THE FRENCH STOCK EXCHANGE
& RELATED FINANCIALMARKETS
How they operate
and how they are regulated

Amongst the rights benefiting any shareholder is that of selling securities, no person can be a "prisoner" of his securities (on the condition that a buyer can be found). Although this freedom to sell, a principle of public order, can be limited, in no case can it totally disappear. A partner who wishes to sell his shares cannot be totally prevented from doing so, in price conditions which are fair when compared to the market. Such limits can be easily understood given everything that is at stake when share are sold, stipulations exist corresponding to each of the stakes to eliminate possible risks (share acquisition or even majority acquisition by hostile third parties, the dispersion of shares of a family company, undesirable interference etc.). It is possible, for example, to mention clauses which aim at putting a ceiling limit on participation, exit clauses, or pre-emptive rights, often combined with approval clauses which are the subject of this paper. The mechanism of the approval consists in submitting any transferee of shares in a company to the company's approval, thereby ensuring a preventive control and above all the faculty to refuse entrance of a candidate partner. It is a question of taking into consideration the personality (artificial or natural) of the candidate, which comes down to instilling in the company the notion of intuitus personae which traditionally characterises companies of people as opposed to capital companies.

Although the law no. 66-537 of 24.07.1966 gave the possibility of inserting an approval clause in the articles of incorporation of corporations (the law's articles 274 to 277 give the mechanism for joint-stock companies) the existence of such clauses do not date from this law as courts recognised their validity at the end of the last century. A great deal can be learnt from the abundant legal cases in the area as they complete and give precision on the legal mechanism. Within joint-stock companies, the law distinguishes companies listed on the stock exchange, by organising a special procedure of approval for them, their securities being negotiated by the intermediary of a investment service company. But in addition to this procedural difference, it transpires that in listed companies, approval clauses are prohibited or made almost inapplicable because of stock exchange regulations. Finally, it should be noted that procedures which have the same aim of such approvals exist in most foreign countries, and that community law also accepts that such restrictions can exist for the sale of shares.

I - Approval clauses admitted for joint-stock companies by the law of 24.07.1966.

A -A legal derogation from the principle of the negotiability of shares

1 - The assumption: the liberty to sell shares

2 - The limit: introduction of a dose of intuitus personae

B - The conditions of validity of approval clauses

1 - Legal prohibitions (article 274 of the law of 24.07.1966)

2 - The prohibition of approval clauses between shareholders (decision of the trade chamber of the Cour de cassation 10.03.1976)

3 - Legal obligations (companies exercising certain professions, press companies)

4 - The securities aimed at by approval clauses

C - Clauses within or without the articles of incorporation

II - The implementation of approval clauses

A - The procedure of approval for the transferee

1 - The competent body for granting approval

2 - The procedure for requesting approval

3 - Granting approval

B - Refusing approval and the resulting rights for the transferor

1 - The decision to refuse the transfer

2 - The partners' obligation to buy the shares

3 - The faculty of the transferor to refuse to sell his shares

C - Breach of an approval clause

D - Particular cases

1 - Approval clauses and mergers

2 - Approval clauses and pledged securities (article 277 of the law of 24.07.1966)

3 - Approval clauses and collective procedures

III - Approval clauses and listed companies: the contradiction of company law and stock exchange regulations

A - The procedure of article 276 of the law of 24.07.1997

1 - Reduced delays due to speed imperatives linked to stock exchange transactions

2 - Specific rules if approval is refused

B - The hostility of institutions and stock exchange regulations

1 - The position of the Commission des opérations de bourse

2 - Approval clauses under attack by stock exchange rules

I - Validity and contents of pre-emption clauses

A - An attack on free share trading, validated by case law

1 - The alternative: a statutory clause or a clause integrated into a shareholder pact

2 - Pre-emption clauses: prohibitions contained in the legal regime for approval clauses (article 274 of the law of 24.07.1966)?

B - The field of application of pre-emption clauses

1 - The diversity of pre-emption mechanisms

2 - Pre-emption clauses and transfers between shareholders

II - The implementation of pre-emption clauses

A - The application of pre-emption mechanisms

1 - The absence of imperative rules for pre-emption procedures

2 - Fixing the price of transferred shares in the case of acquisition by the clause beneficiary

3 - The possible combination of approval and pre-emption clauses

B - The sanction for violating pre-emption clauses

D.M.

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