The dismemberment of ownership is a widely used asset management and transfer tool, particularly for company directors to organise the succession of their shares. This technique, which consists of separating usufruct (the right to enjoy the property and receive income from it) from bare ownership (the right to dispose of the property), raises complex questions about the division of powers within the company. Who has the right to vote at general meetings? Who receives the dividends? These questions are far from theoretical, and if they are not anticipated correctly, they can lead to blockages and conflicts that are detrimental to both the family and the business. The aim of this article is to clarify the division of rights and powers between usufructuaries and bare owners of shares, based on legal texts and case law interpretations. For an overview of this topic, please consult our a complete guide to managing and transferring shares in joint ownership or dismemberment. It is important to make a clear distinction between dismemberment and joint ownership, another form of shared ownership that is governed by different rules, as detailed in our analysis of shares in undivided ownership and their specific management features.
Shareholder status in the event of dismemberment
The first and fundamental question is whether the usufructuary or the bare owner is a shareholder. The answer to this question is not a mere legal curiosity; it is the pivot that determines the attribution of all rights and obligations that are not expressly allocated by law or by the articles of association. It is, in a way, the default rule that applies in the event of silence in the texts.
The position of case law and legal doctrine
For a long time, the debate agitated legal experts. Some argued that the usufructuary, who receives the income and exercises some of the prerogatives, should be considered a shareholder. Others, more traditionally, argued that only the bare owner, the true owner of the shares in the long term, could claim this status. This second view is based on a simple argument: a shareholder is someone who has a claim on the company's capital, which is what a bare owner has.
The Cour de cassation has clearly and consistently put an end to this controversy. In a number of rulings, most explicitly in a decision dated 16 February 2022, it ruled: "the usufructuary of shares cannot be recognised as a partner, which is the sole right of the bare owner".. This position is now firmly established and constitutes the basic principle on the basis of which the entire distribution of rights must be analysed.
Impact of being a partner
Recognising only the bare owner as a partner has very practical consequences. This means that all the rights attached to this status, such as the right to take part in collective decisions, are acquired by the bare owner as a matter of principle. Even if the Articles of Association can adjust the distribution of voting rights, in principle they cannot completely deprive the bare owner of his fundamental right to participate in the life of the company.
Conversely, usufructuaries, who are not shareholders, only benefit from company rights to the extent that the law or the Articles of Association specifically allocate them to them. His rights are rights of attribution, not rights inherent in a capacity that he does not possess. This distinction is essential to understanding the logic of the division of powers that follows.
Distribution of political rights
Political rights are those that enable you to influence the management and strategic decisions of the company. These are mainly the right to be invited to meetings, the right to information and, of course, the right to vote. The law provides for a division in principle, but leaves considerable room for manoeuvre to the Articles of Association.
Right to convene and information
Initially, the right to attend meetings was the prerogative of the partner, i.e. the bare owner. However, the law has evolved to protect the interests of both parties. Since the Soilihi Act of 19 July 2019, which amended article 1844 of the Civil Code, a clear principle has emerged: the bare owner and the beneficial owner both have the right to participate in all collective decisions.
In practical terms, this means that both the beneficial owner and the bare owner must be invited to attend all general meetings, whether ordinary or extraordinary, even if one of them does not have the right to vote on the resolutions on the agenda. Similarly, the right to receive company documents (annual accounts, management reports, etc.) is open to both of them. Failure to respect these rights may result in the meeting being declared null and void, which underlines their importance.
Voting rights: legal distribution and statutory exceptions
The distribution of voting rights is the most sensitive point. The Commercial Code lays down a suppletive rule, i.e. one that applies in the absence of a clause to the contrary in the Articles of Association. According to Article L. 225-110, voting rights are allocated :
- To the beneficial owner for decisions taken at Ordinary General Meetings (OGM), which mainly concern the approval of accounts and the allocation of profits.
- To the bare owner for decisions taken at Extraordinary General Meetings (EGMs), which amend the Articles of Association (capital increase, merger, change of corporate purpose, etc.).
