Corporate Law (SAS), Coup D’accordéon (Increase in Share Capital) and Temporary Measure

On 04 January 2023, the French Cour de cassation (financial, commercial and economic chamber (F-B)) stated that the reduction to zero of the share capital can only legally be made on the condition that a subsequent increase in share capital amounting to, at least, the minimum legal or contractual share capital.

Applying articles L.210-2 and L.224-2 of the French commercial Code, the French supreme Court draws the lines of what is named the coup d’accordéon (accordion effect), a metaphor referring to the two cumulative operations leading to an in fine increase in share capital after a reduction of it to zero. Initially used to save the company (see Usinor case dated 17 May 1994, 91-21.364 – B, cited in inter alia Traité de droit des affaires G. Ripert, R. Roblot by M. Germain, V. Magnier Les sociétés commerciales, LGDJ, T2, 23 ed 2022, n°1019 p.718 et seq. and in a nutshell Droit commercial et des affaires, D. Legeais, Sirey, 29 ed 2023, n°601 p.333), this cumulative operation is now more widely associated with a change in the partners allowing new partners to join the company in the event of significant loss (by law total equity (capitaux propres) valuated less than 50% of the share capital, to avoid the dissolution of the company).

As to this specific case, the legal practitioner will take into account that the cancellation of the whole operation was initiated by a shareholder in référé (summary judgment) before the commercial Tribunal, with an ephemera success, such Tribunal decided with innovation to retain the decrease of the share capital to zero but to temporary suspend the increase.

Fortunately, the French Cour de cassation maintains the mechanism composed of the two operations, evidencing the indivisible feature of the coup d’accordéon in a positive way (the two operations cannot be separated), when, in other contexts, the cancellation of one operation cancels a subsequent operation (group of contracts).

It should however be observed that article L.224-2 states that the sanction of dissolution is not automatic as any interested party has to ask for the dissolution of the company before the commercial judge (and as a regularization is possible before the judge states on the dissolution case). This possibility of regularization may be the reason leading the initial commercial judge to have decided to temporarily suspend the subsequent increase of the share capital.

It remains to be seen if and how this legal corporate scheme of coup d’accordéon may be alternatively contractually replicated with the new threshold of 1 euro of the share capital applicable to selected companies only. The operation would consist in the reduction to 1 euro of the share capital and in a subsequent increase of the said share capital to refund the company (see S. comments of S. Sylvestre Dalloz ActualitésLe quotidien du droit dated 21 February 2023). This would apply to SARL and SAS for example, but the question remains to determine if the same indivisible feature would follow.

The thought may be fed by the fact that such an indivisible feature is necessary to refund the company and to therefore protect its creditors. In this perspective, it is hard to imagine how a reduction of the share capital to 1 euro would not be followed by a subsequent increase (the contrary would lead to a bankruptcy, or at least to a material weakening of the company). However, since this operation would not fall within the article L.224-2 legal scheme, a suspension of one of the two operations (the subsequent increase for example) may be contemplated as a temporary measure on a case-by-case basis, as the function of the commercial judge is to be pragmatic and as this temporary measure only aims at putting the process on hold, without cancelling the whole process. In addition, preventing a commercial judge from ruling a temporary measure in any events would lead to bind such judge without any legal exceptions, such situation leading to an illegality.

A temporary measure of suspension may be contemplated for example in the event of necessity of regularization or ratification of the contractual replicated scheme.

It would be for the parties to challenge such temporary measure and for the judge to decide, as decided by the supreme Court with this decision dated 04 January 2023, to bind the two operations and to follow the current case law based on the article L224-2 (or not).

Article by;

Ludovic Timbal Duclaux de Martin, EIRL Me Ludovic Timbal Duclaux de Martin Avocat à la Cour – Barreau de Paris

Up to date 21 February 2023