Owning company shares may seem straightforward, but the situation becomes more complex when several people have rights to the same shares. Joint ownership, which is often the result of an inheritance, and ownership dismemberment, which is a technique for transferring assets, are two systems that transform the management of shares into a real legal and strategic issue. The aim of this article is to provide an overview of these concepts, clarify the rights of each party and highlight the precautions to be taken. The more technical aspects of each situation are dealt with in detail in our dedicated articles. If you have any questions about these issues, our firm offers a legal support in financial and company law.
What is joint ownership and share ownership splitting?
Indivision and dismemberment are two ways of sharing ownership of property, including company shares. Although both situations involve shared rights, their origins and operating rules are very different. Undivided ownership is a form of joint ownership in which several people, the undivided co-owners, together hold rights of the same kind in an asset. Dismemberment, on the other hand, separates the attributes of ownership between a usufructuary, who has the right to use the property and receive its income, and a bare owner, who has the right to dispose of the property and is entitled to regain full ownership when the usufruct expires.
Joint ownership of shares: origin and main characteristics
Joint ownership of shares is most often the result of an inheritance, when several heirs receive a portfolio of shares together. It may also result from a joint purchase, the contribution of an undivided asset to a company or the former PACS property regime. Legally, each undivided shareholder is recognised as a partner. However, the exercise of the rights associated with this status is governed by the strict rules of joint ownership, which often require collective management. For a full analysis of these mechanisms, see our article on management of undivided share rights.
Share ownership split: usufruct and bare ownership
Dismemberment is a technique frequently used in the transfer of assets. Parents can, for example, give bare ownership of shares to their children while retaining usufruct, enabling them to continue to receive dividends. The usufructuary enjoys the "fruits" of the shares (the dividends), while the bare owner is entitled to recover full ownership of the shares on the death of the usufructuary, with no additional inheritance tax. It is the distinction between these two roles that creates power and management issues. Find out more about the implications of this division in our guide on the rights of the bare owner and usufructuary.
Rights attached to jointly-owned shares or shares in joint ownership: who decides what?
The central question is who exercises the political rights (voting) and who receives the pecuniary rights (income). The answer varies greatly depending on whether the shares are jointly owned or split up, and can be determined by the articles of association or by agreement, within the limits set by law.
Exercising political rights (voting, information, calling meetings)
For joint ownership shares, the principle is one of sole representation: the joint owners must appoint a proxy to vote on their behalf at general meetings. Failing agreement, the proxy may be appointed by the courts. Each undivided co-owner nevertheless retains an individual right to information and to be convened. In the case of joint ownership, the law provides for a suppletive distribution: the voting right belongs to the beneficial owner for ordinary decisions (such as approval of the accounts and allocation of profits) and to the bare owner for extraordinary decisions (amendment of the articles of association, merger, etc.). The articles of association may, however, provide for a different distribution, but without ever depriving the bare owner of the right to participate in collective decisions. These rules are explored in more detail in our articles on joint actions and the ownership stripping.
Pecuniary rights (dividends, reserves, liquidation surplus)
The distribution of gains is clearer. In the case of stripped shares, the usufructuary receives dividends, which are considered as income. On the other hand, anything relating to capital, such as reserves set aside or liquidation surpluses (the balance remaining after payment of debts in the event of dissolution), goes to the bare owner. In the case of joint ownership, all income and proceeds from the shares (dividends, capital gains, etc.) increase the joint ownership and are shared between the joint owners in proportion to their rights at the time of division.
Transfer and contribution of shared shares: pitfalls to avoid
Transferring shares held jointly or in dismemberment is a delicate operation, subject to very specific formal and substantive conditions. Failure to comply with these rules can result in severe penalties, such as the deed not being enforceable against the other rights holders, or even being null and void. The taxation of these transactions is also a major point of attention. To understand these procedures in detail, please refer to our article on transfer and contribution of stripped or undivided shares.
Unanimity rules and exceptions
For undivided shares, any act of disposal, such as a sale (transfer) or a contribution to another company, requires the unanimous agreement of the co-divisors. This is a protective rule, but it can lead to deadlock. The law provides for mechanisms to overcome such blockages, including the possibility of seeking judicial authorisation if a joint owner refuses, thereby jeopardising the common interest. In the case of joint ownership, the sale of full ownership of shares requires the joint agreement of the bare owner and the beneficial owner.
Tax implications of transfers
The sale of shares that are stripped or undivided triggers capital gains tax. There are complex rules for apportioning this tax and calculating the capital gain. In the case of dismemberment, the valuation of the usufruct and bare ownership according to the tax scale in article 669 of the General Tax Code or according to an economic valuation has a direct impact on the calculation of transfer duties in the case of a gift and on the capital gain in the case of a sale. Strategies exist to optimise the tax treatment of such transfers, but they must be implemented with care to avoid abuse of the law. These tax issues are a central aspect of our article on transmission of shared actions.
Why is the support of a lawyer essential?
The management, transfer or contribution of shares in joint ownership or dismemberment are at the crossroads of several branches of law: company law, property law, inheritance law and tax law. A simple error in the wording of a clause in the articles of association, a misunderstanding of voting rights or an incorrect tax assessment can have major financial and legal consequences, leading to disputes between partners or heirs.
A lawyer who is an expert in these areas can help you secure transactions, anticipate disputes and structure your shareholding in the best possible way. Whether you are preparing for a transfer of assets, resolving a deadlock in joint ownership or drafting appropriate articles of association, legal advice is essential to protect your interests. For an in-depth analysis of your situation and tailored advice, contact our team of lawyers.
Frequently asked questions
Who has voting rights when shares are stripped?
Unless otherwise stipulated in the Articles of Association, the beneficial owner votes on ordinary decisions (allocation of profits) and the bare owner on extraordinary decisions (amendment of the Articles of Association).
Is it possible to sell shares in joint ownership without everyone's agreement?
No, in principle, the transfer of undivided shares requires the unanimous agreement of all the undivided co-owners. A deed signed without this agreement cannot be enforced against the others.
Who receives the dividends in the event of dismemberment?
The beneficial owner receives all the dividends distributed, as they are considered to be the fruits of the shares.
How do you get out of joint ownership of shares?
Joint ownership can be ended by dividing the shares between the joint owners, by selling all the shares (with the agreement of all) or by one joint owner selling his share to another joint owner or to a third party (subject to the pre-emptive rights of the others).
Does the bare owner have the right to attend general meetings?
Yes, as a shareholder, the bare owner has the right to take part in all collective decisions, including those for which he does not have the right to vote.
Are joint ownership and dismemberment appropriate for a family SME?
Yes, these are widely used tools. Joint ownership is a preferred technique for preparing the transfer of the business to children, while retaining income and a degree of control. Joint ownership is often a consequence of succession, and needs to be carefully managed to ensure the company's long-term future.
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