"Drag along" provisions are frequently included in shareholders' agreements. Whenever an offer for all (or a high proportion) of a company's share capital is accepted by a majority (as determined by the shareholders' agreement) of its shareholders, the purpose of these provisions is to oblige all shareholders to sell their shares under the terms and conditions accepted by the majority, thus preventing any individual shareholder from jeopardizing the transaction, for instance by demanding more favorable terms or merely refusing to sell his or her shares.
These provisions are particularly important in transactions involving private equity investors, who have, from the outset, the intention of eventually exiting the company, often in the context of a sale of the entire share capital.
The decision rendered by the Commercial Chamber of the French Supreme Court (Cour de cassation – Chambre Commerciale) on November 27, 2024, has raised a number of questions, as the Court ruled that a drag along clause in a shareholders' agreement was null and void for lack of price determination.
In the case at hand, the shareholders' agreement provided that "In the event of a firm offer to acquire no less than all of the company's shares representing 100% of the company's share capital and voting rights addressed by a third party (or third parties) and/or a shareholder (or shareholders) (...) all the parties to this agreement irrevocably undertake to transfer all their shares to the purchaser (...) Each of the shareholders acknowledges that the foregoing provisions constitute a promise to sell their shares".
The undertaking to sell could therefore be exercised in his or her favor by one of the parties to the agreement, the latter, in the absence of any provision relating to the determination of the sale price, being free to unilaterally set such price. Based on this, the decision of the French Supreme Court seems therefore perfectly logical.
Does this decision create a risk for the validity of drag along provisions? We do not think so. Indeed, the clause in question was somewhat atypical in that it (i) could be exercised at will by the parties to the agreement for their own benefit, in the absence of any triggering event, and (ii) did not provide any mechanism for setting the transfer price.
Conversely, the triggering event for the implementation of drag along provisions is generally an acquisition offer from a third party (and not from a party to the shareholders' agreement), which a majority of shareholders wish to accept, the transfer price used for the implementation of the drag along provision being the price set forth in the third party's offer. Therefore, the validity of a commitment to sell at a price set by a third party and accepted by the majority of a company's shareholders does not appear to be questioned by this decision of the French Supreme Court as long as the third party is acting in good faith.
In line with the above, we do not believe that this judgment questions the validity of a clause allowing a party to a shareholders' agreement to "step into" the rights of the third party making the offer in order to acquire the shares itself, insofar as, again, the purchase price would be based on the third party's offer and would not depend solely on the will of the beneficiary of this clause.
Furthermore, the decision of the French Supreme Court does not question the validity of an undertaking of the parties to a shareholders' agreement to sell their shares to another party to such agreement, provided that the share price (i) is either agreed from the outset, or (ii) will be determined upon exercise of the option, either by a calculation formula – in this case, the availability of the data required for such calculation should be ensured, and rules for the settlement of any dispute arising from such calculation should also be agreed, in order to avoid the risk of the price being indeterminate, or by a third-party expert – in this case, the agreement should specify, where appropriate, how the expert should be appointed and which valuation methods or relevant benchmarks should be used, it being noted that the expert would in any event make an independent assessment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
