09/29/2023
Written by Candice Wack
Act no. 2023-171 of 9 March 2023 relaxed the rules governing the procedure for reconstituting shareholders’ equity in joint stock companies and limited liability companies (SARLs), in particular by extending the period during which companies can regularise their situation. The law introduces a new two-year period during which companies can reduce their share capital to a value less than or equal to a threshold set by decree in the “French Council State” (Conseil d’État), in order to avoid being dissolved.
Decree no. 2023-657 of 25 July 2023 sets these thresholds at 1% of the balance sheet total at the end of the last financial year for Limited liability companies and Joint stock companies for which no minimum share capital is required. In the case of joint stock companies for which a minimum share capital is required, this threshold is set at the higher of 1% of the balance sheet total recorded at the last financial year-end and the minimum share capital associated with their corporate form.
When, as a result of losses recorded in the accounting documents, the shareholders’ equity of a joint-stock company or a Lilimited liabily company falls below half of the share capital, the shareholders must, in accordance with articles L. 223-42 and L. 225-248 of the French Commercial Code, decide whether or not to dissolve the company early. If the shareholders decide to continue the company, the situation must be regularised.
Until now, when the shareholders decided to continue the company, it was obliged, by the end of the second financial year following that in which the losses were recognised, to reduce its capital by an amount at least equal to the losses that could not be charged to reserves, if the shareholders’ equity had not been reconstituted to a value at least equal to half the share capital within this period.
The Act of 9 March 2023 amended the provisions of Articles L. 223-42 and L. 225-248 of the French Commercial Code, and now allows companies, if their shareholders’ equity has not been reconstituted to a value at least equal to half of their share capital, to reduce their share capital by the amount necessary to ensure that the value of their shareholders’ equity is at least equal to half of their share capital.
The Act therefore removes the requirement for companies to reduce their capital by an amount at least equal to the losses that could not be charged to reserves.
Furthermore, even if a company’s shareholders’ equity remains below half of its share capital at the end of the two-year period, the law now allows companies to escape the penalty of dissolution by introducing a new two-year period during which companies may reduce their share capital to a value less than or equal to a threshold set by decree of the “French State Council” (Conseil d’État).
The thresholds were set by decree no. 2023-657, which came into force on 27 July 2023 and is codified in articles R.223-37 and R.226-166-1 of the French Commercial Code.
For limited liability companies, the threshold is set at 1% of the balance sheet total at the end of the last financial year.
For joint stock companies, the new article R 226-166-1 of the Commercial Code sets the threshold at :
- 1% of the balance sheet total at the end of the last financial year for companies whose legal and regulatory provisions do not impose a minimum share capital because of their corporate form (as is the case for simplified joint stock companies)
- at the higher of 1% of the balance sheet total at the end of the last financial year and the minimum share capital associated with their corporate form, for companies whose applicable laws and regulations impose a minimum share capital (as is the case for joint-stock companies and partnership limited by shares).
If the situation is not remedied within this period, any interested party may apply to the courts to have the company dissolved. The court may then grant the company a maximum period of six months to rectify the situation, but may not, in any event, order the company to be dissolved if the situation has been rectified by the date on which the court rules on the merits of the case.
This procedure does not apply to companies in safeguard procedure or company in receivership proceedings or which benefit from a safeguard or receivership plan.
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