However, this legal distribution can be adjusted in the Articles of Association. But is this contractual freedom without limits? Case law has established safeguards to preserve the balance of rights. For example, it is accepted that a clause cannot completely deprive the usufructuary of his right to vote on the allocation of profits, as this would be tantamount to depriving him of the very substance of his right of usufruct. Similarly, while the bare owner may be deprived of the right to vote, he retains his inalienable right to participate in collective decisions.
The specific case of airlocks
The Simplified Joint Stock Company (Société par Actions Simplifiée - SAS) is renowned for the great freedom it affords under its articles of association. In terms of dismemberment, this freedom makes it possible to organise a tailor-made distribution of political rights that is much more detailed than in a public limited company (SA). The articles of association of an SAS can allocate voting rights to the usufructuary for certain extraordinary decisions, or to the bare owner for certain ordinary decisions.
However, this freedom is not absolute. It must comply with the fundamental principles of company law and property law. In particular, article 1844 of the Civil Code, which guarantees the right to participate in collective decisions and the right of the usufructuary to vote on the allocation of profits, is a basic principle of public policy. A clause that violates these fundamental principles risks being declared unwritten by a judge.
Distribution of pecuniary rights
After political rights, let's move on to the question that often interests us most: who gets the money? The distribution of financial rights (dividends, reserves, liquidation surplus) follows a logic derived from property law, distinguishing between what comes under "fruits" and what comes under "capital".
Dividends and interim dividends
Case law is consistent on this point: dividends are civil fruits. Under Article 582 of the Civil Code, the fruits belong to the usufructuary. Consequently, it is the usufructuary, and he alone, who has the right to receive dividends distributed by the company. The same applies to interim dividends.
The beneficial owner's right to dividends arises at the precise moment when the General Meeting decides to distribute them. Before this decision, the profits made by the company are not fruits, but simply an enrichment of the company that benefits the bare owner, the holder of the capital.
Reserves and share premium
Unlike dividends, reserves (undistributed profits allocated to a specific account) are not income. They represent an increase in the company's assets, an increase in the value of the company. As such, they have the nature of capital and therefore belong to the bare owner.
What happens if the company decides to distribute these reserves? The situation is subtle. The sums automatically revert to the bare owner, but the usufructuary retains a right of enjoyment over them. This right is exercised in the form of a "quasi-usufruct": the usufructuary receives the funds, may use them, but incurs a debt of restitution towards the bare owner, which he will have to repay at the end of his usufruct. Share premiums, which are an additional contribution, are treated in the same way as reserves.
Pre-emptive rights and liquidation dividend
The pre-emptive right, which entitles the holder to subscribe for new shares in the event of a capital increase, is a right attached to the status of shareholder and is intended to preserve the value of the capital. It therefore belongs in principle to the bare owner. If new shares are subscribed, the dismemberment is transferred to these new shares. If the pre-emptive right is sold, it is referred to as a transfer of stripped sharesThe proceeds of the sale are subject to a quasi-usufruct in favour of the usufructuary.
Finally, if the company is dissolved, the liquidation surplus (what remains after payment of debts and repayment of contributions) represents the very substance of the capital. It therefore reverts to the bare owner. However, as in the case of distributions of reserves, the usufruct is transferred to the sums received, creating a quasi-usufruct and a restitution debt payable by the usufructuary.
Share stripping is an effective mechanism, but one that creates a complex legal situation where suppletive legal rules, public policy limits and freedom under the Articles of Association intermingle. Precise drafting of the Articles of Association is essential to anticipate conflicts and ensure smooth management of the company. To secure the transfer of your company and the management of your split-right shares, we strongly recommend that you call on the services of a expertise in banking and financial law. Our firm can help you structure these transactions and draft clauses tailored to your situation.
Sources
- Civil Code, in particular articles 578 et seq. on usufruct, and article 1844 on shareholders' rights.
- Commercial Code, in particular Articles L. 225-110 and L. 228-1 et seq. on securities.
- Code général des impôts (General Tax Code), for tax aspects relating to the valuation and sale of dismembered rights.
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