FRANCE Trends and Developments Contributed by: Karl Hepp de Sevelinges and Nicolas Martin, Jeantet
What are the Legal Consequences in Case of an Illegal Distribution of Dividends? An illegal distribution of dividends – including (since the decision of the French Supreme Court) a distribution from the retained earnings – could be declared null and void by a competent court. The legal representative allowing such type of distribution could also be held liable and charged for paying fictitious dividends. The offence of distributing fictitious dividends is punishable under criminal law and may lead to five years of imprisonment and to a EUR375,000 fine for natural persons, and to a EUR1,875,000 fine for legal entities. Is it Possible to Limit the Risk or Regularise the Situation? We consider that the risk of nullity applicable to a distribution of dividends from the retained earnings is rather limited. Indeed, any legal action (which could be brought by the company, its shareholders, or any person who demonstrates a legitimate interest) would be time-barred after three years. Therefore, as at the time of writing, all decisions of distribution of dividends having occurred prior to February 2022 would no longer be of relevance. It should also be noted that even if the distribu - tion is declared as null and void by a judge, such decision will not automatically lead to the repay - ment of the distributed dividends. In accordance with French law requirements, the company may only ask for the repayment of the dividends in case it proves that the two following conditions have been fulfilled: • the distribution has been carried out in viola - tion of the French legal requirements – which is the case since the French Supreme Court
However, such distribution requires compliance with strict conditions (ie, establishment of a bal - ance sheet to be certified by a statutory auditor and existence of sufficient profits since the last closed annual accounts). Finally, in case a repatriation of certain amounts to the shareholders is envisaged in the course of the financial year, it could also be envisaged to transfer such amounts by way of an upstream loan from the company to the shareholders. However, please note such an option shall be assessed on a case-by-case basis from a legal and tax perspective and would in any case be subject to certain conditions derived from corpo - rate benefit rules under French law. Indeed, such loan agreement should notably (i) be concluded at arm’s length, (ii) be in the common economic, social or financial interest of the parties, (iii) be duly compensated (ie, interest), (iv) not create an imbalance in the rights and obligations of the concerned parties towards each other or (v) exceed the financial capabilities of the company providing financial support. Are There Other Restrictions to the Distribution of Dividends? Any distribution of dividends that would lead to the net equity ( capitaux propres ) falling below half of the share capital (as increased by the amount of the legal and statutory reserves) is prohibited. A distribution is also not possible in case the share capital of the company has not been fully released. In any case, the distribution of dividends must be consistent with the corporate purpose of the company and shall not compromise its financial stability, particularly in situations where the com - pany has accumulated losses.
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