The ownership of shares is not always individual. Inheritance, transfer of assets or joint acquisition can lead to situations where ownership is shared, whether under the joint ownership system or as part of a joint ownership arrangement. Managing these shares is complex enough, but selling them or transferring them to another company raises particularly complex legal and tax issues. An ill-prepared operation can lead to blockages, conflicts between the beneficiaries or heavy financial penalties. Understanding the rules governing these disposals is therefore an essential step in securing your assets and your projects. For an overview of this subject, see our a complete guide to managing and transferring shares in joint ownership or dismembermentwhich provides an essential overview before undertaking such actions.
Contribution of shares in undivided ownership or dismemberment
The contribution of securities to a company is a strategic operation, often used to restructure assets or optimise their management. When the shares concerned are held collectively, specific rules apply to protect the rights of each party. The contribution may involve undivided shares, or only bare ownership or usufruct.
Contribution of undivided shares: conditions and penalties
The contribution of shares held in joint ownership to a company is considered to be an act of disposal. As a result, the rule of principle is unanimity. All co-owners must give their agreement for the transaction to be valid. This requirement, set out in article 815-3 of the Civil Code, is designed to protect the rights of each co-owner to the common property.
However, there are exceptions. In the event of a deadlock, if the refusal of one of the undivided co-owners jeopardises the common interest, the others may request judicial authorisation to go ahead. This approach, which is governed by article 815-5 of the Civil Code, is exceptional and requires the judge to be satisfied that the transaction is essential to safeguard the interests of the joint ownership.
What happens if one of the undivided co-owners makes the contribution without the agreement of the others? Contrary to popular belief, the deed is not null and void. The penalty is that the contribution cannot be enforced against the other undivided co-owners. In practical terms, for them, everything happens as if the shares were still in joint ownership. They retain their rights and can enforce them against the company receiving the contribution. However, one essential point should be noted: this irregularity does not affect the validity of the formation of the company receiving the securities. The company is validly formed, but it will have to deal with the rights of undivided co-owners who did not consent to the transaction.
Isolated contribution of bare ownership or usufruct
The dismemberment of ownership separates the right to use the property and to receive income from it (usufruct) from the right to dispose of it (bare ownership). The usufructuary and bare owner of company shares are free to transfer or contribute the rights they hold separately. This flexibility opens up interesting prospects in terms of asset management. To fully understand the implications of this separation, it is useful to know the rights and obligations of the parties in the event of share ownership dismemberment.
Contributing only bare ownership is a common technique for anticipating a transfer. For example, parents can contribute bare ownership of shares to a holding company that they control, and then give the shares in this holding company to their children. This arrangement makes it possible to prepare for the transfer while retaining the management and income from the shares via the usufruct.
From a tax point of view, these isolated transactions can be advantageous. Article 150-0 B of the General Tax Code provides for a deferral of taxation on capital gains realised on the contribution of securities (including split-right securities) to a company subject to corporation tax. Taxation is not cancelled, but deferred to a later date, for example when the securities received in exchange are sold. If the shares are subsequently transferred by gift, the deferred capital gain is definitively purged.
Joint contribution and deferment of dismemberment
It is also possible for the beneficial owner and the bare owner to jointly contribute their respective rights to a company. The aim is often to reconstitute full ownership of the shares within the special purpose vehicle. The question then arises as to whether the dismemberment can be transferred directly to the shares received as consideration for the contribution. In practical terms, can the usufructuary of the contributed asset become the usufructuary of the new shares, and the bare owner become the bare owner?
This point is the subject of legal and tax debates. Company law lays down a clear principle: any contribution must be remunerated by the attribution of the status of partner, materialised by the holding of shares in full ownership. Traditionally, however, case law has held that only the bare owner is a shareholder. Allocating usufruct shares to the contributor of the usufruct would be tantamount to depriving him of the status of shareholder, which would weaken the transaction.
Consequently, a direct deferral of the dismemberment is legally complex. The safest solution is to pay each contributor (beneficial owner and bare owner) in full ownership shares, in proportion to the value of their respective rights. If the parties then wish to reconstitute a dismemberment on the new shares, they will have to exchange or transfer the rights between themselves. This additional step is not neutral and must be analysed carefully for its tax consequences.
Sale of shares in joint ownership
The sale of jointly-owned shares is a transaction that involves significant risks if the rules are not scrupulously followed. Protecting the interests of each joint owner is at the heart of the legal system.
The unanimity requirement and its exceptions
As with a contribution, the transfer of full ownership of undivided shares is an act of disposal that requires the consent of all the co-owners. A single co-owner may not decide to sell all of the common shares. This unanimity rule is fundamental to the protection of everyone's property rights. For a more in-depth look at the rules of governance, you may wish to consult our article on day-to-day management and exercise of rights in respect of undivided shares.
In the event of disagreement, the law provides for ways out to avoid paralysis. If a joint owner refuses to agree to the sale and this refusal jeopardises the common interest of the joint ownership, the others can take the matter to court. The judge may then authorise the sale, taking the view that the collective interest must take precedence over individual blocking. The jeopardy must be seriously demonstrated: it is not enough for the sale offer simply to be advantageous.
