial Code; Commercial Chamber of the French Court of Cassation, 28 June 1988: Bulletin civil IV no. 226

However, the company may seek annulment if the irregularity invoked constitutes an autonomous ground for nullity of contracts, such as an unlawful object or a manifest violation of public policy (Commercial Chamber of the French Court of Cassation, 22 May 2001).

b) However, the manager or shareholder concerned must indemnify the company for damage suffered as a result of the agreement

Any damage suffered by the company as a result of the unapproved agreement remains the responsibility of the manager or, where applicable, the contracting shareholder. If several managers or shareholders participated in the conclusion of the agreement, their liability is joint.

Thus, a shareholder was thus ordered to reimburse all the sums received in performance of an agreement not approved by the shareholders (Commercial Chamber of the French Court of Cassation, 10 December 1996); a manager was ordered to reimburse the SARL for rents paid under a lease concluded with a third-party company, useless for the SARL, and in which the manager was also a shareholder (Court of Appeal of Agen, 3 April 2007).

The action in liability must be brought within a period of three years:

• From the date of conclusion of the agreement,
• And not from the meeting of shareholders having refused ratification.

In case of concealment, the period runs from the discovery of the agreement.

Legal basis: Article L. 223-23 of the French Commercial Code; Commercial Chamber of the French Court of Cassation, 21 January 1997

When the facts are characterized as a crime, the limitation period is increased to ten years (Article L. 223-23 of the French Commercial Code).

In the case of an agreement with a fixed term, tacitly renewable, the starting point of the three-year limitation period is set at the date of the last renewal (Commercial Chamber of the French Court of Cassation, 11 October 2023, no. 22-10.271).

5. What happens if the approval procedure has not been respected?

When the SARL concludes regulated agreements without respecting the procedural rules imposed by the French Commercial Code, the legal consequences are the same as those applicable in the event of refusal of approval by the shareholders. Formal non-compliance with the procedure does not affect the validity of the agreement, but it engages the liability of the managers or shareholders concerned.

The following are in particular constitutive of a breach of the procedure:

• Absence of report of the manager or of the statutory auditor (when their intervention is required),
• Failure to consult the shareholders,
• Participation in the vote by the manager or shareholder concerned, in violation of Article L. 223-19 paragraph 1.

These irregularities entail the same sanctions as those provided in case of refusal of ratification or prior authorization of the agreement.

The action in liability brought against the manager or the contracting shareholder is subject to the three-year limitation period:

• It runs from the date of the damaging act,
• Or, in case of concealment, from the discovery of the act.

Case law recognizes that concealment may be characterized in different circumstances, in particular when the management report erroneously states that no regulated agreement has been concluded when in fact there was one.

However, repeated declarations at general meetings affirming that there are no regulated agreements do not always suffice to characterize concealment, insofar as these declarations reflect a sincere assessment, even if mistaken, that the agreements in question do not fall under the regime of Article L. 223-19 (Commercial Chamber of the French Court of Cassation, 11 October 2023, no. 22-10.271). In such cases, the company’s position may reflect a disagreement on the qualification of the agreement as “regulated”, and not an intention of concealment.