Penalty for non-enforceability
If a transfer of undivided shares is made without the unanimous agreement of all the undivided co-owners, the penalty is not the nullity of the sale between the seller and the buyer. The deed of sale is said not to be enforceable against co-owners who have not consented to it. This means that the sale has no effect on them. They may continue to consider themselves co-owners of the shares and exercise the rights attached to them.
This inopposability has major practical consequences. Aggrieved co-owners can claim their share of dividends, take part in general meetings and, eventually, when the joint ownership is divided, claim ownership of the shares as if the sale had never taken place. For the company, this situation creates considerable legal uncertainty, as it does not know who its real shareholders are. Decisions taken at a general meeting with the purchaser's vote could be challenged and potentially overturned.
The right of pre-emption of joint owners
The situation is different if a joint owner does not wish to sell the undivided property himself, but his own share in the joint ownership. They are free to do so. However, to prevent an unwanted third party from entering the undivided property, the law grants a right of pre-emption to the other co-owners.
Article 815-14 of the French Civil Code requires an undivided co-owner who wishes to sell his or her share to someone outside the joint ownership to notify the others of his or her plans by bailiff's deed. The notification must specify the price, the conditions of the transfer and the identity of the prospective buyer. The co-owners then have one month to indicate whether they wish to buy back the share on the same terms. If this procedure is not followed, the penalty is severe: an application may be made to the courts for the transfer to be declared null and void. This mechanism provides essential protection for the cohesion of joint ownership.
Transfer of stripped shares
The sale of shares in which ownership is split can take several forms, with different legal and tax implications. The bare owner and usufructuary may act separately or jointly, each scenario obeying its own rules.
Isolated transfer of usufruct or bare ownership
The bare owner and the usufructuary are each masters of their rights. The bare owner can sell his bare ownership, and the usufructuary can sell his usufruct, without needing the consent of the other. The purchaser of the bare ownership will become the owner of the shares, but must respect the usufructuary's rights until they expire. Similarly, the purchaser of the usufruct will receive dividends but must return the shares to the bare owner at the end of the usufruct.
However, this freedom can be restricted. Clauses in the company's Articles of Association, such as an approval clause, may make the sale subject to the approval of the other partners. Similarly, a shareholders' agreement or a dismemberment agreement may provide for temporary inalienability clauses or a right of first refusal in favour of the other holder of the dismembered right.
For tax purposes, the sale of any one of these rights is taxable. The capital gain is calculated on the basis of the difference between the sale price of the right and its acquisition price. Determining this acquisition price can be complex, particularly when the dismemberment is the result of a gift.
Joint sale: apportionment of the price and capital gains
When the bare owner and usufructuary agree to sell the full ownership of the shares together, a central question arises: how should the sale price be divided? Under article 621 of the Civil Code, the law provides that the price is to be divided between them according to the respective value of their rights. This value may be determined by agreement between the parties, often by reference to the tax scale set out in article 669 of the General Tax Code or, more precisely, by an economic valuation that takes into account the age of the beneficial owner and the yield on the security.
The parties may also agree on another solution: deferring the dismemberment of the sale price. In this case, the usufructuary receives the full price, but must return it to the bare owner at the end of the usufruct period. This is known as quasi-usufruct. The usufructuary may use the funds, but a restitution debt will fall on his or her estate.
The taxation of capital gains depends directly on this choice. If the price is split, each party is taxed on the capital gain it makes on its own interest. If a quasi-usufruct is set up, tax jurisprudence considers that the capital gain from the sale is fully taxable in the name of the usufructuary alone.
Special case of the stripped share portfolio
The management of a dismembered securities portfolio is governed by specific rules, stemming from the seminal case law of the Cour de cassation (Baylet ruling, 1998). The Court described the portfolio as a "de facto universality". This qualification gives the usufructuary extensive management powers.
Contrary to the general rule, the beneficial owner of a portfolio may sell securities without the agreement of the bare owner. However, this power is subject to a strict condition: the beneficial owner must reinvest the proceeds of the sale in the portfolio. He must preserve the substance of the portfolio, i.e. maintain its overall value, and may not appropriate the funds. This is not a quasi-usufruct. In return for these powers, the usufructuary is required to provide the bare owner with regular information on the composition and development of the portfolio.
From a tax point of view, in the event of sale and reinvestment by the usufructuary, it is normally the bare owner who remains liable for capital gains tax, even though he or she neither decided on the transaction nor received any cash. However, for portfolios resulting from an inheritance, a contractual option allows the usufructuary to be liable for tax. This situation is a perfect illustration of the complexity and subtleties of managing split securities.
The transfer or sale of shares in joint ownership or dismemberment is complex and fraught with consequences. Each situation requires a tailor-made analysis in order to choose the most appropriate and secure strategy. To ensure the security of your transactions and provide support on the legal and tax aspects of these arrangements, our law firm specialising in banking and financial law is at your disposal.
Sources
- Civil Code (in particular the articles on joint ownership, art. 815 et seq., and on usufruct, art. 578 et seq.)
- French Commercial Code (particularly articles on shareholders' rights and the transfer of shares)
- General Tax Code (in particular the articles on the taxation of capital gains)
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